By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published September 2004, ABA Bank Marketing

Why should you assess the value of your customers?

Grades are a fact of life and are used to assess the value of something.  All of us have received grades and most of us have given grades to others.  Grades are used for many reasons:

§         They give us motivation to learn.

§         They show us our strengths and weaknesses and they give us incentive to improve.

§         They provide a measure that indicates improvement (or lack of such) over time.

§         They provide the grader with a uniform standard for performance.

Our customers have become very skilled at assessing the value of our financial institutions.  We score high marks if we have the lowest interest rates on loans, the highest interest rates on deposits, are open for extended hours and have a branch within a 5 minute drive from their home or office!

On the other hand, most bankers are not very skilled at assessing the value of their customers.  That’s because it’s not easy to do and most banks lack the data to even attempt such a project.  However, banks are now becoming more interested in assessing the value of their customers.  The banks that have actually accomplished this undertaking are well on the road to increasing their profitability.

How do you assign a grade to your customers?

Before you grade your customers, you need to determine if you want to assess the value of just the customer or the customer’s whole household.  If you want to assess the value of just the customer, then you will need to aggregate your grading data using a customer ID number (typically their Social Security or Tax ID Number).  However, if you want to grade the customer’s whole household, then you will need to aggregate your grading data using a household number (typically generated by a householding engine in your MCIF or CRM) or the bank’s internally-generated CIF number, which manually links accounts).

Once you have decided at which level to assess customers, you then need to determine what standard to use to grade your customers.  The data that is the easiest to get is not necessarily the best to use for this task.

For instance, you can aggregate the household’s total deposits and say that an “A” customer has more than $50,000 with the bank.  However, this doesn’t tell the whole story.  This customer could have one certificate of deposit account with you and they could have insisted that you give them an above-market rate for their money.  If you looked at other factors, this customer may actually turn out to be less valuable to the bank!

One such factor you may wish to employ when determining a customer’s value is their profitability.  To know how profitable they are, you need to know the profitability of each of their accounts.  To know the profitability of each of their accounts, you need to compute and reconcile the profitability of all the bank’s products back to the financial statements.  Once this has been done you can sort your customers by profitability and break them up into 4 equal groups (or quartiles).  The top quartile could be your “A” customers and the bottom quartile could be your “D” customers.

As good as profit is for assessing the value of customers, it doesn’t tell the whole story either.  Your most profitable customer could also be a single-service customer who has a $1 Million mortgage loan, but hasn’t bothered to refinance it and is paying you 10% interest!

What you need is a multi-dimensional way of viewing your customers.  Using a wide variety of variables that grade different aspects of your customer’s behavior can accomplish this goal, such as:

§         Total profit

§         Total deposits

§         Total loans

§         Date the first account opened (“Start Date”)

§         Total accounts

§         Total services

§         Various Demographics

By assigning weights to these variables, you can construct an econometric formula, to grade your customers.  And, you might find that your best customers are those that have been with you the longest, have been sold a variety of profitable services and have maintained higher balances.

Using Customer Grades

Grading your customers shouldn’t be just an intellectual exercise – you need to do something with this information that will make your bank more profitable.  For instance, you can:

§         Set a goal for converting 5% of your “B” customers to “A” customers.  If you have an MCIF or a CRM, you can look at your Household Service report to discover the most profitable combinations of services used by your “A” customers.  Then, you can cross-sell these services to your “B” customers.

§         Get the word out!  Work with your data processing department to distribute these grades to your tellers and CSRs.

§         Train your tellers and CSRs regarding the level of service to be provided for each grade of customers.  You have finite resources and you can’t treat all of your customers equally, but you can treat them all with dignity.  For instance, if an “A” customer bounces a check you can waive the NSF fee.  If a “D” customer closes their one account with you – such as a low-balance IRA, you can close it with courtesy and not try to cross-sell them another account!

By using customer grades effectively, your bank can earn an A+ for performance!

John J. Coffey, C.P.A. and Gene Palm are the principals of Profit Resources, a consulting company that specializes in MCIF technologies.  © Profit Resources, Inc. 2006