For decades now, there have been debates between the finance and marketing departments on how to truly measure the “profitability” of a customer. Every time the marketing department or MCIF provider comes up with a calculation to estimate how much profit an account or a customer generates, the finance people say that the number is over-inflated or under-inflated or doesn’t allocate the appropriate amount of “overhead” to each customer.
The truth of the matter is that the debate is really unnecessary. The focus of marketing should be to generate revenue by bringing in new account holders or getting existing customers to utilize additional accounts and services. While it’s important to be conscious of the cost of the account opening channel (online vs branch for instance), the overhead isn’t a factor that can be controlled by marketing, so it’s less relevant in the calculation. Although often used interchangeably, it’s more accurate to say that the goal of marketing is to bring in customers who generate revenue instead of profits.
When dealing with existing customers, the relative revenue of the customer or account is often more important than the actual dollar amount of the revenue or whether the customer is “profitable.” The main reason to find out whether a customer generates a lot of revenue, some revenue, or little to no revenue is so that you’ll know how and what to communicate to the customer. Putting customers into revenue segments is all that’s necessary to make this actionable.
For example, if customers are in the high revenue group, they should be communicated to about topics that are relevant to them—often enough so they feel valued to ensure they don’t leave. Customers in the medium or low revenue groups can be profiled to see if they have potential to move into the high revenue segments. If the potential is there and product need exists, they should be communicated to about additional products/services that are relevant to them. Customers in the low/no revenue group that don’t have much potential for anything additional can be communicated to much less frequently using lower cost channels to allocate marketing resources elsewhere.
The added benefit of using revenue segmentation is there is no debate on whether the calculation is “right” or not. The segmentation is based on the relative amount of revenue… the customers being in the top third of revenue generators means they are in the high revenue group… so the actual dollar amount is not needed. In the end, every for-profit company can agree that customers who generate revenue are what keeps the company in business—and should be the focus of that business.