This lesson explores how banks segment their customer base and analyze profitability to identify high-value customers and make strategic decisions.

2.1 The Importance of Customer Profitability Analysis
Customer base profitability needs to be fully understood to answer strategic questions such as: Is the current service model for a specific customer segment too expensive? Which types of loans should you stop originating given their low interest margin? Should pricing terms be changed for a specific customer? Decision making at all levels is significantly enhanced by having a robust customer profitability model .

2.2 Segmentation and Profitability Insights
Common wisdom based on “traditional” views is sometimes confirmed but frequently dispelled by profitability analysis :

  • Wealthy Customer Segment: Customers with the largest deposits or investment accounts may not always be the most profitable. They often show a low or even negative return on equity because they consume large resources through a personalized service model and receive the best interest rates and waived fees .

  • College-Student Deposit Accounts: A good portion of these accounts may be owned by customers who finished school long ago, generating a thin or even negative net income margin. These customers are good candidates for migrating to higher premium and more profitable deposit products .

  • Personal Loans: There is often a minimum loan amount below which profitability is negative. Management may establish a minimum loan amount, charge higher fees, or create an expedited and less expensive underwriting process .

2.3 The Co-operative Bank Case Study
An ABC analysis of product profitability at Co-operative Bank revealed that Independent Financial Advice/Insurance was losing money and the basic core product was not profitable . The bank had the highest cost-to-income ratio and had to cut costs and services to survive. A weakness of the product profitability analysis was that it ignored cross-selling opportunities—the unprofitable product may be attractive to wealthy account holders, help retain those customers, and ultimately increase their lifetime profitability . Customer-level analysis revealed that up to half of all current accounts, particularly those with low balances, were unprofitable .

2.4 Strategies for Improving Profitability
Once information on product and customer profitability is obtained, banks can devise new strategies such as :

  • Cross-selling more profitable products

  • Distinguishing between new customer and mature accounts

  • Switching unprofitable customers to lower-cost channels (e.g., ATM transactions)

  • Setting pricing for minimum balances, ATM fees, and overdrafts

  • Outsourcing non-core functions (ATM network, cheque clearing)

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