To Grow Profitably, Manage Customer Value, Not Customer Relationships

It's a zero-sum game and the clock is ticking, but only a few players have the right 'play book.' Senior executives at virtually every major financial institution are frustrated. They have seen minimal return on huge investments in customer relationship management - well over $2 billion annually in the United States alone.1 Often the return on these investments hasn't covered their dollar cost or the opportunity cost of management time and energy, let alone provided an adequate return to shareholders. Yes, there have been a few success stories, but for the most part these investments have been disappointing. Consequently, in a period of slow economic growth and intense profitability pressures, many companies are facing a key strategic choice: whether to continue investing in CRM - and, if so, how? We believe that customer management initiatives have the potential to drive tremendous improvements in profitable growth and warrant continued investment by many large financial institutions. But most firms must take a dramatically different approach if they want to create true strategic advantages. Companies unwilling or unable to change their traditional approach are likely to lose (gradually at first and more rapidly in three to five years) their ability to retain their most profitable customers and generate reasonable shareholder returns. First and foremost, they must shift their frame of mind from managing customer relationships to managing customer value. Managing customer value is a two-way street: It entails managing both the value provided by the company to customers and the value of customers to the company. Decisions are based on a detailed understanding of the value that customers place on the benefits they receive and on the economics of delivering those benefits. In this article, we address four questions that executives should ask themselves when considering additional investment in customer management initiatives: 1. Can I deliver meaningful profitable growth through a more systematic management of my customer relationships? 2. What constraints are keeping me from translating this customer value into value for the company? 3. How should I best pursue future investments in managing customer value? 4. Are there natural next steps I can take today to advance my company's capabilities? Profitable Growth Potential The profitable growth potential (top-line and bottom-line) of improved customer management is particularly large in financial services. Analysis has shown time and again that the economic profits (net income less a charge for equity capital employed) of financial institutions are highly concentrated in the top two to three deciles of customers. In many businesses, the top decile alone accounts for more than 50% of total economic profits. Enriching the customer mix toward the more profitable deciles, reducing the numbers of unprofitable customers and capturing a greater share of total customer spending have all proven to be powerful ways of increasing long-term intrinsic value. Can these opportunities be more effectively pursued through a customer value approach? Several early leaders have reported major improvements in performance. Royal Bank of Canada is considered a pioneer in customer value management, and its returns to shareholders have substantially exceeded the S&P 500 Financial Index over the past five years, creating an additional $8.6 billion in shareholder wealth. Although the bank is fairly tightlipped about its success, it has cited an increase in its direct-marketing response rate to as much as 40%, compared to a 2-4% average across industries. The National Australia Bank has also demonstrated dramatic improvements in performance from its early initiatives, with customer penetration and share of wallet in the small business sector rising to market-leading levels of 31% and 77%, respectively. …

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