Presented by: Dan Hill, CMA, CFM
Mine that Customer of MineUsing Customer Profitability to Mine Your Most
Valuable Customers
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence© 2012 Institute of Management Accountants. All rights reserved.
Today’s Agenda• Why customer profitability?• The customer profitability implementation
framework• A numerical example• Segment customers based on homogenous
needs• Use value propositions to improve customer
segment performance• A real world example
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 2
A Bold New Plan
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What is Customer Profitability?
• Customer profitability– Measures the profitability for every customer or
customer segment– The sum of the profitability of all the products and
services the customer buys, adjusted for costsspecific to that customer
• Customer Profitability Management (CPM)– Uses customer profitability to measure and manage
corporate performance
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 4
A Crucial Principle
Profitable customers,current and future, are
the source of allcorporate value.
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Customers are NOT Created Equal
Research shows:• About 20% of customers generate 150% to
300% of company profits• About 70% of customers are breakeven• About 10% of customers reduce or destroy
50% to 200% of company profits
(Kaplan and Narayanan 2001)
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Profitability Whale Curve Tells the Tale
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Custom er Profitability W hale Curve - $
$0$10$20$30$40$50$60$70$80$90
$100
0 5 10 15 20
N umber C ustomers (R anked Most to Least P rofitab le)
Cu
mu
late
Pro
fits
($
Mill
ion
)
Eight custom e rsa re profita ble
Five custom e rsa re bre a k-e ve n
The re m a ining 7custom e rs a reunprofita ble
What’s the Upside?
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 8
Custom er Profitability W hale Curve - $
$0
$20
$40
$60
$80
$100
$120
$140
$160
0 5 10 15 20
N umber C ustomers (R anked Most to Least P rofitab le)
Cum
ulat
ive
Prof
its ($
Mill
ion)
P ote ntia l profitim prove m e nt of $96m
Old School
• Common practice is to measure profitability ofproducts, services, or departments
• This yields average product profitability – theaverage of all customers using that product
• Averages have a tendency to hide importantdetails
• Need to de-average product profitability tothe customer level
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 9
Old School, Too
• Most companies organize around products,regions, or functions, not customers orcustomer segments
• A customer’s total relationship often spansdepartments, which is hard to see from insidea single department (or silo)
• Managers are rewarded based on departmentperformance – not customer results
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 10
Ignorance is Not Bliss
Not understanding customer profitability leadsmanagers and employees to:
– spend too much time on the wrong products andcustomers
– encourage unprofitable customer behaviors, forexample, “... bring it back if it doesn’t fit”
– incentivize the wrong things, e.g., promoting aproduct whether or not that product is right forthe customer
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 11
SMA – Customer Profitability Management
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CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 13
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
1. Decision Phase
• Explore the value and reasons for a CPMsystem
• Analyze financial consequences -implementation, maintenance, production
• Make “go or no-go” decision• Establish the primary purpose to guide
development and use
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 14
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 15
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
2. Foundation Basics – Cost Object
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• Establish the ultimate cost object –customer, account, invoice, segment, etc.
• Must be compatible with transaction data• Revenue must be measureable for it• Credit Union Example
–Customer is ultimate cost object–Account is intermediate cost object
Credit Union Customer Hierarchy
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 17
Define Customer, Product, Channel
• Customer– Define the customer
• Delivery channel– Define how customers interact with
the company• Products or services
– Define the products or servicesIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 18
Credit Union Product Hierarchy
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 19
Calculate Profitability Your Way
• Establish accounting principles• Resolve thorny accounting issues
– Unsuccessful sales efforts– Capitalization of large marketing programs– Controllable versus non-controllable
• Determine how customer profitabilitywill be measured
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Customer Profitability Report
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CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 22
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
3. CostingTo know customer profitability, one must knowcustomer costs:• Product costs
– Direct material and labor costs
• Costs to serve– Selling, distribution, invoice processing, receivables
funding
• Corporate sustaining costs– Landscaping, accounting, IT services, patent amortization,
executive salaries, etc.
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 23
The ABC’s of Customer CostsCustomer level costs require ActivityBased Costing (ABC):• ABC captures costs at the activity level so
each cost object is charged for the numberof times it performs each activity
• ABC captures the different resourceconsumption patterns of every customer
• Conventional costing assumes customers arehomogenous and consume resources equally
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Standard ABC Model
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Evaluating the Costing Journey: A Costing Levels Continuum Maturity Framework2.0, Gary Cokins, 2012, IFAC. All Rights Reserved. Used with permission.
