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Investing in your customers.

To invest in your customers, you need to learn from the masters of investing: 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, the higher the "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).

To understand the value of any asset, it first needs to be appraised. You begin the process of appraising your customers' value by 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 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"--a trait that is 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 customer traits that are difficult for other customers to easily replicate (e.g., high income, high home value, highly creditworthiness and the like). We'll "call these deep economic moat customers "high value" customers.

Some of your high value customers may be using a combination of your products, but using them in a way that is not profitable to your bank. However, some of your high value customers may be unprofitable because they are only using one service and have a low balance as well.

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 percent) more profitable than he is currently.

Let's use another example. If Moe is also a profitable high value customer and Iris 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 percent) more profitable than he is currently. Obviously it's better to sell to Larry with a potential return of 2,100 percent than sell to Moe with a potential return of only 10 percent. 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 fast.

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 sell those same combinations of services to your least profitable high value customers.

John J Coffey, CPA (Left) and Gene Palm(right) are the principals of Profit, a consulting company that specializes in MCIF technologies: (863) 686-4385 or at
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Title Annotation:Database Marketing
Author:Palm, Gene; Coffey, John J.
Publication:ABA Bank Marketing
Geographic Code:1USA
Date:Jun 1, 2004
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