To celebrate its 75th anniversary last year, Pulaski Bank wanted to let customers know just how much it valued their business.

So the St. Louis-based thrift gave out commemorative gifts to customers according to how much they added to its bottom line. The top third received six wine glasses, the middle tier insulated lunch bags, and the bottom third coffee mugs.

The stratification, determined by cost-analysis software, was designed to thank the bank's best customers and send a subtle message to the not-so- profitable.

"People do find out that they didn't all receive the same kind of gift," said William A. Donius, president of $190 million-asset Pulaski. "The concept was very well received by our top customers."

Pulaski's strategy is one way community banks are using new technology to identify their best-and worst-customers. Taking their cue from big banks, small institutions nationwide are investing in profitability analysis software to help determine which customers to cater to, which to cross-sell, and, in some cases, which to nudge out the door.

"You're really making like an ostrich if you're not doing this," said John R. Madden, chairman of First National Bank of LaGrange, Ill.

Lawrence McCants, chairman, president and chief executive of First National Bank of Goodland, Kan., said, "This is the first time in all my years of banking that I feel I have control of the data."

Holding on to profitable customers is easier than cultivating new ones, which is why banks are taking steps to make sure their profitable customers know they are appreciated. Banks hope to build enough loyalty that these customers will not be tempted to leave when rival banks offer slightly better deals.

To keep its best customers, Pawling Savings Bank in Fishkill, N.Y.-which bought profitability analysis software from St. Paul-based Deluxe Corp. about 18 months ago-hired personal bankers to exclusively serve customers who hold the bank's no-interest checking account.

The premier checking account, the thrift's most profitable, requires a $1,500 minimum balance, but Pawling finds that most of these customers maintain balances far above the minimum. They appreciate the individual attention, and Pawling sells additional products to those who are already money-makers, said Rob Ward, senior vice president at $1 billion-asset Pawling.

Other banks use cross-selling to convert money-losers into earners.

Take Mr. McCants' First National Bank of Goodland, which installed Chicago-based Financial Technology Inc.'s system this spring.

The $200 million-asset bank has 70% market share in two of its communities and operates the only bank in nearby Sharon Springs. Because the bank cannot expect unprofitable customers-such as those who only have a low-balance savings account-to move their accounts, it pushes higher-margin products to them.

"Our marketing philosophy is 'kiss them until their lips are chapped,'" Mr. McCants said.

First Bank and Trust Co. of Illinois in Palatine tries to capture new business by persuading existing customers to transfer certificates of deposit from competing banks. When customers open accounts at First Bank, they fill out questionnaires listing where they hold CDs and when the CDs expire.

Just before the CDs roll over, First Bank's computer system reminds the customer's personal banker to call for the competitor's rate. With the rate information in hand, First Bank then offers a better deal.

"It isn't rocket science, but it works," said Robert G. Hershenhorn, chairman and CEO of $525 million-asset First Bank.

Once banks have developed general profiles of their profitable customers, many seek out new customers with similar traits.

At Mr. Madden's First National Bank of LaGrange, for example, the bank's most profitable customers are small-business owners. The entrepreneurs often hold many accounts at the bank, from checking accounts to operating lines of credit to estate planning.

Armed with that information, First National markets most heavily to small businesses near the suburban Chicago bank. The profitability analysis "has helped us identify which business to go after," Mr. Madden said.

Profitability analysis helped Pulaski realize that its most profitable customers are over 70. Mr. Donius said Pulaski must attract about three new customers to offset the loss of one older customer; younger customers do not maintain the high-balance, low-interest rate savings accounts that make their elders so profitable.

Without the profitability software, "we may have sat around and said this (loss of our older customers) is no big deal," he said. "Now we're building new relationships much more aggressively than we would have otherwise."

First Bank of Conroe (Tex.) is using profitability analysis, also called marketing customer information file, or MCIF, to determine where to build a new branch. Once it learns where its most profitable customers live, First Bank of Conroe plans to open a branch there and tailor that branch's products to those customers.

"If you're going to put a branch in, you might as well better serve your most profitable customers," said Ken Mayfield, controller at $100 million- asset First Bank of Conroe.

Though the data show which customers to keep, they also point out which should be dropped. At First National Bank of Goodland, the local government and school board accounts Mr. McCants thought were money-makers turned out to be duds, because the bank set its interest rates for public funds too high. Next year First National will not bid as aggressively, he said.

Salt Lake City-based Brighton Bank also reprices its unprofitable accounts, adding fees until a customer becomes profitable or changes banks. Indeed, when customers get letters from the bank detailing the new charges, most close their accounts, said James R. Fraser, president and chief executive officer.

This repricing trend is encouraging Linn-Benton Bank of Albany, Ore., to invest in profitability analysis software later this year. Dallas Enger, president and CEO, said he is afraid the flood of new accounts at his $63 million-asset bank are those his competitors have forced out.

"We may be getting the ones they're shooing out the door," he said.

Like Brighton, Mr. Enger said he would consider increasing fees for his unprofitable customers as incentives for them to go elsewhere.

"I suppose they may end up at a credit union," he said.

Still, most bankers take a wait-and-see attitude when it comes to unprofitable customers-especially if they are young.

Students and first-time homebuyers tend to be unprofitable because they only have one or two accounts and maintain low cash balances. But most banks believe those customers become profit-generators with time.

"We feel they're going to need banking services throughout their lifetimes," Mr. Madden said. "The loyalty built from giving a first mortgage is almost metaphysical."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.