Enhancing Profitability and Growth (2 Questions Every Bank Executive Must Be Able To Answer)
Having worked with many community banks over the years, I have noticed that executives struggle trying to answer two very important questions with any real degree of confidence or specificity:
Who are my most profitable customers?
How can I get more customers that resemble my most profitable customers?
Most bankers can generally describe the demographic profiles of their most profitable customers as a function of their personal relationships with those customers. However, truly answering these questions well is the foundation for charting and implementing a predictable and scalable growth and profitability strategy. Not knowing who your best customers are (and your best potential customers) leads to all sorts of problems and issues which hold you back from realizing your revenue growth and profitability goals.
Pareto’s Principle and The Whale Curve
The convention in most industries is that Pareto’s 80-20 principle applies. Generally, only 20% of customers contribute to 80% of an organization’s profitability. For many community banks, it is not unusual to see that only 10% of customers contribute to profitability. However, research has shown in many industries that as much as 180% of profits are contributed by the top 20% of customers. The middle 60% may only break even or contribute to a small percentage of profits, and the lowest 20% actually extract profits. In fact, the lowest 20% could lose up to 80% of profits generated. When graphing cumulative profits, the line resembles a whale giving the curve its name.
When graphing cumulative profits, the line resembles a whale giving the curve its name.
What Should You Do with Your Current Whale Curve?
If you can already determine the contribution to profitability of all your customers, and create your own whale curve analysis, great. If not, we work with firms that have special expertise, software and 3rd party data to:
a) clearly identify your most profitable customers, and
b) create a data portrait of your customers that provides deep insights about their demographics, psychographics and life stage needs.
Then, what’s important to know is what you can do with new data portraits and insights about your customers.
Here are 4 general strategies:
Focus on the retention and growth of your most profitable customers – serve them better than your competition and find ways to deepen your product, advisory and personal relationships.
Develop strategies to move your current break-even customers with high growth potential into profitable ones. Understand their demographics and life-stages and identify product and service opportunities to meet their needs in a way that is mutually profitable.
Manage attrition of your profit drainers in a responsible, mission-compatible manner. The reality is that many of your customers may not have profit potential in the short term. You have to decide how to operate in a mission-minded way for the long-term and to invest in the needs of your community to support the long-term health and economic sustainability.
Use your customer profitability analysis as the first step in identifying and capturing non-customers with high growth and profitability potential in the markets you serve.We will focus on this strategy in our next blog.
If you would like a free 15-minute discovery call with a Princeton Partners FSG team member to discuss specific goals around your financial institution’s profitability and growth, you can schedule a call here with CEO Tom Sullivan.