The profit pursuit: but there are a lot of conflicting approaches for doing this. Which works best? We asked three 'profit prophets' for their perspectives on this and related issues. To identify customer segments that offer good returns, marketers have to measure profitability.

AuthorBernstal, Janet Bigham
PositionProfitability - Cover Story

Measuring customer profitability for marketing purposes has long been problematic. Is one system better than the others?

ABA Bank Marketing magazine spoke with experts who offered slightly different perspectives on three issues related to profitability and profit measurement. The profit issues include concentrating on (1) wallet share, (2) customer relationships and (3) marketing return on investment (ROI). Most profit approaches am built around the core belief that banks must establish a system that marries marketing to finance and targets the truly profitable customer.

  1. Focus on Market Share

Most marketing campaigns are volume driven, and that very practice puts the bank at profit risk.

Profit risk is a term coined by Rich Weissman, president and CEO of the Portland, Oregon-based Database Marketing Agency Inc. to describe the degree to which net income is concentrated in a very small portion of a banks' relationship base.

Basically, this small group "owns" the bank's profits. If this group is not retained, and retained at current profitability levels, then the overall net income of the bank is at serious risk.

"Most clients guess it's the 80/20 role, where 80 percent of their earnings are coming from the top 20 percent of their base, "says Weissman. "It's not an 80/20 rule. It can be 150 percent and we've seen it as high as 300 percent."

How do banks get into this position? Dangerous concentrations of profit risk are a result of traditional marketing and sales efforts.

"They prayed to the cross sell ratio, they believed the higher the cross sell, the more money they would make, but it turned out to be highly unprofitable," claims Weissman. "We tell sales and marketing, think beyond just 'sell lots of things.' Focus on share of wallet and profit dynamics, because profitability is dynamic."

To grasp "share of wallet," Weissman's firm does a full customer profitability assessment that balances back to the general ledger. They look at each customer on a relationship basis, to see what true relationship profitability is, as well as by officer basis to see what contribution officers are making, and on down to the branch and region level.

"There could be a branch with high volume, but it's not profitable," explains Weissman. "They could have a low-volume branch, or an officer with low volume, but they're bringing in profitability and they're impacting bottom line. Suddenly marketers see it's not just generating volume, but doing things well." Doing things well means:

1) Understanding profit risk concentrations. "Folks at the top...

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