By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published March 2003, ABA Bank Marketing

As a bank marketer, you should constantly be seeking ways of making your existing customers more profitable to your bank.  There is a very straightforward reason for doing this – it is much less expensive to sell additional services to your existing customers than it is to sell new services to new customers.  In other words, the most efficient means of increasing the returns to your bank is by investing in your existing customers.

Learning from the Masters of Investing

To become a wise investor, you need to learn from the masters of investing.  Two of the best known and widely emulated investors are Benjamin Graham and Warren Buffet.  Graham’s book” The Intelligent Investor” published in 1949 has become the classic text on “value investing.”  Simply stated, value investing is when you purchase an asset at a discount to its true value  (e.g., buying a $200,000 house for only $150,000).  The steeper the discount in value the higher the “margin of safety.”  Assets purchased with a high margin of safely have less chance of losing value than assets with a low (or negative) margin of safety.

To invest in your customers using Graham’s approach, you need to determine their current and potential value.  You should invest in valuable customers (especially customers who have the potential of becoming valuable) and conversely, you should not invest in customers who do not have the potential of becoming valuable.

To understand the value of any asset, it first needs to be appraised.  You can begin the process of appraising your customers’ value by first reconciling the product profitability within your MCIF or CRM back to your bank’s financial statements.  (We have written a number of columns on how this can be done.)  Then, through the magic of these technologies, you can see which customers are currently profitable and which ones are not.  But this only tells a part of the story and this is where Buffet’s approach comes in.

Buffet popularized investing in companies that have a “deep economic moat” – traits that are difficult for other companies to easily replicate (e.g., Microsoft).  These companies as a whole generate higher returns on capital than their peers.

To invest in your customers using Buffet’s approach, you need to use demographic data to see the traits of your customers that are difficult for other customers to easily replicate (e.g., high income, high home value, highly credit-worthy, and the like).  We’ll call these deep economic moat customers “high value” customers.  Ultimately, you will want your high value customers to generate higher than average returns to the bank year after year.

Some of your high value customers may be profitably using a combination of your products.  However, some of your high value customers may be unprofitable because they are only using one service and have a low balance as well.  Yet, these are potentially your most valuable customers!

How to Invest in Your Customers

Now, let’s use a combination of Graham’s and Buffet’s approaches.  If Larry is your least profitable high value customer and Curly is your most profitable high value customer, then Larry has the potential to become as profitable as Curly.  If Larry’s profitability is negative $50 per year and Curly’s profitability is $1,000 per year, then Larry has the potential to become $1,050 (or 2,100%) more profitable than he is currently.  The margin of safety is huge!

Let’s use another example.  If Moe is also a profitable high value customer and his profitability is $910 per year but is less profitable than Curly’s profitability of $1,000 per year, he still has the potential to become as profitable as Curly.  However, he only has the potential to become $90 (or 10%) more profitable than he is currently.  Obviously it’s better to sell to Larry with a potential return of 2,100% than sell to Moe with a potential return of only 10%.  By sorting your high value customers (using an ascending sort of their profitably) you can rank the potential profitability of these customers to help prioritize to whom you wish to sell first.

Once you have determined this, you will then need to determine what you wish to sell.  You can do that by using the Service Mix Report to discover the most profitable combinations of services your profitable high value customers use.  Then, you can then sell those same combinations of services to your least profitable high value customers.

Have fun investing!

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