In Search of Customer Value

In today’s increasingly competitive financial services industry, customer profitability has become a hot topic among bank marketers. Accompanying this growing interest has been the challenge of developing and interpreting customer profitability information. For all the talk about retaining the most profitable customers and transforming the less profitable ones, few banks can actually calculate profitability at the customer level with any degree of accuracy. In fact, a number of industry studies indicate that less than one-fifth of U.S. financial institutions calculate customer profitability accurately.

Customer profitability models provide a powerful means for linking marketing strategy to “bottom-line” results. The integration of financial data with MCIF information allows marketers to focus on the value of customer relationships in addition to the behavioral and demographic perspectives offered by the traditional MCIF system. However, navigating through the various technical issues related to profitability can be confusing and intimidating.

Traditional MCIF systems have followed various approaches to calculating customer profitability, but very few have performed this calculation with any degree of accuracy. The increased emphasis on customer profitability information has created the need for MCIF systems to improve their capabilities in this area. To help support the development of more value-focused marketing strategies, the profitability model must first accurately capture the true economics of the institution’s customer relationships.

Best practice approaches for deriving account profitability and aggregating to the customer level will contain the following key components: matched rate transfer pricing, non-interest income and non-interest expense calculations based on customer specific transaction activity and risk adjusted loan loss provision. While the level of precision will vary depending on the availability of the data – including account-level transaction detail – the main objective should be to reflect specific customer behavior in the calculation of customer relationship value.

As the competition for the “best” customers intensifies, it is no longer enough to settle for a rough idea of relative profitability. Successful marketing strategies must create opportunities to serve customer needs in ways that will be profitable to the institution. Accurate customer profitability information is essential to identifying where those opportunities exist.

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A Fresh Start

I kept reminding myself as the final seconds ticked away in Sunday’s surprise upset of my beloved New England Patriots by the NY Jets, that there’s always next year.  Well, it may be a long 7 months wait until training camp rolls around again for the Pats, but right now, many financial institutions are gearing up for the start of their new ‘season’ – with a whole fresh set of marketing  initiatives, strategies and goals.

But how do you set realistic goals and come up with the tactics to achieve them?  There’s always pressure to “improve over last year”,  but that’s a very broad statement and ultimately, performance is about having a good game plan and executing the details within that game plan (sorry, I guess I’m not quite over the game yet).  An objective year-end review can be very helpful in looking back at what worked, what didn’t and using that information to develop new tactics and strategies or simply modify existing ones.

You can learn a lot from analyzing not just the new customer relationships that were generated, but also those that were lost during the past year. What attracted customers to your institution? What caused them to leave? Were there warning signs that you could look for in your current customers to identify at risk relationships? Which branches performed better at retaining and growing customer relationships? Which of your customer segments are likely to be most impacted by the latest industry trends?

While the challenging economic climate may continue to temper everyone’s optimism, there’s no question that new marketing ideas  – bolstered by insight gleaned from the past – will have you well-positioned for the coming year.

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