Instilling a profit-driven marketing mindset: Capital One Corp., McLean, Va., uses four instruments in order to inculcate an ROI-oriented marketing mentality within its organization: analytics, decision-support tools, process and organizational alignment. The authors of the new book, "The Four Pillars of Profit-Driven Marketing" explain how the financial services company succeeds in this effort.

• Author: Moeller, Leslie H.
• Position: Capital One Financial Corp

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Capital One Financial Corp., McLean, Va., is probably best known for its television ads featuring barbarian bordes invading suburban neighborhoods with the tagline, "What's in your wallet?"

Capital One started as a credit card issuer and, in 2006, after the $14.6 billion purchase of North Fork Bancorporation, it became one of the largest 10 U.S. banks. The company was founded by two men: Rich Fairbank and Nigel Morris on the basis of a single idea--that credit cards are not banking, they're information. Back in the 1980s, Fairbank and Morris became convinced that customer data and sophisticated analytics could be blended to tailor products that would meet the needs of different types of customer". Until then, most banks were not using all the customer data available to them for the purpose of creating customized products.

The two men were initially hired by a bank to help turnaround an unprofitable division. The consultants talked the bank into running a test in which a random set of consumers got offers for credit cards at one interest rate; another group received a different proposition entirely. The results were measured and showed promise, but the bank backed off from the innovative idea and dropped the program.

The two men shopped the idea around, and eventually Signet Bank, based in Richmond, Va., signed on. Their approach was to create a culture where decisions would be based on rigorous analysis and testing rather than gut feelings and guesswork--that is, an environment in which the marketing ROI mindset could flourish.

Fairbank and Morris's successes caused Signet's managed credit card portfolio to swell from just over $1 billion in 1988 to almost $6.5 billion in 1994. With its credit card division generating about two-thirds of the bank's revenues, from 1992 until 1994, Signet was the best-performing stock on the New York Stock Exchange. In October 1994, the bank cashed in, spinning off its credit card business in a $1.1 billion initial public offering (IPO). Fairbank was named chairman and CEO of Capital One Financial Corp.; Morris became president and chief operating officer.

Fairbank and Morris have evolved a formal test-and-learn philosophy that they call Informational Based Strategy (IBS). This approach is based, in part, on data from hundreds of thousands of offers the company has tested over the years. Essentially, Capital One created a cultural environment in which the capacity for marketing ROI is encouraged.

What are the elements of this capacity and how was it developed? In the excerpt below, the authors provide the answers to these questions by looking at how Capital One operates.

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One key element can be found in Capital One's rigorously analytical approach to understanding which of its marketing offers generates the most profitable return on investment. In fact, each of its offers is a test, one of thousands of informed questions in search of working hypotheses. Do cat lovers carry larger balances than dog lovers do? Which group defaults more frequently? Who will pay an annual fee? How much will they pay? What should they get in return? Do they prefer a fixed or variable interest rate? At Capital One, the answers to these questions are written in spreadsheets, not stone, and results are continually retested. The company uses analytics to determine what works and what does not. Without some kind of analytical rigor, Capital One would be forced to either mindlessly replicate what it had done in the past (which is exactly what all of its competitors were doing back in 1994) or take random shots in the dark.

Another element we see in place at Capital One is a set of decision support tools that routinize the analytics, making them consistent, comprehensive, and comprehensible to the company's employees. Customized software at Capital One's call centers, for example, recognizes a customer's phone number and characterizes that individual according to 12 criteria (e.g., what...