Which customers make the biggest contribution to your bottom line, and which generate a negative return? Do your promotions target volume without profitability? How do you decide what to charge a particular customer for a business loan, a mortgage, or a car loan? On what basis do you waive fees for customers who ask?
If you base your pricing on intuition or what the bank across the street is doing, you're missing profitable opportunities. And if you can't measure the value of your customers, you can't project the value of expanding those relationships or acquiring others.
In our experience, the general 80/20 rule of thumb often is greatly understated. The top 20% of your customers may be contributing more than 80% of your profits.
There is a need for better customer-level metrics, instead of the traditional organizational- and product-level measurements such as sales, revenue, and margin. This is driven by pressure on margins as a result of market consolidation, as well as increasing customer sophistication in using multiple delivery channels.
However, because customer profitability analysis is not mission-critical, it doesn't get the attention it deserves, especially at midsize and community banks. And until recently only large institutions could afford such systems, but now more affordable ones are available.
As with any customer-centric technology implementation, there's no cut-and-dried ROI analysis for customer profitability, predictive analytics, and customer relationship strategy. Financial justification is often subjective and hard to measure, especially if an organization has not developed a strategy and appropriate metrics. Yet there are many benefits, both direct and indirect. What's needed is a clear strategy and a corresponding set of metrics based on what you are trying to accomplish.
One of the largest direct benefits traditionally considered in an ROI analysis is savings, although the objective should be maximizing the benefits rather than simply minimizing cost.
In addition to cost reduction, profitability systems can increase revenue, loan volume, and wallet share. An analysis of your customer portfolio can provide the basis for determining the best products for each segment. Furthermore, pricing tools or simulators integrated with the system can allow relationship managers and loan officers to tailor product terms to the customer's specific needs while maintaining established profitability, ROA, and/or ROE objectives.
When purchasing a customer profitability system, consider the quantifiable indirect benefits by analyzing the entire strategic arena — including business processes, people, and the technology itself. Who will use the system, and how often? The more people it affects and the more often it is used, the higher the potential return.
Historically, ROI has been focused solely on the technology aspect, which does not present a true picture. Profitability and predictive data, when available, have resided in the back office, but there's far more value in distributing functionality and profitability information throughout the organization.
What ROI means, and what kind of return is needed to make a purchase worthwhile, may differ for small and large financial institutions.
At a small bank, the culture may be challenged in supporting the required investment, or an extensive ROI process itself may be overwhelming. Decisions sometimes are made by an appointment from the CEO or after a few promising reference calls. Additionally, customer relationship strategies may not be as complex or sophisticated as they are at a large institution.
However, one trend is changing this picture. Executives from large institutions are starting financial institutions of their own and bringing with them a more sophisticated culture that embraces customer relationship management, profitability, and predictive analytics. The result is a leveling of the competitive landscape.
A customer profitability system provides an analytical basis essential for a successful CRM initiative. The need and utility for customer profitability analytics within a CRM implementation is based on the degree to which:
A strong profitability gradient exists between the most and least profitable customers.
Customer-directed behavior drives profitability, e.g., product use and delivery channel choices are made by the customer.
- Differential pricing can be applied to these customer-driven behaviors without punitive business or legal constraints.
The CRM efforts of the past focused on targeted systems within products or channels, often overwhelming customers with multiple or contradictory offers. The CRM efforts of today must work at an enterprise level, providing touch points across the organization as well as multichannel offerings.
