If...

IF  you could save 25% of your marketing costs....
IF you could save 25% of irrelevant marketing communications...
IF you could save 25% of your sales commission costs...
IF you could align people to do the right thing for your customers and your business...

What would it be worth to your company ?

The reality is that most consumer banking / financial services companies have a waste factor of at least 25% of resources which is targeted at capturing money that is already in the bank or retaining money that isn't at risk of leaving. That is the startling finding of the fact-based bank customer behaviour research we did over the last several years using our own proprietary methods.

The key to unlocking these savings is pretty obvious: simply stop chasing money that is churning among products and branches in the bank and focus on real dollars won and lost.  The tricky bit is being able to distinguish and measure money flows in the same dimensions that are used to manage the bank - product, location, business unit, legal entity - because money flows are inherently a customer driven behaviour.

Fortunately there are solutions at hand. The simplest is to simply manage sales and lost business at the aggregate customer level - if their balances go up, you have sales, if they go down you have lost business. This works, but is pretty crude. We have developed a better way that quantifies the flow of funds at the account level, which enables reporting and analysis in the same dimensions as are used for management. This bridges the gap between customer and business, enabling management to synchronize resource allocation to customer behaviour objectives.

All this should be old hat, but sadly it's not. Most banks are still struggling under the old paradigms of driving branch and product balance, revenue and profit targets instead of adding the customer dimension.  How to move the mountain of management intertia ?

David McNab

If...

Unprofitable Customers: Naughty or Nice ?

Customer value helps identify the top tier customers we need to focus retention activity on, but what of the other 80% of customers who generate nominal or even negative contribution? Are they naughty or are they nice to have in your portfolio?


This question has been troubling strategists and marketers since customer profitability measurement first became viable in the early 1990s. And with good reason: depending on what you are measuring and what your goals are customer value can suggest very different actions. It is imperative to measure customer values using a model appropriate to the decisions you want to make. More often than not you will discover that a variety of measurement models are needed to support different kinds of decisions. (See CMA article How should we measure customer profitability). Even if you’ve got the models you need, however, it is inevitable that 60% of your clients are going to be somewhere in the middle and 20% at each of the top and tail of your list.

Let’s consider the bottom 20%. Are they “bad” customers that we should de-market? Are they “abusers” of our services? Customers in the bottom quintile of value rarely have an “average” customer profile. In this tier you will find customers with a wide variety of business relationships with your bank, most of them fairly substantial in terms of balances and activity. If you dig deep enough into the numbers, you are likely to find pricing at the root of their negative value. Some will have their value depressed by shrewd negotiation of rates and fees, others by strategic discounting and others still by irrational market pricing conditions.

Negotiated discounts in fees and rates certainly need to be taken into account when assessing customer value. But pricing anomalies driven by market conditions or strategic discounting have little to do with the customer, and should not be included in customer value. The extreme case of this is when the market prices entire business lines at negative spreads, which happens from time to time in periods of crisis. Whole segments of customer values can turn from gold to brass in a matter of months when this happens.

Obviously one cannot switch customer relationship strategies with these shifting winds of chance. You need to look past the numbers to manage customer strategy effectively. Clearly we need to reprice relationships where excessive discounting is negotiated. It is equally clear we should not penalize customers for aberrations in market or strategic conditions. There is no substitute for wisdom and understanding when working with customer value !

Best holiday wishes to all.
David McNab

Unprofitable Customers: Naughty or Nice ?

Customer behaviour = real intelligence !

Nothing artificial about it... real custoemr intelligence comes from understanding your business, and how customer behaviour gets reflected in the data you capture about customer interactions.

Many data mining experts today come from one of two schools - first the traditionalists who are dyed in the wool statisticians. These folks are plenty smart, but are first and foremost mathematicians and they draw their insights from interpretation of mathematical modeling techniques. They can glean powerful insights about the correlations among your data.. but is that really meaningful ? Is not customer behaviour - and it's dynamics not more to the point ?

The second school of data miners are those who use current generation data mining tools and advocate the concept of  self-service data mining. Tools have become much easier to use, with GUI interfaces and process logic that manages things - like covariance - that it used to require a mathematician to control when designing models. These tools are great - they reduce the mathematical knowledge required to create models and accelerate model production. But are they measuring things that really matter ? Is this more data or more information ?

Our sense is that it is imperative to apply deep business knowledge to the process. Understanding who your customers are, why they buy / use your products, what they like and dislike, and how they behave under varying circumstances is crucial to obtaining real inferential insights about customer behaviour. Unless you know what is an aberration and can separate real from false positive behaviours models are essentially just more data that has limited value for business decisions.

Liberate yourself from the tyranny of the math ! Model your customer interactions and search out the menaingful indicators of relationship change. Getting these basics right can save you a ton of money and improve service to boot.-DBM

Customer behaviour = real intelligence !