Typically only 20% of retail financial services customers are providing profitable business and most banks do not have the information either by segment or individual customer to identify which 20% of customers this is. When they have this information, they can target profitable customer segments with tailored products or differentiated service levels. More importantly, they do not know which customer segments are the unprofitable segments which should be discouraged, or how customers can be made more profitable though cross selling or where products could be made more cost efficient.
Using profitability analysis in customer management brings benefits in targeting the right customer for the right product, in understanding and maximising lifetime profitability, and in managing service levels to maintain customer satisfaction at an acceptable cost.
The ranking of customers by income, profitability or product usage is becoming very important to most financial institutions as the markets become increasingly competitive and as customers themselves become more sophisticated. Profitability analysis is a powerful tool in customer segmentation and customer relationship management (CRM), which is itself a key factor in maintaining and enhancing profitability.
Understanding customer-facing activities, the true costs of undertaking them and the life-time value of customers themselves, is essential before effective customer management can begin.
Today, many organisations realise that customer profitability and contribution analysis can yield valuable insights into how to deal differently with less profitable customers and customer groups. They can make customers and customer groups generate greater contributions by systematically reviewing the activities relating to the provision of products and services to those customer groups and reducing those activities which are not perceived by the customers to be adding value.
Profitability information alone is not the answer, however. There still needs to be a cultural shift at both management and employee level to focus on customer needs and to pool organisational resources and information across functional barriers. However, the insights gained from profitability should be a wake-up call to management and could help to prevent the CRM failure forecasts from becoming a reality.
We can work with you to help to define customer segments and to identify those that provide the highest contribution to profitability. More importantly, we can help you to identify those customers that are loss making and to develop strategies for improving their contribution.