Assessing the value of your customers.

Grades are a fact of life. They are used to assess the value of something. All of us have received grades, and most of us have given grades to others. Grades are used for many reasons:

* They give us motivation to learn.

* They show us our strengths and weaknesses, and they give us incentive to improve.

* They provide a measure that indicates improvement (or lack of such) over time.

* They provide the grader with a uniform standard for performance.

Our customers have become very skilled at assessing the value of our financial institutions. We score high marks if we have the lowest interest rates on loans, the highest interest rates on deposits, the most extended business hours and the closest branch!

On the other hand, most bankers are not very skilled at assessing the value of their customers. That's because it's not easy to do, and most banks lack the data to even attempt such a project. However, banks are now becoming more interested in assessing their customers. The banks that have actually accomplished this undertaking are well on the road to increasing their profitability.

How do you assign a grade to your customers?

Before you grade your customers, you need to determine if you want to assess the value of the each individual customer or the customer's whole household. If you want to assess just the customer, then you will need to aggregate your grading data using a customer identification number (typically a Social Security or Tax ID Number). However, if you want to grade the customer's whole household, then you will need to aggregate your grading data using a household number (typically generated by a householding engine in your MCIF or CRM, or the bank's internally generated CIF number, which manually links accounts).

Once you have decided at which level to assess customers, you then need to determine what standard to use to grade your customers. The data that is the easiest to get is not necessarily the best to use for this task.

For instance, you can aggregate the household's total deposits and say that an "A" customer has more than $50,000 with the bank. However, this doesn't tell the whole story. This household could have one certificate of deposit account with you, and the owners could have insisted that you give them an above-market rate for their money. If you looked at other factors, this household may actually turn out to be less valuable to the bank!

One such factor you may wish to employ when determining a customer's value is profitability. To know how profitable a particular customer is, you need to know the profitability of each of his accounts. To do this, you need to compute and reconcile the profitability of all the bank's products back to the financial statements.

Once you do this, you can sort your customers by profitability and break them into four equal groups (or quartiles). The top quartile could be your "A" customers.

Next: Viewing your customers in a multidimensional way.

John J. Colley, CPA (left) and Gene Palm, (right) are the principals of Profit Resources, a consulting company that specializes in MCIF technologies: [phone] or at www.profitres.com