Fly with your angels (profitable customers).

• Position: Q & A/ Larry Selden and Geoffrey Colvin - Interview

Larry Selden, a professor at the Columbia University Business School, and Geoffrey Colvin, editorial director of Fortune magazine joined forces to author the recent book, "Angel Customers & Demon Customers" (Portfolio). Their central thesis is that it's not a good idea to treat all customers equally. Treating customers the same may sound virtuous, but it's a surefire way of hurting your financial institution's bottom line.

Q: What are angel and demon customers?

A: Angel customers are the ones from which your institution earns most of its economic profit. Demon customers are the very few who not only reduce your company's profit but cannot be made profitable. Most managers don't realize that 150 percent of their profit typically comes from just 20 percent of customers--their angels--while the Least profitable 20 percent of customers, which includes the demons, often Lose money equal to 100 percent of profit. Nor do most managers know who their angels and demons are; and, when they think they know, they're usually wrong.

Q: You cite Royal Bank of Canada as an example of a bank that does a goad job of identifying profitable and unprofitable customers. Can you give examples of some of the things it does?

A: It calculates the economic profitability of each of its 10 million customers every month. That fact amazes many managers, but every financial institution possesses or can get the necessary data; and the software is now up to the job.

Q: Is the Royal Bank able to turn any of its unprofitable customers into profitable ones?

A: Yes. It has managers whose explicit responsibility is to increase the profitability of customers within customer segments. These...