Be Sure to Factor Profitability in Any Target Marketing Plan
Hannafin, Richard M., American Banker
In the past two decades, bankers have fallen in love with the idea of target marketing: Going after that he of the market that they have been told will provide them the greatest opportunity to make the biggest buck.
What's wrong with that? Everyone wants to make the biggest buck with the least amount of effort. And, in a highly competitive banking world, an efficient strategy like that certainly makes a great deal of sense.
But it can cause you to mistake unprofitable households for profitable ones, and unprofitable product lines for moneymakers. It can cause you to spend money developing special programs designed for people you'd rather not even have as customers, and too much of that can cost you everything you've got.
To understand how this works, let's start by tracing the history of the target marketing movement in retail banking.
Identifying Good Customers
First we had the 80-20 rule, which said that 20% of customers provided 80% of your profits. The key then was to figure out which ones were the good ones -- and bankers thought that the little old ladies in the trust department and the rich old men that shuffled in for donuts and coffee with their Social Security check on Thursday afternoons were the good ones.
The problem was that those 20% didn't provide 80% of the profits -- only the balances -- and there weren't enough to even justify running branches just for them.
This led to the movement to target the affluent, who were defined primarily by balances available to sit in the vault. Fees were waived for the affluent who maintained certain balance levels. And explicit pricing was instituted to make nonaffluent customers pay their own freight.
After the affluent-marketing movement came the push for relationship banking. The idea behind it was that the more accounts someone maintained, the more profitable they would be.
Along with this came an emphasis on the "mature market," which occurred when someone figured out that older people were net savers, not net borrowers, and so keep more money on deposit in the bank. Again, it was all about balances.
Finally, with increased emphasis on technology came a desire for precision in target marketing, which gave rise to the cluster code craze. Sophisticated demographers -- many of whom know nothing about banking -- group together information about income, homeownership, age, and other data and cross-reference it by census tract to suggest the perfect "target markets" within your financial institution's particular market area.
A Little Matter of Profit
The one thing these demographers forget to factor in is profit, which, whether they know it or hot, is a very important component of the banking business.
Does targeting rich people -- no matter what fancy name you call them by -- insure they'll provide your bank the most profit of any market segment? No. Only a sophisticated analysis of individual account and household profitability can do that.
As a matter of fact, rich people as a market segment generally don't provide banks with the greatest net profit. …