Gartner Research

Customer Profitability Analysis in Retail Banking

Published: 18 September 2000

ID: G0092628

Analyst(s): Kimberly Collins

Summary

Management Summary The two types of customer profitability common in retail banking include current customer profitability and lifetime value. Customer profitability analysis enhances a bank's ability to 1) acquire new, profitable customers, 2) cross-sell profitably to existing customers, 3) provide differentiated service to customers based on their profitability, 4) migrate customers to more profitable products and services and 5) make pricing determinations that will make products more profitable. Before undertaking customer profitability analysis, banks must ensure that they are ready to calculate customer profitability. Banks must 1) establish buy-in from the various business units affected by customer profitability analysis, 2) develop consistent, accurate and fair cost and revenue allocations, 3) develop good specifications prior to implementation and 4) ensure that all necessary staff are ready to undertake customer profitability analysis. The largest banks were more likely to calculate current customer profitability than smaller banks. Current customer profitability was used primarily to support product development, pricing determinations, the identification of customers for migration to more profitable products and services and the establishment of customer segments. However, the resulting activities supported by customer profitability analysis were not very effective. Few of banks were calculating lifetime value, although many of the largest banks expected to be doing so by year-end 2000. Many smaller banks will be developing customer profitability analyses for the first time. Regardless of bank size, most banks that currently calculate customer profitability will need to increase the effectiveness of the support for the resulting applications. They will need to do this by incorporating more product information into the analysis and using actual costs and transaction- level behavior in their analyses. There are several considerations for banks...

Table Of Contents
  • Management Summary
  • Customer Profitability Analysis Defined
    • The Importance of Customer Profitability Analysis
    • Applications of Customer Profitability Analysis
  • Bank Readiness for Customer Profitability Analysis
    • Establish Buy-In From the Various Affected Units
    • Develop Consistent, Accurate and Fair Cost and Revenue Allocations
    • Develop Good Specifications Prior to Implementation
    • Ensure Staff Readiness
  • Current Use of Customer Profitability Analysis by Banks
    • Applications Supported
    • Customer Profitability Calculations
    • Frequency of Calculation and Retention of Previous Scores and Data Elements
    • In-House Development vs. the Use of Third Parties
    • Lifetime Value
  • Considerations for Current Customer Profitability Analysis
    • Use of Industry Averages vs. a Bank’s Own Costs
    • Use of Actual or Standard Costs
    • Treatment of One-Time Costs and Revenue
    • Use of Historical Profitability Ratings
    • Use of Detailed Transaction Information
    • Use of Entire Product Portfolio
  • Technologies Aiding Customer Profitability Analysis and Application
    • CIF
    • Marketing Database System (MDS)/Marketing Customer Information Files (MCIFs)
    • Profitability Systems
    • Data Warehouse (DW)
    • Optimal Combination
  • Conclusion
  • Strategic Planning Assumptions
  • Acronym Key

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