If You’re Going by the Old Rules, You Don’t Know Your Customer


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Many years ago, the “3-6-3 rule” was an expression used to explain an informal rule of operation for banks in which 3 percent interest was paid on deposits, 6 percent interest was charged for loans and the bank president was playing golf by 3 o’clock in the afternoon. The 3-6-3 rule gave life to the phrase “banker’s hours.”

The rules have certainly changed in the environment that characterizes banking today. Even with convenient ATMs and 24-hour Internet access, more banks are extending hours and opening branches on weekends because of the fierce competition for customers. In addition, the undifferentiated marketing strategy implied in the 3-6-3 rule is based on treating the market in a homogeneous manner. A homogeneous market requires only one marketing mix to satisfy all people, and all customers are treated equally.

In fact, all customers are not equal, at least not when it comes to profitability. While total sales may follow the 80-20 rule, the curve for total profitability typically reveals that the most profitable 20 percent of customers generate between 150 percent and 300 percent of total profits. The middle 70 percent of customers about break even, and the least profitable 10 percent of customers lose 50 percent to 200 percent of total profits, leaving a bank with its 100 percent of total profits. This distribution curve requires the ability to adjust the marketing mix on a segment-by-segment basis to maximize profitability.

Is your bank’s marketing strategy still powered by the old rules? Under the old rules, marketing uses a “spray and pray” approach to business development. They spray—mass media marketing—and then pray that new sales would follow. As a result, the marketing messages launched reach a large number of the wrong targets and only a small percentage of the right targets.

The wrong targets are consumers who find one or more elements of the marketing mix irrelevant, or, even if they accept it, will not generate profits for the bank. Of course, the marketing programs are launched with all good intentions. Often an entry or core product, such as a checking account, is presented with the idea of leveraging the new relationship by attempting to later cross-sell additional products. The logic supporting this strategy is that profitability will materialize and grow over time, as new small customers transform into large loyal customers through the acquisition of additional products and services.

In truth, even if the customer acquires additional products, the incremental revenue created may not necessarily bring proportional profits. A customer’s size does not necessarily determine profitability. For example, a small customer who makes few service requests and uses only electronic channels like the Internet and ATMs may be more profitable than a larger customer whose cost to serve is high because of the service demands he or she places on resources.

New rules

That means that understanding and measuring customer profitability is vital to powering profitable growth and operating under the new rules that characterize today’s competitive environment.

Can you analyze customer-buying trends, segment customers with precision, design targeted sales and marketing campaigns and measure ROI? If the answers are no, you are not working under the new rules. The new rules are characterized by advanced marketing technology that is designed to create a sustainable competitive advantage by profitably aligning the right customer with the right product and the right message at the right time.

A primary challenge to uncovering customer profitability will be in monitoring interactions that provide insight into a customer’s behavior while pulling the right information together to form a single view of the customer relationship. Customer transactional data from back-office core systems and front-office CRM systems must be linked with financial information so that calculating individual customer profitability reflects the total revenue generated minus the total cost of providing the consumed products and services across the entire relationship.

The technology infrastructure for supporting this single view will include data warehousing and ETL (extract, transform and load) processes, as well as data quality components. In addition, activity-based costing and behavior monitoring type applications will expose the real-time relationships between customer interactions across multiple channels and the cost-to-serve components that drive toward individual customer profitability calculations.

Advanced marketing and predictive analytic applications provide proactive firepower and round out the new rules by taking this complete picture of the customer and delivering highly targeted marketing campaigns that are both efficient and effective.

The rules have changed, and banks that have the ability to measure, analyze, customize and deliver a tailored marketing mix to their targeted customers will achieve profitable growth and create a sustainable competitive advantage.


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