Viewing your customers in a multidimensional way.

• Author: Coffey, John J.
• Position: Database Marketing

In our previous column, we discussed assessing the value of your customers. One such factor you may wish to employ when determining customer value is profitability. To know how profitable customers are, you need to know the profitability of each account. To know the profitability of each account, 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 four 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, butt hasn't bothered to refinance it and is paying you 10 percent interest!

What you need is a multidimensional 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 profits; total deposits; total loans; date the first account opened ("start date"); total account; 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...