Simple Credit Union Example
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CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 27
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
4. Transaction Data
• Measuring a cost object depends on theavailability of transaction counts (productsand channels, too)
• CPM data is sourced from disparate computersystems– General Ledger (GL) for financial data– Core application systems for transaction data– Data warehouses for everything
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 28
Vast Sources of Data
Vast sources of data are buried deep inyour company’s IT systems• Harnessing that data for CPM can be costly
and time consuming• Accurate, repeatable, and timely sourcing of
data is difficult• Data sourcing poses the greatest risk of failure
to a CPM system
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 29
Cost What You Can Source
Maxim – Cost what you can source andsource what you can cost• Data must be available for the cost object to
build an activity cost driver• An activity cost pool must be available to
make use of an activity cost driver• Do not source driver data when no activity
cost pool exists, and vice-versa
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 30
Cost What You Can Source
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 31
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 32
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
It Takes CoordinationFoundation basics, costing, and data phasesare highly interdependent:• Foundation basics are limited by costing
and data limitations• Cost object must have transaction data• Cost object activities determines what data
to source, and available data determineswhat activity cost pools to develop
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 33
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 34
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
5. System Options
Select the appropriate information technology (IT)solution:• Two calculation engines for CPM
– Costing system – calculates cost driver rates– Profitability system – uses cost driver rates to calculate
cost object profitability• System expenses never end:
– Ongoing maintenance – backups, re-runs, data repair, etc.– Software upgrades – installation and testing– System refinements – changes in processes or data
sourcing
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 35
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 36
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
6. Business Algorithms
Develop formulas that calculate cost driverrates and cost object profitability
• Similar to Excel where formulas areprogrammed into a spreadsheet
• Involve all employees as they know theirareas
• Thoroughly testing the entire CPM system iscrucial to its success
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 37
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 38
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
7. Production and Results
Production – system runs monthly and producesCPM reports• Maintain high levels of quality control to
support confidence and usage• CPM reports – understandable, relevant,
usable, and actionable• Update cost driver rates every 12 to 18
months
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 39
CPM Implementation Framework
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 40
Decision Phase
BusinessAlgorithms
Production andResults
Strategic Integration
FoundationBasics
CostingTransaction
Data
SystemOptions
8. Strategic Integration
Customer profitability• Integrate into strategic decisions• Provides customer insights not
available before• Goal is to improve company’s
performance
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 41
The $64,000 Question
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 42
???!!!
But First – A Numerical Example
1. Decision Phase– Simple example from financial services industry– CPM purpose is to measure success of strategic
initiatives with customer profitability
2. Foundation basics– Establish the Cost Object:
• Customer account (e.g., checking account,mortgage loan account)
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 43
2. More Foundation Basics–Define the customer
• Customer profitability is sum of accountprofitability
–Define the Products• Loan• Deposit
–Define delivery channels• Branch• ATM (Automated Teller Machine)
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2. More Foundation Basics
–Define the Activities• Open an account• Make a deposit• Make a withdrawal• Make a loan payment
– We’ll skip Phase 3 for now
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4. Transaction Data Phase
Transaction data needed for cost object• Date account opened (new account)• Number deposits by channel for account• Number withdrawals by channel for account• Number loan payments by channel for
account• Account balance, account interest, and
account fees
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4. Sample Data File
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Now Back to Phase 3: CostingFour steps to costing
1. Arrange general ledger expenses intodepartments
2. Develop activity cost pools in eachdepartment
3. By department divide each activity cost poolby its number of transactions to yielddepartment cost driver rates
4. Combine department cost driver rates into atotal cost driver rate for each activity
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 48
1. Arrange GL Expenses by Dept.
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 49
2. Develop Activity Cost Pools
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3. Calculate Dept. Cost Driver Rates
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4. Combine Dept. Cost Driver Rates
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Phase 6. Business AlgorithmsThree steps to determine customerprofitability
1. Calculate costs for each customer account(the cost object)
2. Calculate profitability for each customeraccount (the cost object)
3. Calculate profitability for each customer(sum of customer’s accounts)
This example will skip Phase 5 – IT SystemOptionsIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 53
1. Calculate Each Account’s Costs
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 54
2. Parameters Needed
Credit union requires parameters forprofitability• Funds Transfer Pricing• Provision for Loan Losses• Corporate Overhead Rate• Tax Rate
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 55
2. Economic Profits Require FTP• Funds Transfer Pricing (FTP)
– Capital cost of funding loan balances, or– Capital benefit of investing deposit balances
• For Example– Banks are paid interest on loans (GAAP interest
income)– Capital cost of the funds loaned are not
accounted for by GAAP– FTP assigns a capital charge to the loan’s
balancesIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 56
2. Loans Have Default Risk• Loans are charged a provision for loan
loss expense– Accounts for the risk of default– Similar to an insurance premium
• Loan loss provision rates vary by– Product risk– Customer risk– Bank exposure to customer– Other loss risk factors
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 57
2. Fully Loaded Corporate Overhead
Derivation of the Corporate OverheadRate:
(a) Exp. w/o Corp Sustaining=$1,177,000(b) Corporate Sustaining Costs=$292,500(b)/(a) Corporate Overhead Rate = 24.9%
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 58
2. Profitability Parameters
Parameters needed for credit unionprofitability calculations:
– FTP Cost of Funding Loans 6.5% annual rate– FTP Earnings Credit on Deposits 6.5% annual rate– Loan Loss Provision rate 0.6% annual rate– Corporate Overhead Rate 24.9%– Tax Rate 35.0%
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 59
2. Calculate Each Account’s Profits
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 60
3. Calculate Customer Profitability
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Too Much Data – What To Do?
