Academic journal article The Journal of Bank Cost & Management Accounting

Re-Think Customer Segmentation for CRM Results

Academic journal article The Journal of Bank Cost & Management Accounting

Re-Think Customer Segmentation for CRM Results

Article excerpt

The conventional wisdom in banking today is that the majority of a bank's customers are unprofitable, or at best marginally profitable. All bankers are now familiar with a chart like the one below, which was presented recently at an industry conference. As it illustrates, segmenting customers according to profitability shows that a small percentage of customers generate all of a bank's profits.

Yet, every banker also knows from a gnawing feeling in the gut that this "Profit Segmentation" model is fatally flawed. It is flawed because it starts with the assumption that profitability is a function of a customer. However, profitability is not a function of a customer. Customers simply have needs and usage patterns. Profitability is a function of the processes a bank uses to serve customer needs. In other words, customers are not intrinsically profitable based on their characteristics, but are profitable based on how a bank chooses to serve their needs. Given options in service and delivery methods, nearly all bank customers have the potential to meet the required target for profitability.

The reason banks see the large disparity in customer profitability is that we as an industry have tried to serve all customers through essentially a few similar processes. Competitors and non-banks have devised new processes, and taken both customers and a significant share of wallet from the customers we do keep. Painful examples exist across all customer types. Our wealthiest customers are taken by the lower cost, direct-selling brokers with cash management accounts. Customers with limited resources are increasingly taken by the booming Check Advance industry. The mass market is attacked from all sides by grocery stores and credit unions.

When using the Profitability Segmentation Model, the purpose of Customer Relationship Management (CRM) is to rate customers by their attractiveness. Banks want to "build fences around the profitable customers," and to attract "look-alike" customers. Less attractive customers must either be cross-sold profitable products, or be corralled into less expensive service channels. Developing a CRM strategy around the Profit Segmentation Model identifies the customers a bank wants because they are intrinsically profitable, others that have the potential to become profitable if cross-sold, and still others whom the bank does not want because they are inherently unprofitable.

Product development, delivery channels, marketing budgets, sales efforts, information systems and service levels all become geared around customer profitability segments. For example, some banks have proudly touted in the press how they can leave "C" customers on hold longer than "A" customers; force "C" customers out of the branch to alternative channels, and target "A" customers for special customer calling efforts. …

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