Profitability

We have to protect the investment we make in acquiring and communicating with customers. We create the customer relationship with retention in mind, of course. But retaining customers is not an end in itself. Not all customers are equal. Not all customers are a good investment. The object, the source of any financial success, is retaining profitable customers. A loyal customer is an annuity. That doesn t mean customer relationships can be allowed to become static. Increasing wallet share and moving customers up the value chain is the most sustainable growth path for a company.

Every encounter with a customer represents an enterprise-wide opportunity to understand the customer s needs better. Acting on the opportunity means increasing wallet share. Every division and every employee is working toward one goal ”improving the relationship with the customer so that customer is more profitable for the company over the long term .

For some companies, internal growth is the only possibility for expansion. In the banking industry, for example, many institutions have reached the legal limit for growth by acquisition, so their focus has by necessity shifted back to internal growth and strengthening their bonds with existing customers. Every customer counts when internal growth is the focus.

Strengthening relationships with existing customers is an imperative for companies like Royal Bank of Canada (RBC), especially when consumers today have more choices than ever before in terms of how they want to manage their finances and with whom. By using the get to know your client rule in creative and strategic ways, RBC is delivering integrated business and marketing plans to grow and maintain a satisfied and profitable client base.

RBC

In 1987, RBC was a traditional personal and commercial bank. It had no trust capability, no investment banking, no wealth management, no brokerage, asset management or insurance. The bank set a target of creating a universal financial enterprise with services delivered to the customer in an integrated way. RBC is now Canada s largest bank and global financial services organization. The ultimate goal is a profitable relationship with every customer.

In practice this means three things. First, the customer experience needs to be precisely tailored. Give each individual customer the right stuff. Customers want to be understood . They want their needs to be anticipated and their business valued. Second, the cost structure needs to be appropriate to the customer. Finally, the risk profile of each customer needs to be known and reflected in the cost structure.

Any effort to tailor the customer experience must take their needs as the baseline and work through the cost structure and risk profile. 24/7 call centers and branches on every corner are not enough anymore. RBC has developed a combination of strategic and tactical segmentation codes to allow it to tailor its customers experience. It has indicators for profitability, life cycle segment, lifetime value (five years ), credit risk, vulnerability (susceptibility to leave), channel preference, commitment (loyalty) and consolidation ( propensity to consolidate financial services with RBC). It has developed strategies to retain the customer, reduce their risk or grow their business.

One of the most efficient ways to serve customers is through package services that offer value for the customer and enhance profitability for the bank. It is more cost-effective for the bank and, in RBC s experience, the customer is more satisfied because they are no longer nickeled and dimed for every transaction, which made reading bank statements a confusing, often frustrating task. Instead customers feel their needs are understood, which is certainly something they value.

From 1999 to 2002, approximately 55 percent of RBC s personal deposit account customers were in a banking package. In 2002, 74 percent were in packages. Using the wealth of customer information at its disposal, and the detailed analytical segmentation RBC has built, the bank was able to better target its packages to the right customers to better meet their banking needs.

RBC s personal banking packages originally did not include Internet service. By introducing online banking as part of these packages, customers not only received greater value but were also introduced to paying many of their bills online. Today, the Internet is the most popular method used by RBC s customers to pay their bills, followed by branch, telephone and banking machine.

In the three-year period between 1999 and 2002, RBC s total number of most profitable customers rose 18 percent, or 1.2 million. Those customers average profitability went up $80 per customer.

 

The first step toward internal growth to drive improved profitability is consolidating the company s understanding of its customers, achieving that critical single view of the total customer base. In an ideal company a customer s information moves with them as they touch the company from different angles and through varied channels. A customer should always be talking to the whole enterprise. There should be no disconnection between a customer s purchases on the Internet, calls to customer service and in-store visits . A solid communication strategy is key to growth.

Profitable customers help companies grow. We need to know how to identify them, to understand each customer s profitability.

Summary data is misleading at best and significantly flawed at worst. To rely on anything but the detailed information about an individual customer will result in poor assumptions, an inferior customer relationship and decreased customer value.

It is simply not possible to maximize a customer s profitability based on summary and assumption-based information. Detailed, integrated data is the differentiator of success.

Understanding the profitability profile of customers is an essential ingredient in success.

RBC

RBC once relied on summary data to estimate the profitability of its customers. The goal was to align the right resources against the customer based on their needs and business with the bank. Then the bank made a commitment to the future by investing time and money to create an information center that consolidated all its detailed information about customers in one place. For the first time, the bank had a single, comprehensive view of each customer. To its surprise, the bank discovered that 75 percent of its customers shifted two or more profitability deciles. Customers the bank had been treating alike were, in fact, dramatically different in their banking profiles.

 

Customer profitability is not only a historical fact. Every customer also has an intrinsic value: a discounted present value based on future cash flows ”a lifetime value .

RBC

RBC knows that it s critically important to differentiate between the current and potential value of clients , both in the short term and the long term. This enables the bank to serve each client better by providing the right service at the right time in the client s life stage. For example, RBC recognizes the long-term value and the future profitability potential of supporting students now, and provides such features as interest-only payments on student credit lines and higher limits for students enrolled in professional programs.

 

Lifetime value is the longer term view of customer profitability. We run our businesses for the long run and we should structure and prepare our organizations for that future. We should create our customer relationships for the long run too. Our strategies for acquisition, communication, retention and growth ought to be robust enough for the future. We need to align our resources in a manner that is appropriate to our customers needs and their business with the bank. Over the long term, their lifetime value is the key to success.