Investing in your customers.

• Author: Palm, Gene
• Position: Database Marketing

To invest in your customers, you need to learn from the masters of investing: Benjamin Graham and Warren Buffet. Graham's book, "The Intelligent Investor" published in 1949, has become the classic text on "value investing." Simply stated, value investing is when you purchase an asset at a discount to its true value (e.g., buying a $200,000 house for only $150,000). The steeper the discount, the higher the "margin of safety."

To invest in your customers using Graham's approach, you need to determine their current and potential value. You should invest in valuable customers (especially customers who have the potential of becoming valuable).

To understand the value of any asset, it first needs to be appraised. You begin the process of appraising your customers' value by reconciling the product profitability within your MCIF or CRM back to your bank's financial statements. (We have written a number of columns on how this can be done.) Then, through the magic of these technologies, you can see which customers are currently profitable and which are not. But this only tells a part of the story, and this is where Buffet's approach comes in.

Buffet popularized investing in companies that have a "deep economic moat"--a trait that is difficult for other companies to easily replicate (e.g., Microsoft). These companies as a whole generate higher returns on capital than their peers.

To invest in your customers using Buffet's approach, you need to use demographic data to see the customer traits that are difficult for other customers to easily replicate (e.g., high income, high home value, highly creditworthiness and the like). We'll "call these deep economic moat customers "high value" customers.

Some of your high value customers may be using a combination of your products, but using them in a way that is not profitable to your bank. However, some of your high value customers may be unprofitable because they are only using one service and have a low balance as...