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Why Is Customer Profitability Measurement In Banking Today So Badly Flawed, Grossly Misleading and Worthless?

by Ralph Harrison

Why is customer profitability measurement in banking today flawed, misleading and worthless? It's very simple. The Profitability Measurement Model currently in use is wrong. It's badly flawed because it is incomplete. And the sales representations of the vendors hawking this stuff border on outright fraud! A 20th Century Technology Model still trying to do business in the new higher intelligence enabled 21st Century!

All current MCIF, Data Warehousing, Data Mart and Database Marketing Technologies that have for years prided themselves and touted their software on the benefits of Customer Profitability Measurement are badly flawed and invalid; and materially misleading and fraudulent in their representations that lead one to believe that there is soundness to the model when, in reality, there is not! They attempt to disguise and hide the fact that an entire technology has gone far astray and bet a fortune on an out-of-date, obsolete 20th Century model that is woefully short on measurement content and in the end, produces meaningless results re: the profitability of any subject customer under measurement. In short, all current profitability measurement methodologies employed by current MCIF, data base marketing software, and CRM technologies simply leave out the most important customer relationships, the most important profit enhancing customer behavioral disciplines, and the customer's lifetime relationship value (past and future) so essential to the accurate calculation of current and lifetime customer profitability!

In other words, these costly, out-of-date, and fast fading technologies are woefully wrong and invalid in that they take into consideration in the measurement of customer profitability, only those traditional banking relationships that relate to loan and deposit spreads and current account balances in relation to cost of funds, and only a few consider the value of over thirty other fee driven relationships that drive much greater lifetime customer value than loan and deposit balance spreads measured on a static basis. Accordingly, the resulting distorted picture reflects net spread profitability only at the moment of the photo, and tells one nothing about past and future profitability and lifetime value of that customer! And further, only a seasoned banker can even read and interpret the spread information provided by current profitability measurement models. Not something that means much to a teller or secondary line person in the bank in interacting with the customer.

Here's the problem. What's the real contribution to profitability of a home loan or a home equity loan or a jumbo CD if the home loan and the home equity loan gets refinanced by a competitor and moved to another financial service provider? And the CD customer moves to another investment source for a higher rate? And what effect does the balance of these loans and investment products have on anything if the bank has no real and permanent means of retaining these products and a marketing system that ensures a long-term relationship with the customer?

So what are the most commonly omitted relationships that are worth more than all of the common elements of measurement used by most current day profitability measurement technologies? Well try these for starters! The cumulative value of lifetime Customer Referrals (Selling for you); the Customer Influence Value of Seniors; the Cumulative Lifetime Value of the number of years a customer has invested in your bank; the Retention Power and Lifetime Value of share ownership in the company; plus the Cumulative Lifetime Value of the insurance relationships, the brokerage relationships; the Lifetime Value of Positive Behavioral Disciplines of direct deposit relationships including payroll and pension and retirement direct deposit relationships: and even the value added fee producing relationships?

If the customer sells for you for a lifetime (referrals); lends his influence to your bank through a Seniors Club Membership; invests many years of his life with you (loyalty) to provide Lifetime Retention of all relationships; owns a piece of your company; banks "your way" by using your efficiency disciplines to reduce your service costs and enhance your retention control over the overall relationship; and uses the services of your insurance and brokerage affiliates as well, I submit that all of this is worth far more than any high-balance home equity loan that will be refinanced and moved elsewhere sometime soon by a competitor!

A new customer-driven, customer-engaged marketing system is preparing to enter the marketplace to correct all of these missing elements and rectify the shortcomings of the current misguided "customer profitability model" in use in the marketplace, and render all of these technologies obsolete very soon. It's called Loyalty Banking and it engages the customer in a Marketing System, supported by current day technology to correct all of these heretofore wrongs in customer profitability measurement. And replace it all with a truly reliable and meaningful new intelligence that delivers real customer lifetime value measurement, and does it much more cost efficiently and without the current level of technology overkill.

And if the current customer profitability model employed by the banking industry is a fraud, where do you think this leaves similar technology used in other industries?

Ralph Harrison is Managing Director of The Harrison Company, Aurora, CO, developer of the recently patented Loyalty Banking System and the Harrison Marketing Library, the only bank marketing library for the Internet and CD-ROM. Harrison has 25 years of marketing consulting experience in serving the banking and financial services industry with the past 15 years dedicated to building intellectual capital in the discipline of "customer-driven" loyalty-based marketing. He may be contacted through his web site at www.harrisoncompany.net or directly at ralph@harrisoncompany.net.

First published on BankersOnline.com 8/19/02