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Profitability Analysis: Is Your Bank’s Bottom Line Bleeding?

By Michael Deely

If Your Retail Bank’s Bottom Line Is Bleeding Money, It’s Time For A Customer Profitability AnalysisAt your retail bank, your bottom-line is the beating heart of profitability. If your financial institution doesn’t turn a profit, you’re out of business.

So, when it comes to your customers, you need a profitability analysis to ensure your banking operations aren’t just driving you nearer to closing day. The three types of customer profitability analysis include: Retail customer profitability, business customer profitability and customer lifetime value. Today, we’ll be covering customer profitability for retail banking.

Retail Banking Customer Profitability

Most middle-market bankers are surprised by the results of a retail profitability analysis, because most of them don’t expect so many of their customers to be unprofitable. In fact, the truth might surprise you: Only about 20% of your customers are driving 80% of your profits. Another 20-40% of your customers account for the remaining 20% of your profits. And the most shocking fact of all is that 40-60% of your retail banking customers are unprofitable.

However, once you determine the precise figures for your retail bank, this knowledge empowers you to turn the situation around by identifying various customer segments, differentiating the customer experience for each segment and then moving each customer up the profitability scale.

A customer profitability analysis enables to you increase your bottom-line growth in a number of different ways, including:
  • Segmenting and categorizing customers to identify and differentiate between profitability levels
  • Acquiring new, profitable customers by pinpointing the attributes of existing profitable customers and applying those filters to sales and marketing activities
  • Cross-selling products to existing customers to move them into more profitable segments
  • Providing differentiated services to customers based on their profitability
  • Determining prices that make products and relationships more profitable in the long run

Best Practices For Profitability Analysis Success

Before undertaking a customer profitability analysis, your retail bank must be ready to calculate customer profitability properly. The good news is that most of the data needed to determine customer profitability already exists in various systems across your institution.

To leverage this data and create a usable customer profitability analysis, you need to take a number of important steps:
  1. Develop buy-in from the management team and the various business areas that need to embrace customer profitability analysis.
  2. Develop accurate, consistent and fair allocations for both cost and revenue.
  3. Implement robust data analysis and reporting structures to support ongoing evaluation efforts.
  4. Ensure that all necessary staff members understand your approach and their role in using customer profitability analysis, including front-line staff, marketing and servicing.
The ability to tailor interactions to each customer and segment accordingly gives you the opportunity to drive top-line growth through deeper, more meaningful engagements with customers. These differentiated customer experiences, along with a robust strategy and trained personnel, all combine to deliver long-term sustainable customer profitability.

Your retail bank’s bottom line can’t afford to keep bleeding from unprofitable customers. If you ignore customer profitability analysis, your competitors are primed to steal your potential and existing customers. But, if you arm your staff with the skills and analysis for better bottom-line growth, your customers won’t be going anywhere.

To keep your bank’s profitability healthy, your retail banking operations need to function as efficiently as possible. Click below to download a free whitepaper from Big Sky Associates and discover how process improvement directly benefits your bottom line.

Download Your Free Report - 6 Bottom-line benefits of process improvement for your post-recession middle market bank