How Does Customer Profitability Increase Our ROE?

Author: Cheryl Wondrasch, CWondrasch@profitstars.com

“Cheryl, how does customer profitability increase our ROE?”  I received this question on one of my first customer profitability installation and training sessions from the CEO at the bank.  At that time, I was shocked by the question.  How could you spend money on a system if you didn’t know what to do with it?  I’m not criticizing him; I’ve received the same question in different context for the last nine years.  I’ve done several presentations on how to get the most from customer profitability.  So many, I wonder if anyone is listening!

So how would I answer that question today, nine years later?

1. USE the information!  Customer profitability provides you with a stacked rank list of your most profitable to least profitable customers.  Because customer profitability has a financial focus, some institutions think of it as a finance only tool.  Customer profitability information becomes more valuable if it is widely distributed.   Consider segmenting your clients into “gold, silver or bronze status”.  Then provide access to these rankings to your front-line employees through a core or CRM feed and instruct them on how to treat these most valuable clients.
2. Think outside the box, a loyal customer is not always a profitable customer.  The results are not always popular, but customer profitability is only one factor in customer retention. Is it important to retain all your clients or more essential that you retain your most valuable clients?
3. In most financial institutions, 70% to 80% of their customers are either breakeven or unprofitable.  Bankers do not like negative numbers – be prepared to defend the assumptions.
   1. Have a retention plan for your most profitable customers.
   2. Find customers in the bottom 10% not related to credit issues.  What would you do with the customer that has twenty high-rate $2,000 CD’s?
   3. You can decrease the number of customers you have and INCREASE profit.
4. Decide on your financial focus; is it ROE, profit, or contribution?  If equity and funding is an issue, focus on ROE, if net income or profit increase is your objective, use that as measurement.
   1. If you’re looking at a pricing opportunity, you may want to focus on ROE, or incremental profit.
   2. If you’re designing a marketing campaign, use profit tier or rank.
5. Effectively setting pricing to enhance net interest margin is essential for profitability.  Using customer profitability and pricing tools, you can understand the impact of rate, balance and risk rating changes to ensure you are effectively setting prices.  Additionally, knowing how low you can go for your most valuable customers is only available with profitability data.

Putting this information into action has its rewards!  Financial institutions that actively analyze and use customer profitability information generally drive NIM that is six basis points or more above their competition. For a $500 million institution that is $300,000 annually!