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The $64,000 Question Remains
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???!!!
Let’s Get Some Help!
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FYI - availableat Amazon.com
Killer Customers - 2 Big Ideas!
1. Customer segmentation basedon homogenous needs
2. Value propositions targeted tosatisfy the needs of eachsegment
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 65
Idea One
Needs based customer segments:“Customer segments are groups of customers
whose traits, needs, and desires aresufficiently similar that the members of thesegment can be most profitably servicedwith similar value propositions.”
Killer Customers: Tell the Good from the Bad –and Crush Your Competition, Larry Seldenand Geoffrey Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 66
Idea Two
Targeted value propositions:• The complete experience a company delivers
to its customer• The winning value proposition is the one that
most profitably meets all customer needs forthe targeted segment, including price
Killer Customers: Tell the Good from theBad – and Crush Your Competition, LarrySelden and Geoffrey Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 67
Killer Customers - 2 Big Ideas!
1. Customer segmentation basedon needs
2. Value propositions targeted tosatisfy the needs of eachsegment
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 68
Reality of Customer Segments
• Some customer segments are morevaluable than others
• Customer segments must be treateddifferently
• Overcome idea that all customers shouldbe treated the same
• Profitable customers should get betterservice
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A Real World ExampleMid-sized credit union (similar to a bank)• 275 employees• 60,000+ steady state customers• 7 quarters of customer profitability data• Starting point is steady state customers
– No new accounts– No closed accounts– No charged-off accounts
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 70
Customer Segmentation is a 5 StepProcess
1. Group all customers into profitability deciles2. Study behaviors within deciles to understand
why some are profitable and others are not3. With this understanding, define needs-based
customer segments4. Group each needs-based segment into
profitability deciles5. As experience and knowledge grow, re-define
and re-segmentKiller Customers, Selden and Colvin
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CU Profitability Deciles – All Customers
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Most profitable
Least profitable
Credit Union Whale Curve
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Correlations Sometimes Help
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Two Big Myths
Two rules of thumb have long existedin the banking industry:
1. Loan balances drive profitability2. Cross sale more products to make a
customer more profitable
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Loan Balances are Important
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Looks like a strongrelationship to loan
balances
We Need More Than Loan Balances
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Closer look shows for bulk ofcustomers, the relationship to
loan balances vanishes
Cross Selling – That’s the Ticket?
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Most profitable:3.4 accounts per
customerLeast profitable:2.4 accounts per
customer
Customer Segmentation is a 5 StepProcess
1. Group all customers into profitability deciles2. Study behaviors within deciles to understand
why some are profitable and others are not3. With this understanding, define needs-based
customer segments4. Group each needs-based segment into
profitability deciles5. As experience and knowledge grow, re-define
and re-segmentKiller Customers, Selden and Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 79
Correlations of Decile 1 – the MostProfitable
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Decile 1 – See Any Patterns?
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Maybehere?
Decile 1 – A Closer Look
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A lot of Decile 1 folks haveno loan balances at all!
Bottom Line at Top of the Organization
• Actionable information from high levelanalysis of customer data is rare and tenuous
• High level “rules of thumb” often fail whenexamined under the lens of customerprofitability
• The reasons customers fall into a particularprofitability decile are different and varied –there is no one way to reach them
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 83
Customer Segmentation is a 5 StepProcess
1. Group all customers into profitability deciles2. Study behaviors within deciles to understand
why some are profitable and others are not3. With this understanding, define needs-based
customer segments4. Group each needs-based segment into
profitability deciles5. As experience and knowledge grow, re-define
and re-segmentKiller Customers, Selden and Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 84
Customers Have Needs
Customer needs• What problem or desire needs to be fulfilled
• What value is placed on solving that problemor satisfying that desire
• Needs include both cost and non-cost
• Needs are not demographic or psychographic(e.g., age, zip-code, income, occupation,attitudes, marital status)
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 85
Watch Those Behaviors!
