Pilgrim Bank

Savita Aswath 2008047

Somnath Sinha Mahapatra 2008056
Vishwanathan Sahasranamam 2008068
Abhijeet Gokhale 2008072
Gaurav Barman 2008081
Situation
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.
 Questions
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?
Revenue Profit Mis-alignment. All customers are not alike!
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
Data is representative. As of today, Online customers are only marginally more profitable.
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? No. There are demography specific variations.
4. What role do customer demographics play in analyzing customer profitability for online and offline
customers?
They help identify opportunities for improving profitability.
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?

Push Online banking Channel, free of cost!

Facts
No clear relationship between Balances and Customer Profitability

[Exhibit 2]
Revenue Profit Mis-alignment
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 / $

CRM
This is where CRM fits in.
Cost

Revenue

Biggest <- Customers -> Smallest

Service Spectrum

Increasing value additions and returns ->>

Self help Mixed Bank Customized

(Online) (ATM) Branch Service

Increasing Skill sets, Personalization and Customer Contact ->>

Implies, that you save your resources for your MOST PROFITABLE customers!
Cost to Serve
1. Transaction Related costs
2. Allocated Fixed Costs

Personalized: Very High Bank: Fairly high VC. Very

Variable Cost. (VC); High FC for every new
Moderate Fixed Cost (FC). branch
Total Cost

ATM: Low VC, but reasonable

FC with every new installation

Adoption of online
channel indeed makes
Online: Very low VC. Very scalable. customers more
profitable.

Fixed Cost
No. of Customers >
 Profitability Skew More than 50% of the customers
are non-profitable

120%
100%
90%
80%
70%
Cumulative Profit

10% of my customers account for

60% 70% of my profits!

50%
40%
30%
20%
10%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cumulative Customers
Customer Classification using ABC
-> High

Passive Costly to Service

Product is Crucial But pay top dollar
Good Supplier Match
Net Margin Realized

Price Sensitive and Aggressive

Few Special Leverage their buying power
Demands Low price and lots pf
customized service and
Low <-

features

Low <- Profitability -> High

Profitability depends on whether and how much the net product margins
recover the customer specific costs
Strategy Perspective
-> High

Passive Costly to Service

Product is Crucial But pay top dollar
High Cost- High Margin
High Cost- High Margin
Good Supplier Match
BEST customers. Should be Customers. They are more
BEST customers. Should be
Net Margin Realized

cherished and protected. than covering their costs.

Prime Target for Competitors. Value service and pay for
them.

Price Sensitive and Aggressive

Few Special Leverage their buying power
Help reduce cost to serve. Low price and lots of
Demands customized
Low Margin –service andto Serve.
High Cost
Low <-

features

Low <- Profitability -> High

Profitability depends on whether and how much the net product margins
recover the customer specific costs
Strategy Perspective
-> High

Passive Costly to Service

Product is Crucial But pay top dollar
High Cost- High Margin
High Cost- High Margin
Good Supplier Match
BEST customers. Should be Customers. They are more
BEST customers. Should be
Net Margin Realized

cherished and protected. than covering their costs.

Prime Target for Competitors. Value service and pay for
them.

Price Sensitive and Aggressive

Few Special Leverage their buying power
Help reduce cost to serve. Low price and lots of
Demands customized
Low Margin –service andto Serve.
High Cost
Low <-

features

Low <- Profitability -> High

Profitability depends on whether and how much the net product margins
recover the customer specific costs
Strategy Perspective
-> High Bonding
Passive
Passive Costly
Costly to
to Service
Service
Product is Crucial But pay top dollar
Product is Crucial
Good Supplier Match But pay top dollar
Good Supplier Match
Net Margin Realized

Strategic Customers
Improve Online Offering

Offer Rebates Ot
he
rs
M : Pus
ay w h t
an owa
Price Sensitive
Price Sensitive and
and Aggressive
t to rd
con s On
sid line
Few Special Leverage
er
cha unctheir buying power
Few Special
Demands Low price r on
gin and
g a itionlots of
d
customizedfeservice e. ally and
Demands
Low <-

features
Convertibles and New Customers
Discounts for more
predictable behavior
Incentivize to improve ordering and delivery
relationships => Standard Service. Penalize for using high cost
channels.

Low <- Profitability -> High

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

Personalized: Very High Bank: Fairly high VC. Very

Variable Cost. (VC); High FC for every new
Moderate Fixed Cost (FC). branch
Total Cost

ATM: Low VC, but reasonable

FC with every new installation

Online: Very low VC. Very scalable.

Fixed Cost
No. of Customers >
Cost to Serve (new)
Even though the volumes increase while progressively moving to lower cost channels, the incremental
costs are very minimal.

Personalized: Very High Bank: Fairly high VC. Very

Variable Cost. (VC); High FC for every new
Moderate Fixed Cost (FC). branch
Total Cost

ATM: Low VC, but reasonable

FC with every new installation

Online: Very low VC. Very scalable.

Fixed Cost
No. of Customers >
 Strategy Impact on Profitability Skew Reduce the no. of non-profitable
customers.
120%
New Skew
100%
90%
80%
70%
Cumulative Profit

60%
50%
40%
30%
20%
10%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cumulative Customers
Demographics
Are the profits from Online Customers any significantly better?

Observations
Mean: Online user : $116.67, non users 110.79
Correlation between profit and online use : .007
Regression (online and profit)- R-Square: ~0
Role of Other Factors
Cluster Analysis of Profit from non
online user

Observations
Good 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
Cluster Analysis of Profit from online
user

Observations
Good 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
Non Online Users
Customization, Structural
Good Profit: Age 45+, Income 50K-100K, stayed longer with the bank Bonds; Convert if possible
Moderate Profit: Age 35-45, Income 50K-75K, tenure reasonably longer
No profit: Age 25-35, Income 40K-50K, tenure is relatively shorter No Incentive

Online Users
Retain – Financial Bonds
Good Profit: Age 35-55, Income 75K-125K, stayed longer with the bank
Moderate Profit: Age 35-55, Income 75K-100K, tenure reasonably longer
No Incentive
No profit: Age 15-35, Income 50K-75K, tenure is relatively shorter
Demographic Implications
Bonding: Bonding:
Financial, Social Customization, Structural
-> High

Age 35-55, Income 75K-125K, Age 45+, Income 50K-100K,

stayed longer with the bank stayed longer with the bank
Net Margin Realized

Age 15-35, Income 50K-75K,Improve Online Offering

Push Online Offering
Financial Bonding

tenure is relatively shorter

Oth
ers
:
Ma Push
yw
an towa
Age 35-45, Income 50K- Age 25-35, Income 40K-
t to rds
con On
side line
75K, tenure reasonably 50K, tenure is relatively
r c unc
har ond
gin
g a ition
longer shorter fee ally.
.
Low <-

Low <- Profitability -> High

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