pilgrim bank final

Pilgrim BankSavita Aswath 2008047Somnath Sinha Mahapatra 2008056Vishwanathan Sahasranamam 2008068Abhijeet Gokhale 2008072Gaurav Barman 2008081

Broadly, need to define the Internet Strategy.

Questions that need answers:

1. Are Online Customer better customers?

2. Is the adoption of the online channel actually producing better customers.

3. What should be the pricing strategy?1. Should Online Channel have fees?2. Should users be given rebates and lower services charges to

encourage online channel usage.

Situation

1. How do retail banks make money from their customers? How much variation is there in profit across customers? Based on this, what do you recommend the bank do in terms of matching service levels to customer profit levels?

2. Based on the sample of customer data for 1999, what can Green conclude about average customer profitability for Pilgrim bank’s entire customer population

3. Is the difference in average profitability between online and offline customers in the sample indicative of a meaningful difference in profitability across these groups for Pilgrim Bank’s entire customer population?

4. What role do customer demographics play in analyzing customer profitability for online and offline customers?

5. What is your recommendation to the senior management team in terms of Pilgrim Bank’s online channel pricing strategy? Should the bank charge fees, offer rebates, or do nothing in regards to pricing for online channel use?

Questions

Revenue Profit Mis-alignment. All customers are not alike!

Data is representative. As of today, Online customers are only marginally more profitable.

They help identify opportunities for improving profitability.

Push Online banking Channel, free of cost!

No. There are demography specific variations.

No clear relationship between Balances and Customer Profitability

Facts

[Exhibit 2]

Revenue Profit Mis-alignment

Cost

Revenue

CRMThis is where CRM fits in.

Typically the distribution of revenues is exponential, while the costs are distributed in a more linear relationship with customer size. Revenues are sharply skewed from the largest to the smallest customers, while the costs tends to decline more gradually.

Unit /

$

Biggest <- Customers -> Smallest

Service Spectrum

Self help (Online)

Mixed (ATM)

Bank Branch

Customized Service

Increasing value additions and returns ->>

Increasing Skill sets, Personalization and Customer Contact ->>

Implies, that you save your resources for your MOST PROFITABLE customers!

Cost to Serve

Online: Very low VC. Very scalable.

1. Transaction Related costs

2. Allocated Fixed Costs

Tota

l Cos

t

No. of Customers >

ATM: Low VC, but reasonable FC with every new installation

Bank: Fairly high VC. Very High FC for every new branch

Personalized: Very High Variable Cost. (VC); Moderate Fixed Cost (FC).

Fixed Cost

Adoption of online channel indeed makes

customers more profitable.

Profitability SkewC

um

ula

tive

Pr

ofit

Cumulative Customers

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

120%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

10% of my customers account for 70% of my profits!

More than 50% of the customers are non-profitable

Customer Classification using ABCPassive

Product is CrucialGood Supplier Match

Costly to ServiceBut pay top dollar

Price Sensitive and Few Special Demands

AggressiveLeverage their buying powerLow price and lots pf customized service and features

Profitability depends on whether and how much the net product margins recover the customer specific costs

Low <- Profitability -> High

Low

<-

Net

Marg

in R

ealiz

ed

->

H

igh

Strategy Perspective

PassiveProduct is CrucialGood Supplier Match



AggressiveLeverage their buying powerLow price and lots of customized service and features



Low

<-

Net

Marg

in R

ealiz

ed

->

H

igh

BEST customers. Should be cherished and protected.

Prime Target for Competitors.

Help reduce cost to serve.

High Cost- High Margin Customers. They are more than covering their costs. Value service and pay for

them.

Low Margin – High Cost to Serve.

Strategy Perspective




AggressiveLeverage their buying powerLow price and lots of customized service and features



Low

<-

Net

Marg

in R

ealiz

ed

->

H

igh



Discounts for more predictable behavior

Penalize for using high cost channels.


Stra

tegi

c Cu

stom

ers

Improve Online Offering

Bonding


Convertibles and New Customers Incentivize to improve ordering and delivery

relationships => Standard Service.

Offe

r Reb

ates Others: Push towards Online unconditionally

May want to consider charging a fee.

Strategy Impact on Cost to Serve


Movement from High Cost to Lost Cost Channels. Reserve the High Cost Channels for the MOST PROFITABLE customers. Eventually cut down on Channels which increase Fixed Costs.

Tota

l Cos

t

No. of Customers >




Fixed Cost

Cost to Serve (new)To

tal C

ost

No. of Customers >

Fixed Cost

Even though the volumes increase while progressively moving to lower cost channels, the incremental costs are very minimal.





Strategy Impact on Profitability Skew

Cum

ula

tive

Pr

ofit

Cumulative Customers

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

120%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

New Skew

Reduce the no. of non-profitable customers.

Demographics

ObservationsMean: Online user : $116.67, non users 110.79

Correlation between profit and online use : .007

Regression (online and profit)- R-Square: ~0

Are the profits from Online Customers any significantly better?

Role of Other Factors

Cluster Analysis of Profit from non online user

Good Profit: Age 45+, Income 50K-100K, stayed longer with the bankModerate Profit: Age 35-45, Income 50K-75K, tenure reasonably longerNo profit: Age 25-35, Income 40K-50K, tenure is relatively shorter

Observations

Good Profit: Age 35-55, Income 75K-125K, stayed longer with the bankModerate Profit: Age 35-55, Income 75K-100K, tenure reasonably longerNo profit: Age 15-35, Income 50K-75K, tenure is relatively shorter

Cluster Analysis of Profit from online user

Observations

Non Online UsersGood Profit: Age 45+, Income 50K-100K, stayed longer with the bank

Moderate Profit: Age 35-45, Income 50K-75K, tenure reasonably longer

No profit: Age 25-35, Income 40K-50K, tenure is relatively shorter

Online UsersGood Profit: Age 35-55, Income 75K-125K, stayed longer with the bank

Moderate Profit: Age 35-55, Income 75K-100K, tenure reasonably longer

No profit: Age 15-35, Income 50K-75K, tenure is relatively shorter

Demographic Implications

Retain – Financial Bonds

Customization, Structural Bonds; Convert if possible

No Incentive

No Incentive

Demographic Implications

Age 35-55, Income 75K-125K, stayed longer with the bank

Age 15-35, Income 50K-75K, tenure is relatively shorter

Age 45+, Income 50K-100K, stayed longer with the bank

Age 35-45, Income 50K-75K, tenure reasonably longer

Age 25-35, Income 40K-50K, tenure is relatively shorter



Low

<-

Net

Marg

in R

ealiz

ed

->

H

igh

Bonding:Financial, Social

Improve Online Offering

Others: Push towards Online unconditionally.

May want to consider charging a fee.

Bonding:Customization, Structural

Push

Onl

ine

Offe

ring

Fina

ncia

l Bon

ding

1. Use Online Channel to Convert High Cost-to-Serve customers to Low-Cost-To-Serve. Online Customers are good customers. Online customers increases profitability.

2. Don’t Charge for Online Channel. Incentivise to use Online Channel.

3. Focus your resources for the Best and Most Profitable Customers.

4. For all others, considering the transaction cost by charging fees.

Conclusions

Thanks

pilgrim bank final

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