InformationWeek
Defining The Business Value Of Technology
March 29, 1999
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Bank of America never attempts to push an unprofitable customer away. "We still consider ourselves the people's bank, so it goes against our culture," senior VP Kelly says. Instead, the bank conducts research to determine why a customer might be unprofitable, and tries to move potentially profitable customers into lower-cost channels for delivering service.
"This is something that the banking industry is going to have to deal with as it becomes increasingly competitive," Winkel says. First National Bank North Dakota looks at ways of repackaging services for highly unprofitable customers or assessing higher fees to cover costs. Or the bank might have to find a less-expensive means of delivering services to unprofitable customers, such as encouraging greater use of ATMs.
Keep Them Coming
Harrah's Entertainment Inc. is using an incentive program called Total Gold, much like a frequent-flier program, to keep its best customers coming back to its 19 entertainment and gambling properties. Some 8 million customers hold Total Gold cards, with which they accumulate points and giveaways such as complementary hotel stays and meals. "We concluded that it made a lot of sense to provide customers with the opportunity to be recognized and rewarded at every property we have," says John Boushy, senior VP of information technology and brand operations. Harrah's estimates that one out of four of its customers visit more than one Harrah's resort in a 12-month period.
Harrah's program is weighted toward its more-profitable services. For example, customers receive more points for gambling than for meals. By swiping guests' cards, Harrah's tracks expenditures in its hotels, restaurants, slots machines, and entertainment events. The collected data goes through transaction systems at each property and is downloaded daily to an Informix database at the company's Memphis, Tenn., headquarters. This "patron" database is used to retain all guest information for several years. For financial and marketing analysis, data is moved to a 100-Gbyte Teradata database. Using modeling tools from SAS Institute and regression-analysis software from SPSS Inc., Harrah's builds profitability and customer-value models that are the basis of the program.
Because of their indirect sales channels, companies in food and consumer packaged goods find it more difficult to identify their most profitable customers, at least on an individual basis. Great Brands International, which sells bottled water under the Evian, Aquafin, Volvic, and Dannon Water labels, gets around this problem by identifying its most profitable groups of customers in specific geographic areas and even stores. "We try to isolate within each of our brands the highest index for our brands, the types of customers that shop in those accounts," says Jim Langley, VP and business unit manager for Evian and Volvic. Evian, for example, is a premium brand with a consumer profile that's different from Dannon Water's.
Great Brands uses Kenosia's Data Alchemy software, which brings in multiple types of customer information data. To identify potential customers for its various products, the company uses Spectra Data, a consumer research service that provides customer demographics according to ZIP code. The data includes lifestyle information and identifies which stores potential customers may patronize. "We break down customer information and create a picture of what our customer looks like," Langley says. "We try to pinpoint where our customers are and where they're predisposed to shop."
Great Brands then aims the distribution of specific products at consumer targets. Stores in Greenwich, Conn., for example, may be stocked with a higher percentage of Evian because the demographics suggest it will be more successful there. It's a way of maximizing profits even when Great Brands doesn't have direct contact with the consumer of its products.
Proceed With Caution
For consumers, one of the positive outcomes of customer-profitability analysis is that they stand to get more attention from the businesses that serve them. Of course, the way that businesses handle that relationship can make the difference between a loyal customer and an ex-customer. Analysts warn that a focus on profitability can become a corporate obsession--and when overdone, it can leave customers feeling overwhelmed with marketing and sales pitches. "What they do is alienate their best customers," says Herb Edelstein, president of Two Crows Corp., a data mining consulting firm. "Data mining is not a substitute for understanding your business."
One-to-one marketing expert Rogers recommends companies take a long-term view and look not only at the current revenue being generated by a customer and the costs associated with providing service to that customer, but also at the customer's potential or strategic value. "To think that it's only [current] revenue is naive," she says.
KPMG Peat Marwick, the accounting and tax services arm of KPMG, keeps this in mind when it identifies its most profitable business customers using PeopleSoft Inc.'s project-accounting system and Epiphany's customer-relationship management package. KPMG also targets emerging companies that, although not profitable today, could become major clients of the firm in the future.
"Technology can't be enough. You have to have an understanding of the potential for the client," says Carey White, KPMG's controller. "You simply devote relatively more attention to the highest potentially valuable customers. You might deliver [services] that are low-volume, low-margin now that, if you have a chance to build a relationship over time, will deliver high-value products."
Problems can also occur when business units, subsidiaries, and divisions identify their most profitable and unprofitable customers without taking an enterprise view of those customers. One business unit might deem a customer unprofitable and treat him or her as such, even though that same customer might be on another business unit's "A" list. Exchange Applications' Frawley cautions against giving too much information about customer profitability to front-line workers, such as call-center representatives, because it could negatively influence how those employees treat customers.
That gives business and IT managers a lot to think about as they embark on projects to assess customer profitability. But when all things are considered, the potential pitfalls of customer-profitability analysis may be outweighed by the alternative--a stable of customers who drain a company's bottom line.
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