Background: The Royal Bank of Canada using CRM and customer profitability tools to gain a competitive advantage in Canada’s increasingly crowded financial services market. Key Issues: RBC financial, a full service bank in Canada is facing fierce competition from leading financial institutes and new niche-market entrants after deregulation, the bank is also struggling with its 7th ranking out of 8 among financial institutions in the bank’s internal value for money study. Mr. Mclaughlin, the VP of CRM and information management have several questions in his mind – Having the real customer profitability numbers and using CRM tool, RBC know clearly about the customer preferences and needs, issue is what should RBC do with this information? • How can they turn unprofitable customers into profitable ones? • Is there a way to enhance the Bank’ value in the eyes of the banking public? • How can they put the while picture together and make decisions that work for both the Bank and their customers? Reorganization around CRM As given in exhibit2, segmentation done based on customers life stages and complexity of their financial needs – pic] Key Grp: Low current value but many within these sub segments have potential to provide higher level of profit Growth: Still growing their assets, and have high credit and financial advisory needs. Strategy – to retain, grow and consolidate the relationship. Prime Grp: More mature customers in accumulation and preservation phases with significant potential for RBCFG offerings. Q1. What are the key elements of CRM at RBC financial Group? Initially RBC mktg team deployed a tool, the model worked as follows – Customer Profitability and Potential MeasurementOrder now
Aggregate Information rather Actual Data For Customer Profitability measurement, the tool used personal banking data to measure the profitability that used aggregate information rather than actual data. Then using this data(of approx 8 million customer base) and distributed the profit over deciles(1/10th each). 100/20 rule Derived 100/20 rules, means 20% customers accounted for 100% profit, The model divided the customer base into three large baskets – a. Basket “A” = ; customers made the most profit b. Basket “B” =; customers made some profit c.
Basket “C” =; customers broke even or lost money Result: o Helped in aligning the sales force around customer profitability and planted the seeds for the new customer centric organization. o Not refined enough for advanced channel optimization or relationship pricing. o It was also found that in some instances customers were treated without consideration of potential business they can contribute. Requirement =; Most robust profitability measurement; thus a better model =; bought a software from NCR – Value Analyzer – providing following benefits – High Processing Power =; can take large size actual data • Calculated Profitability faster =; due to its high processing power and provides • More accurate spread of information • Created a Better Understanding of Customers • Help Determine Customer tolerance Result: Customer profitability calculations not enough as customer can be both profitable and having the potential to be profitable, bank need both kind of customers. Finally, calculated Future Profitability and Lifetime Value and segmentation is doe based on that Future Profitability and Lifetime Value ) Calculate Present Value of Profit : Assuming profitability percentile of client remains constant throughout expected lifetime, calculate the present value of those profits 2) Factor in Variables: (such as: Age, Tenure with Bank, , Number of Products Held, Probability of acquisitions(product portfolio) and Attrition of products) 3) Lifetime Value calculated individually: Can be aggregated up to Segment Level generally. Customer profitability for decision making Customer profitability is used for marketing decision making Q2. How customer profitability is used for marketing decision making?
After profitability and lifetime values are determined, these measures are included for determining customer decisions for – Customized Marketing Campaign Customer profitability was a determinant used for segmenting and targeting, studies were done on customers’ likes, dislikes and types of products they would benefit from and models were developed to determine their propensity to buy. Establishing Service Levels RBC also determined a set of customer treatment strategies using the customer segment categories, customers category would determine the length of wait and type of customer service representative the customer talks to.
