The business press in general and financial services' presentations in particular have extolled the virtues of customer focus and the importance of delighting customers and building lasting loyalty.

For many banks this has been a new way to view the business, and efforts are under way at many institutions to cross-sell and deepen relationships with nearly all their customers - except those who present credit risks.

Unfortunately, while the industry needs to realize that customer value ultimately drives financial performance, the application of a marketing focus on a broad-scale basis can actually hurt the bottom line.

Management of customer relationships is directly linked to financial performance. Work done at has shown empirically that financial performance in service industries is correlated with customer loyalty, and that loyalty in turn is a by-product of retention of the right customers. Indeed, a firm's customer franchise is its most valuable asset.

But like any asset, the customer data base must be managed not as a monolithic whole, but on a granular, individualized basis. How a bank manages its franchise will determine its financial success.

More than any other factor, customer management will increasingly become the basis of competition in financial services.

This principle applies to all industries, but it is particularly evident in those with wide variations in customer profitability. Banking, utilities, and telecommunications are prime examples of industries with huge profit skews. When Procter & Gamble sells a bar of soap to a customer through a retail middleman, its profit on that transaction has been set. On the other hand, when a bank sells a checking account to a customer, the profitability is unknown until the account is actually used. In more than half the cases, the new checking account customer is actually unprofitable.

It now is fairly well known within the industry that all bank products have tremendous profit skews. Managing profits on a product level in an aggregate sense misses the point, given the dynamics of profitability - and unprofitability - within the customer base.

Yet, despite the disparity in profitability from one group of customers to another, few marketers vary their programs, spending levels, or performance measures based on these differences. Indeed, the pricing, promotion, service levels, and communications are often designed to result in more profitable and valuable customers subsidizing the unprofitable ones. The implications of this are enormous.

Four factors combine to pose life-threatening risks to banks that operate this way.

First, the leverage of the highly profitable customers on total profits is dramatic. If they were to leave, a bank's survival would be in jeopardy. Second, there are predators out there who are actively courting those customers and who do not have the infrastructure baggage and other burdens that banks have. New entrants can start with a clean piece of paper and attempt to skim the bank's best customers. Third, information technology now is at the point where these ambitions become more attainable. And last, technology has raised the bar in terms of what customers can get in the way of customized service, and they now expect more.

In this kind of an environment, profitability must be linked to individual customer relationships and not "one size fits all," scale game warfare.

Guerrilla action will win over unfocused mass attack. Traditional performance measures, which in some cases are new to banks and just gaining acceptance, are the wrong yardsticks.

Market share, overall customer satisfaction, branch profitability, and other non-household-specific norms are all the wrong ones for customer management. None of them is very relevant, and each can be misleading, in a world where as many as half of the aggregate customers are unprofitable. Similarly, efforts to raise quality levels and delight customers who are unprofitable are misguided and counterproductive. In the old world, this would be akin to selling Cadillacs at Chevrolet prices, and then counting sales volume as success.

The point is that market share, overall customer satisfaction, and other aggregate measures may have relevance in certain cases, but they are a blunt tool for customer management. What is needed is a recognition that share and satisfaction need to be valued differently for each of the various customer segments measured. All customers are not alike in profitability potential, and some have no profit potential at all.

Just as a customer varies in his or her value to a bank, so too does each customer define what is valuable to them, and that differs from customer to customer. Offering all customers a product feature may be construed as a benefit to only a subset of the entire customer base. Customers seek benefits and not features, which are a means to benefits and value.

When marketers build features into service delivery or products across the board, costs rise, and the marginal cost to many customers exceeds the marginal value created. This in turn gives rise to the need for segmentation.

Segmentation, if done well, addresses the problem but - to date - only on a very broad, generalized level.

The challenge increasingly will be to define and deliver value at the individual customer level in accord with how valuable that customer can be to the bank.

Managing the issues of what type of value proposition gets delivered to whom and what spending level is warranted with whom are now possible using the typical company's data base.

Businesses that handle a high volume of transactions, such as banking and supermarkets, by their nature, attract customers who vary in profitability, because of varying balance levels, degrees of usage, or transaction type and frequency. The good news is that these same industries enable greater individual customer observation on a direct basis.

These observations of individual customers can facilitate proprietary segmentation based on behavior and profitability that can enable a bank to change its marketing mix at the household level. Information technology and market research enable tailoring of offers and measurement of success.

This approach will not remain a banking secret for very long. Too many competitors both within the industry and from outside will find it is very effective in capturing profitable customers. Single-product providers, or category killers, have already had success in parts of the financial services industry. They are likely to expand, both in number and in the product areas they assault.

The old games of downsizing to reduce costs, acquiring new customers to feed growth, and selling more products to existing customers will be necessary but not sufficient. Cost reductions too often leave customers out of the equation and ignore the need to innovate to generate revenue growth.

Growing the customer base often acquires a representative share of more unprofitable customers. And selling more products to unprofitable customers can be fool's errand.

What is needed is a new paradigm and new business process to manage customers in far more sophisticated ways. The question is not whether this will be done with the industry's customers. The questions are who will do it at what pace and scope, and what will those who do not do it do to survive.

Mr. Evans is senior vice president and manager of strategic execution at Chase Manhattan Corp.'s retail bank.

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