The Impact of Forward-Looking Metrics on Employee Decision Making
Executive Summary — In marketing, the use of the customer lifetime value (CLV) metric encourages a focus on long-term customer relationships over short-term sales. This paper examines a situation in which a European bank introduced CLV data to its customer-facing employees, while still maintaining the incentives linked to short-term profitability; the goal was to discover whether and how these employees would modify their mortgage sales decisions. Research was conducted by Pablo Casas-Arce of Universitat Pompeu Fabra, and F. Asís Martínez-Jerez and V.G. Narayanan of Harvard Business School. Key concepts include:
- Having access to the CLV information caused bank managers to shift their focus toward more profitable client segments.
- However, the implementation of the CLV metric had no effect on how branch managers decided to price mortgages. Rather, they seemed to increase sales to their most valuable customers just by improving customer service.
- The availability of the CLV information also did not affect the bank managers' risk-taking tendencies—i.e., they did not relax their standards just to please their most valuable customers.
- The availability of CLV information led bank managers to cross-sell more products to their mortgage customers by targeting segments that bought a higher average number of products, but there was little effect on the average cross-selling to customers from any given segment.
This paper analyzes the effects of providing forward-looking metrics on employee decision making. We use data from a southern European bank that, in April 2002, started providing its branch managers with customer lifetime value (CLV) information about mortgage applicants. The data allows us to gauge the effects of enriching the information set of these employees in an environment where incentives and the allocation of decision rights remained unchanged. We find that CLV availability resulted in a significant shift in attention towards the more profitable client segments (the weight of the top segment in the portfolio of customers increases from 26 percent to 34 percent), but we do not find evidence of improved cross-selling (except for an increase in the sale of insurance products). Moreover, the use of CLV information did not have a negative impact on pricing, as some of the literature suggests, nor on default risk, indicating that managers increased sales to more profitable customers by providing better customer service.