Customer behaviors• How does the customer transact
business• Can behaviors be measured or tracked• Can behaviors be ascertained from the
products and services purchased• Can we impact these behaviors – for
better or worseIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 86
Build a Needs Based SegmentLate Retirement Segment• Advanced age – over 80• Income from pension/401k and investments• Little need for loan balances (small mortgage?)• Investment needs not met by credit union• Large deposit balances• Not user of technologies (ATMs, online banking)• Uses drive-through and grocery store tellers• Pays little to no feesIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 87
What We Cannot See
Late Retirement segment needs• Small local bank• Good customer service• Pleasant people so feels comfortable
dealing with them• Keeps in touch – follows upIMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 88
Define Your Proxies
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Credit Union Data Reveals
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Customer Segmentation is a 5 StepProcess
1. Group all customers into profitability deciles2. Study behaviors within deciles to understand
why some are profitable and others are not3. With this understanding, define needs-based
customer segments4. Group each needs-based segment into
profitability deciles5. As experience and knowledge grow, re-define
and re-segmentKiller Customers, Selden and Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 91
Late Retirement Profitability Deciles
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THIS IS APROFITABLESEGMENT!
A few are stillunprofitable
Late Retirement - See Any Patterns?
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 93
Maybehere?
Customer Segmentation is a 5 StepProcess
1. Group all customers into profitability deciles2. Study behaviors within deciles to understand
why some are profitable and others are not3. With this understanding, define needs-based
customer segments4. Group each needs-based segment into
profitability deciles5. As experience and knowledge grow, re-define
and re-segmentKiller Customers, Selden and Colvin
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 94
What the Profitability Data Tells
Late Retirement Segment• Small but highly profitable segment• Average customer profitability = $2,085• Total segment profitability = $608,774,
which is 3.7% of the organization’s totalprofitability
• Possible relationship to deposit balances
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 95
What Can We Conclude?
Late Retirement Segment• Retain and attract these customers• Cross sell other appropriate services,
such as safe deposit boxes andCertificates of Deposits (CDs)
• Obtain some or all of their investmentbusiness
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 96
Killer Customers - 2 Big Ideas!
1. Customer segmentation basedon needs
2. Value propositions targeted tosatisfy the needs of eachsegment
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 97
Target Needs of Segment
Winning value propositions• Developed for each customer segment• Satisfy customers’ needs in a profitable
manner• Exist for customer segments with
homogeneous needs• Likely do not exist at the corporate,
product or service level
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 98
Profitability is the Yardstick
• Value proposition–Must be measurable to be actionable–Customer profitability tracks its success
or failure• Measuring profitability insures new
initiatives send us down the right path
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 99
Where to Begin?Stages of value proposition1. Creation – propose methods to profitability
meet homogenous customer needs2. Communication – communicate the proposition
to customers and employees3. Execution – implement the proposal and
measure its results using customer profitability4. Learn and repeat – customer profitability leads
the way
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 100
Late Retirement Segment – Value PropositionInitiatives
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 101
Late Retirement Segment - More ValueProposition Initiatives Segment
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 102
Where Have We Been?
• Use the customer profitability framework to builda CPM system
• A numerical example illustrates the calculation ofcustomer profitability
• Too much data - Killer Customers comes to therescue
• Real world Credit Union example– Top of the organization – no “magic bullet”– Needs based segment – needs are not
demographics– Value propositions – profitability is the yardstick
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 103
ConclusionStep 1 – Needs based segmentation groups
customers by homogenous needsStep 2 – Value propositions address the
homogenous needs of eachcustomer segment, including price
Step 3 – Customer profitability measuresthe success or failure of valuepropositions
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 104
Does Your Company Know?
“A key assumption must be that allcustomers are not created equal. If acompany does not know the current orpotential profitability of its customers,then it is likely misallocating its scarceand valuable resources.”
Gary Cokins, Performance Management, JohnWiley & Sons, Inc., 2004, pg 164
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 105
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence ©2012 Institute of Management Accountants. All rights reserved. Page 106
Q & A
Contact Information
Dan Hill, CMA, CFMSenior Vice President, CorePROFIT Solutions, Inc.
[email protected]: (704)509-6076
Cell: (704)618-0126www.coreprofit.com
IMA’s 93rd Annual Conference – CMA: 40 Years of Excellence © 2012Institute of Management Accountants. All rights reserved. Page 107