By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published February 2006, ABA Bank Marketing

Weapons of Warfare

Marketing has been compared to warfare.  Just look at the terms we use.  There’s target marketing, guerilla marketing, offensive marketing, defensive marketing, marketing campaigns and, of course, killing your competition!

Just as in warfare, marketing has many weapons.  Some weapons are designed for accuracy while others are designed for their blockbuster effect on larger numbers.  Some are highly sophisticated and very expensive to manufacture while others are very simple and inexpensive to make.

Which weapon to use depends on the value of the target (or “asset” in military parlance).     A high-value asset will be targeted with a high-value weapon.  A low-value asset will be targeted with fewer or less valuable resources.  In order to determine the value of an asset, the military invests a lot of resources into gathering intelligence about the asset.

In the same way, a bank marketer must also gather intelligence about its targets.  From a marketing standpoint, the bank’s target can be anything from new customers, to new accounts, or even its delivery and pricing.  But how do you determine which are high value and which are low value?  Only by determining how profitable (or potentially profitable) a target is will you know how valuable it is.  But even this poses the question, “How much, in terms of resources, should you invest to gather this intelligence in order to determine the profitability of an asset?”

Types of Targets

The rule of thumb, is that the more operations-oriented the asset is, the more resources should be invested in determining how profitable it is.  The converse is also true.  For instance, it takes less resources to determine how profitable the bank’s products (or accounts) are than it does than it does to determine how profitable the bank’s customers and branches are.

For starters, let’s look at how customer profitability can be determined.  There are two schools of thought on how to accomplish this task.  Both approaches calculate profitability at the account level and then use a marketing relational database to consolidate the account-level profitability at the customer and branch levels.

The first method is a “mass-customized approach” that uses high-level summary data from the bank’s financial statement as well as national normative data.  The resulting account-level profitability is then reconciled to the bank’s income statement.  This is the least expensive approach for calculating account-level profitability, because it involves the least amount of time and effort.  Intended as a “weapon of mass destruction”, it also provides the least amount of accuracy!

The second method meticulously examines the bank’s own detailed trial balance and assigns every general ledger account, branch, and cost center to the bank’s products, using a variety of methods.  This approach, like a smart weapon with pinpoint accuracy, provides the bank with a much better understanding of the costs and fees that are generated by its products.  This method can also be augmented with transaction data to further refine the variable income and variable expenses at the account level.  But, because this approach is more time-intensive, it costs much more than the mass-customized approach.

Once you have determined your most valuable accounts and customers, the best thing you can do is retain them, by offering additional services to cement their relationship.  After all, repeated studies show that some of the bank’s most-profitable customers have but just a little more than one account!  So, by using demographic data, you can profile these valuable customers and find which products they may need, even selling some at a loss, in an attempt to keep them with your bank!

Another approach, is to find currently less-valuable customers who look just like those that have the highest value for the bank.  Then, you can offer them additional products to increase their profitability.

Determining the profitability of another target – your products – is also critical.  This is really another byproduct of account-level profitability because a marketing relational database can also be used to consolidate the account-level profitability at the product level.  Once you know how profitable your products are, you can also know your most profitable product combinations as well which products you can profitability sell to various types of customers based on their profiles.

However, to determine the profitability of an operations-oriented target, such as the bank’s branches, you need to not only calculate the profitability of the accounts at the branch, but you also need to determine the direct and indirect income and expenses of the branch.  The integration of these two sets of data is a complex undertaking, but crucial if the bank is to determine the profitability of its product deployment.  A profitable branch not only has a profitable mix of products, but is also efficiently operated.

Another target that requires a lot of intelligence gathering is your pricing.  The most profitable pricing strategy utilizes an extraordinarily large library of historical rates tied to the bank’s term products in order to determine the historical spread of these products.  As these product mature and rollover, the bank is then able to use the historical spread as a benchmark to improve its current pricing efforts.

Victory!

When you win a war, you’ll probably increase your wealth as well as your territory.  When your marketing efforts are successful, your bank becomes more profitable and your marketing share increases.  Winning a war or losing a war – being a successful bank or an unsuccessful bank – all hinge on how much in resources you commit to intelligence; and, how well you choose to use that intelligence to your advantage.  Let’s roll!

John J. Coffey, C.P.A. and Gene Palm are the principals of Profit Resources, a consulting company that specializes in MCIF technologies.  © Profit Resources, Inc. 2006