It is interesting to see the Mobile phone services in India beginning their journey to increase profit per customer! During the last two years, profits and revenues of Indian telecom companies have suffered from a bruising price war that has cut call tariffs to less than one US cent a minute.
But looking at profits per customer does not come easily to most companies. Banks have done it well & so have some casino companies-Royal Bank of Canada & Harrah’s Casino come to mind here!
Also, the solution does not lie in “firing some of your customers”. Here is a lovely comment from the Vice Chairman, Royal Bank of Canada:
“There is no such thing as an unprofitable customer. If we can’t make money on the client, then it’s not the client’s fault – we have to change something in the way we operate. We can either charge the customer more because we have not got the price right or we need to take our costs down or we need to stop selling the product to them and find something more suitable to their need. We try to match up the package to the client so that they are only paying for what they need” Jim Rager, Vice Chairman, RBC Financial Group
I have seen a Bank in India, practice this strategy very effectively. I was the CMO of HDFC Bank & I saw how effectively customer profitability was baked into the bank strategy.Here are some observations:
- Start with a simple model of customer profitability or Customer value segmentation. Have different segments of customers; band them from least profitable to most profitable. Analytics can help here but try to keep measurement principles simple.
- Keep the measurement consistent –it need not be the most advanced analytic technique but important to hold it consistently over a 3 year period at least!
- Ensure you link management action to it. Look at why a customer is in the low profitability segment. If it is a bank, ask if the customer is doing too many cash transactions or has not been sold another product. This analysis can lead to clear management action.
- Review customer profitability metrics aggressively. Wouldn’t it be nice if you had a customer level P&L, too much to ask for?