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Pilgrim Bank A Customer Profitability Case Solution
The case is centered on the findings of - Alan Green, a new financial analyst at the Pilgrim Bank. He has been given the task of assessing and analyzing customer profitability to help the strategic decision-making about whether a fee should be charged for online banking or not. Green takes into consideration the customer profitability formula used within his bank and also the different factors that go beyond the balance levels. Green works with data from over 30,000 customers. This data has been gathered since the year-end of 1999 for the bank. Green can identify a profitability skew in his findings – where the majority of the profit share for the bank is coming from a small percentage of the bank’s consumers. Green found out that the average customer profitability for the sample is $111.50. Comparatively, the online customers showed higher profitability. Green wonders how these findings can guide the bank’s strategy for increasing income through service levels and fees.
Following questions are answered in this case study solution
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?
Based upon the sample of customer data for 1999, what can Alan Green conclude about average customer profitability for Pilgrim Bank’s entire customer population?
Is the difference in average profitability between online and offline customers in the sample indicative of a meaningful difference in profitability across their groups for Pilgrim Bank’s entire customer population?
What role do customer demographics play in analyzing customer profitability for online and offline customers?
Should the bank charge fees, offer rebates, or do nothing regards to pricing for online channel use?
How does customer channel use in 1999 predict customer profitability in 2000? Customer retention in 2000?
Case Analysis for Pilgrim Bank A Customer Profitability
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?
Retail banks make money from their customers in multiple ways. These include interest income – i.e., the interest charged on loans and the interest that is earned on investments; balance in deposit accounts, which is used to fund investments and loans; net interest spread, fees, and service charges such as fees for account maintenance and ATM usage for example, and the cost to serve. Banks also engage in foreign exchange activities and trading, which facilitates their income earning.
In the case of Pilgrim Bank, the new analyst, Alan Green, has identified a marked variation in the customer profitability within the bank and its 5 million customers. Having assessed the data since 1999, Green found that there was a profitability skew, and only a small number of consumers were contributing to the majority of the profits being earned by the bank. The average profitability for the sample of the customers he studied was $111.50. Compared to this, online customers showcased a higher average profitability of ($116.67, compared to the average profitability of ($110.79 of offline customers. Those highlighted that online customers were more profitable for the bank. Green, however, needed to determine the causation and find out whether the higher profitability was a characteristic of the online channel only or if other factors also contributed.
To match service levels to customer profit levels, green can make use of a segmented approach where customers with higher profit levels can be offered premium services by the banks in addition to exclusive benefits and tailored incentives. This will help increase engagement and build loyalty. The bank could also encourage the use of cost-effective channels, such as online banking and ATM usage, for routine transactions. In addition, the bank should also adjust the fee structure to align with the value of services provided to different customer segments, and personalized financial services and products can be offered accordingly as well.
2. Based upon the sample of customer data for 1999, what can Alan Green conclude about average customer profitability for Pilgrim Bank’s entire customer population?
Based on the sample of customer data that Green analyzed from the year-end of 1999, he found that the average customer profitability for Pilgrim Bank's entire customer population is $111.50. The sample for the data comprised 30,000 customers, and this data led to the finding of the average profitability as well. Green also wondered if this figure and profitability that he has found through his analysis generalized to the entire customer base of 5 million of the bank’s customers – as the sample only represents a fraction of the five million customer base. The analyses, however, include a profitability skew amongst customers. Green found that only a small percentage of the customers were contributing to the majority of the profit that the bank was making. To counter this challenge, the bank needed to segment and sort the customers into groups based on the profitability they gave. Moreover, green also found that a new profitability skew could be developed by sorting customers from most to least profitable and charting percent cumulative profitability versus percent cumulative customers. This new profitability skew suggested that while over half the customers sent the sample had been profitable in 1999, the profit for the bank was derived from only a smaller number of customers. Green also understood the limitations that were present in working with a sample. However, he was confident in the validity of his findings because he noted that the average profitability of the sample was $111.50.
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