The outstanding value delivered every day to consumers by core demand deposit account (DDA) services through retail banking operations of consumer banks is getting lost in the currently fashionable cacophony of media bank bashing. As an industry we have been remiss in communicating just how good we are at serving the interest of individuals, businesses and even the government through provision of deposit services. Let's revisit what we should be talking about in addition to fee levels...

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Too often we see articles and blogs claiming expertise in customer value and customer profitability management that are regurgitating lessons learned at business school instead of in the trenches of business. Simple two-by-two martices that show "how you should use customer value to manage customers" are only illustrations - we fear for those who take them as strategies.
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We have been hearing a lot of talk in Washington and Main Street about how credit card issuers are managing risk and rates lately, so I thought it would be a good idea to offer up a quick analysis of the so-called rationale that supports raising rates on deteriorating-credit clients.

The pricing mantra goes like this...
the expected credit losses on the portfolio is rising so we need more revenue to pay for those losses. And we raise the rates more on people with the worst credit scores because they are the most likely to go under.Well, this is not very sensible, folks. There are several problems with this way of thinking. Read more »

One of the more interesting aspects of customer value measurement - the precedent to customer value management - is that it can have so many different temporal definitions. There is a vast difference between each of these terms:

• customer current value
• customer historical value
• customer present value
• customer lifetime value

 and even within those terms there are variants in meaning. For example current value may mean last week | month | year or it may mean the value of the customer's current business over the next week | month | year.

Getting basic definitions right is crucial to successful acceptance of your customer value measurement techniques. Each of the value metrics identified above has validity - there is no one right answer or single version of the truth that everyone seeks. The reality of customer value measurement is that the techniques and policies used to define the metric must be tailored to the decisions that are to be based on this information.

For pricing decisions one set of definitions might be ideal, while for customer retention strategy another might be more applicable. You need to get the relationship between definitions and decisions right if you want to encourage the right behaviour...and that is what it is really all about.
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Customer value helps identify the top tier customers we need to focus retention activity on, but what of the other 80% of customers who generate nominal or even negative contribution? Are they naughty or are they nice to have in your portfolio?

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