Trend Stories
See for ‘Customer Profitability’
The title is straightforward and so is the essence. You wouldn’t need Sherlock Holmes to say "Elementary". But how many financial institutions (FI) do understand this ‘Elementary’? Ask the industry pundits and nine out of ten of them would say, most of these FIs are still “Dr Watson”!
Customer profitability is not a new concept; it is indeed elementary. Nonetheless, efficient execution of the endeavors to offer superior benefits to customers based on their total relationship value is certainly not a standard yet in the financial services industry. We do know that institutions, which prevail and focus on the appropriate processes and translate the outputs into strategies and initiatives for their sales forces, achieve as much as a 30% improvement in average relationship value. But the irony is that the very cost of this ‘strategy’ formulation and execution could be not worth as much! While the indicators of satisfaction and loyalty might increase -- with discounts, special packages, and communication channels -- these increases are often accompanied by declining profits, especially when the increased functionality and services are not accompanied by increases in prices or volumes. However, for a differentiated strategy to succeed, the value created by the differentiation − measured by higher margins and higher sales volumes − has to exceed the cost of creating and delivering the strategy, be it functionality, features or services. Also, this requires the capturing of effort and the subsequent measuring of its result, which in itself is a far reality for several FIs today.
The industry is currently undergoing several significant challenges, including the economic downturn, but there is also a much more subtle challenge looming in the horizon. It is the concentration of balances and profit among a few clients. As the industry discovers this trend, there is increased pressure to understand your customers better (especially their profitability) so that you can develop strategies to ‘protect’ your best customers! In fact, for FIs, customer profitability is far more important than product profitability, because the cost of providing a service or product is usually determined by customer behavior.
So, the fact remains that assessing profitability is the key while there are challenges galore:
- Not knowing what components and the ‘right’ data that truly drive better profitability valuations – the devil is truly in the details – where you can make compromises without thinning the value of the output; without cutting your bone.
- Partnering with an inexperienced vendor – the profitability measurement process in itself becomes costly with most vendors not able to retrieve the relevant data without overhauling the largely product/service-centric legacy infrastructure
- Thinking you can make a list of the fields needed -- every institution is dealing with its own universe of available information. It is far more productive to start with what you have, than to ask for something that might not even exist.
- Not understanding that it is a ‘continuous process’ and calculating profitability once, and to be done with it.
Often an entry product, like a checking account or a commercial loan, operates at break-even or loss levels. The product and its pricing are justified as a ‘strategic product’ since it enables the institution to leverage its relationship with the customer by selling more profitable financial products and services. (When companies call a product ‘strategic’, it is a sure sign that the product is unprofitable!) But many banks lack the ability to track all the services used by individual customers, much less the profitability of each product/service used by a customer. Deriving a means to measure profitability is only half the journey; the vision is to be able to manage it and make it heftier with continuous improvisation. While running a business means always adding new customers, the idea of eliminating customers may seem counter-intuitive.
A Relationship-based Pricing system holds the key to this situation. A customer-centric framework can help FIs to treat each customer uniquely, based on the overall relationship value, with innovative pricing strategies achieved by streamlining and automating the pricing and billing functions across enterprise. Relationship-based Pricing also ensures that customers' benefits and rewards are provided based on total customer value.
It is elementary for a bank that has a centralized view of customer information to be able to assess the relationship value, which is a score card of the customer’s revenue based on the transaction volume and price across product segments, the long-term relationship shared with the bank, and any other factors, like channel usage, geographical presence, international trade, etc. This relationship value enables the FI to create product and service bundles and packages and then attach attractive usage-based prices and discounts to the same -- in short, to offer a comprehensive ‘customer benefits program’. Further, the RBP framework helps analyze and test how profitable these packages and price plans are. These pre-run modelling solutions give projections on the profits that the bank will earn from each of these packages or price plans for various segments. It will, in turn, enable testing of these against competitor prices!
Now you might ask, “Elementary - isn’t it”? Why didn’t we think of this before
