Customer profitability and management strategies

RBC Case Study

What should RBC's strategy be for managing each market segment and why?

RBC through implementation of a Customer Relationship Management enterprise system, generated an extensive and exhaustive information stream on their customer base; "the good news was that customer, customer segment, and product profitability numbers were more comprehensive and accurate than with the Bank's old profitability model" (Narayanan, V.G. 2002. 1). Mining the data for discernible customer differentiation trends allowed RBC to develop a reorganization of their customer profitability and management framework. The result of this restructuring was the segmentation of customers into one of three groups: Key, Growth, and Prime; "the segment structure reflects life stages and the complexity of their financial needs" (Narayanan, V.G. 2002. 6). Under this structure the Bank could analyze current and future profitability with a focus on developing a customer's portfolio of products regardless of their current stage.

The Key group packages "four sub- segments which have low current value, but have the potential to provide higher levels of profit for the bank; the Growth stage represents clients in mid-life, and/or businesses that are still growing their assets and have high credit and financial advisory needs" (Narayanan, V.G. 2002. 6); and lastly "the prime grouping consists of more mature customers with significant potential for full RBCFG offerings" (Narayanan, V.G. 2002. 6). While each group is targeted in unique ways through "micro-segment and marketing channels; the ultimate objective is one-to-one marketing" (Narayanan, V.G. 2002. 9).

The Key group should be managed with an understanding of the client's lifetime value to the bank, not necessarily their current value which could entail the bank "taking losses in the short-term" (Narayanan, V.G. 2002. 8). This customer may be, as an example, a free checking account customer with a low balance who has no other relationship with the bank, but is looking to add a credit card or car loan. The potential for deepening the relationship with the customer is possible over the longer term. RBC must provide to these customers a value for their continued business, improving on their status of 7th out of 8 Canadian banks in value for the money (Narayanan, V.G. 2002. 1).

The Growth customers have the greatest potential for profitability not only in the short- term but also in the long- term. This customer group holds several bank products currently, and can be considered likely targets for additional value added products: mortgage, insurance, and investment. The key to managing profitability in this group is to solidify their RBC positions in as many functional areas as possible: retain, grow, and consolidate these relationships.

The strategy for the Prime group should be the provision for a client representative which can focus specifically on that customer. Rather than deal with multiple banking agents, the customer communicates their specific need to one individual who then arranges the requisite action for the client. Account Manager Jamie Reich is a perfect example of this type of individual client relationship. "Account managers know their customers and know what their needs are" (Narayanan, V.G. 2002. 7).

What should RBC do about customers who are unprofitable and Why?

The unprofitable customer must be analyzed in the context of current profitability as opposed to the future value of their business. The unprofitable customer is likely in the Key group and has relatively few RBC product offerings. The advantage of the CRM system is that Bank managers can gauge prospective future profitability. The lifetime value calculation involved "calculating the present value" (Narayanan, V.G. 2002. 8) of a future stream of profits, along with a "factoring of other variables such as: age, tenure with the Bank, number of products held, probability of acquisition, and attrition of products" (Narayanan, V.G. 2002. 8). If a currently unprofitable customer is deemed to have future value to the Bank the relationship should be cultivated and expanded to greater product offerings. If on the obverse the customer is not a future profitable actor then the Bank should sever the relationship particularly if current losses are occurring. Because lifetime value "can be aggregated up to segment level" (Narayanan, V.G. 2002 6); a group of unprofitable customers, perhaps utilizing free checking, can be phased out with a new fee structure which will prompt customer exit. The Bank's own analysis revealed the unprofitability of a segment of customers; "20% of its customers accounted for 100% of its profits" (Narayanan, V.G. 2002. 7).