Product Design & Pricing The CRM system used customer profitability and future potential calculations to give pricing parameters to account managers to determine how to price products depending on the customer. Packages vs. Fees Another use for customer profitability data was to inform in the debate over whether to change for services using a flat rate package or charge fees based on the amount and type of transaction the customer was generating with the bank. Q3. Explore alternative decisions and guidelines for Riech and McLaughlin? Calculation of future LTV and profitability: (page8, para after exhibit4) ) Assume that current profitability percentile of the customer would remain constant, throughout her projected lifetime, calculate the present value of those profits 2) Factor in other variables such as age, tenure with the bank, number of products held, probability of acquisition (likelihood of adding product to portfolio), and attrition(of products) Riech’s decision: Whether to give car loan to client’s niece or not? Lifetime value – the present value of the total profit a customer delivers over a lifetime of purchasing from the bank. From Exhibit6, calculating the Niece’s LTV & future profitability: pic] Assuming the loan required is $15,000 for car for a tenure of 5 years, and lending interest rate is 8% which is (prime+2. 5%). Let’s say the expense on handling the loan account is 0. 5%, and the margin on prime over federal rate is 2. 5%, the profit % of bank on loan deal of prime+2. 5% will be 4. 5% (2. 5%+2. 5%-0. 5%) Let’s say total nominal interest rate is 8%, the monthly EMI of $15,000 for 5 yrs = $400 (approx) Present value of profits (interest earned) by bank on car loan @4. 5%=$1,485 only However, following factors need to be considered – . customer can purchase the another product such as credit card etc. which she otherwise may not buy if loan is not given. 2. Since the client is MBA graduate and expecting to get job in an ad company of $60,000, which increases at nominal rate of 6% (real 4%, including 2% inflation), and bank earn an overall interest on the return at 4% (average of checking and savings a/c), the NPV of 45 years (assuming niece also will continue until age of 68 and current age is 23 thus 68-23 = 45 yrs) NPV = $77,943 (calculation in XL sheet) Lifetime value = $77,943 + $1,485 = $79,428
Bank if can retain this customer by focusing on maintaining the customer intimacy, bank can also sell other products in future such as mortgage on home, investment accounts, retirement a/c, line of credit, VISA similar to her aunt. Thus this customer can be high profitable in future as considering the example in Table B, and can reduce the risk of risk calculation. Thus there is a big future profit potential of this customer. The niece is a MBA graduate, she keeps the capability of starting her own business in future thus may be a useful client for bank’s business service deptt.
Thus Mr. Riech should convince his manager to approve loan to her at prime+2. 5% and should convince niece to commit to purchase the credit card and depositing her annual income or salary into RBC as soon she gets the job, which can be split in signature plus checking a/c and royal money maker savings a/c McLaughlin’s Decision: Issue: Some segments having low balances in their personal accounts are having negative profitability as the services such as bill payment they are using though are very convenient for customer but very costly for banks.
From Exhibit7 if we see, bill payment in all channels are very expensive except through Internet. how to optimize the channel ? | | | | | | | | | | |- | |104. 03 |365. 72 |158. 36 |97. 15 |194. 35 |983. 15 | | | |- | |- |- |14. 89 |- |- |- | | | |- | |67. 44 |90. 36 |4. 26 |- |- |- | | | |- | |9. 29 |12. 68 |4. 26 |- |- |- | | | |- | |19. 14 |17. 16 |- |- |- |- | | | |- | |32. 18 |20 |- |- |- |- | | | |0. 4 |0. 55 |3. 8 |- |- |- |- |- | | | |0. 97 |- |2. 87 |- |- |- |- |- | |Bill pmt | |2. 26 |2. 38 |21. 36 |3. 4 |8. 39 |0. 3 |0. 18 |- | | | |0. 9 |- |2. 69 |- |8. 15 |0. 3 |0. 18 |- | | | |0. 31 |0. 54 |9. 19 |7. 18 |8. 52 |0. 3 |0. 19 |- | | | |- |- |28. 49 |47. 93 |10. 75 |- |- |- | | The suggestion came that levy the flat service packages as mentioned in Exhibit8, but RBC rating by customer is given 7th out of 8 in the survey of value for money which is most important factor for customer satisfaction. Suggestion: Thus levying the fee will aggravate the situation as this segment customer feel nickel-and-dimed.
One way to manage this is that restrict these segment to use such services through channels other than internet, Encourage internet usage by providing free service and option of payment basis if they want to do bill payment (e. g. ) through other channels. For retail branch & BBC can be made as flat fee option as number of transaction information is not given, this will help a one time monthly fee rather presenting a huge and complex statement of fee of each transaction, this will also save the cost of maintaining such transaction.