Chan

Question 1) The goal for BBVA Compass is to become one of top 10 banks in the U.S. market. The bank entered the U.S. market via acquisition of various banks. Due to the new emergence and diversified customer base from merger, the customer loyalty and retention rate was relatively low (65% for customer acquired via branches and 55% acquired online). According to a study conducted in 2008, the top 5 most trusted banks in U.S. have churn rate ranged from 13% to 22%, which is much lower than BBVA. To cope with the challenge, the bank has sponsored various major sports events for brand building. The major aim for offline advertising in 2010 is to create brand awareness and trust for potential customers. Further, offline budget are also used in customer acquisition and cross-selling campaigns for improving retention rate.

On the other hand, online advertising which consists of display and search advertising is for acquiring new customer and building online awareness. Customer can complete the account opening process via online application. The bank has allocated approximately 55% for display advertising while 45% for search advertising according to the actual spending in Jan – Nov 2010. In my opinion, the allocation can be enhanced by increasing the budget for search advertising to 60% while 40% for display advertising. The first reason is due to the lower Cost Per Application (“CPA”) (i.e. $73 comparing to $88 of display advertising. The suggestion can be further supported by the customer lifetime value (“LTV”) calculation. LTV = (periodic profit) (lifetime) - acquisition cost. i.e. with assumptions made in exhibit A, the annual profit for the banking industry was $305 (by reverse calculating from the figures: LTV of the banking industry is $800 for 5 years). By assuming the BBVA profit is the same as market, the LTV for search ads will be $470 which is higher than those of display ads ($455). Please refer to Exhibit B for detailed calculation and assumptions. Hence, it is suggested to allocate more budget in search ads.

It is recommended to retain a significant budget for display ads (40%) as it can generate more impressions for building online awareness. The data provided are further analysed, as illustrated in the following table. The click through rate for display ads is lower than search ads, but customer’s conversion rate after starting the application is much higher for the display ads. It has illustrated that those customers who clicked the banners are more willing to complete the online account opening process. Hence, it is worthy to maintain a significant display ads allocation. The effectiveness of the display ads can be enhanced by improving the banner’s content so that more users can be attracted to click trough.

For the search engine, it is suggested to increase the spending for (i) SuperPages, because the CPA is lower; (ii) MSN, because of the high click through rate and high probability