Angel Customers & Demon Customers: Discover Which is Which, and Turbo-Charge Your Stock - Couverture rigide

The Trillion-Dollar Opportunity YouÆre Missing What It Meansùand What ItÆs Worthùto Be Truly Customer Centered True Story

A customer of a major money-center bank wanted a mortgage recently. He looked like every bankÆs dream customer. HeÆs a highly active trader through the bankÆs stock brokerage services, paying huge commissions, which are extremely profitable for the bank. He also keeps lots of money in the bank, and those large balances are very profitable as well. One thing he didnÆt do was borrow much from the bankùhis current mortgage was with another institution. Note: Mortgages can be highly profitable for banks. So when the day came that this customer wanted to refinance his old mortgage, he called the bankÆs mortgage department. He was sure theyÆd be delighted to hear from such a terrific customer as him.

It was as if he had called the Bank of Outer Mongolia.
The mortgage department had no idea whether he was a good customer or a bad oneù highly profitable or break-even or unprofitable. They gave him the same treatment and made him the same offer as if he were a stranger who had walked in off the street. He would have to fill out endless paperwork, even though the bank already had much of it. He would have to pay the same fees and interest rates as anyone else. When would the bank make a firm offer of the terms of the mortgage? They couldnÆt really say. In fact, the mortgage departmentùbeing ignorant of the customerÆs history with the bankù couldnÆt even offer him assurances that heÆd get the mortgage at all.

Instead of just being miffed, this customer called the manager of the branch where he has his accountùa manager who knew just how valuable this guy was. Then he patched in a manager from the bankÆs mortgage department. These two managers had never spoken to each other before. DidnÆt it make sense, asked the customer, for him to get his mortgage and get it at advantageous rates in light of his long history and high profitability with the bank? If he didnÆt, heÆd certainly see if some other bank could be more accommodating. ôSorry,ö said the mortgage manager, who explained that his hands were tied. This bank, like most major banks today, is the product of several mergers, and after the last big one all mortgage managers were put on a very short leash until the integration got worked through. He was strictly forbidden to do anything special for this or any other customer. ôWait!,ö said the branch manager, now pleading with the mortgage manager in an effort to keep this customer. ôIÆll pay you the first-year costs of giving this customer a better mortgage dealùjust give it to him! Make him happy! We make loads of money with this guy!ö ôSorry,ö said the mortgage manager. ôIÆm not allowed.ö

The customer got his mortgage someplace else, at an institution that could see what he was worth and was hungry for the business. He gradually began shifting his trading from the Bank of Outer Mongolia to the new institution as well. So the bank not only blew a great opportunity to deepen its relationship with this highly profitable customer, it let a direct competitor take a significant piece of the customerÆs business. And it made the customer angryùa lose-lose deal. Bottom line: a complete disaster for the bank. ItÆs no surprise to find that this bankÆs financial performance is lousy. Its ROE (return on equity)1 is a dismal 10 percent and falling; profits and its stock price have been plunging, and its P/E (price-earnings) multiple is much worse than mediocre, about half the average P/E for the S&P 500. As we write this, the newspapers are full of rumors that the CEOÆs days are numbered.

Sound like any bank youÆve done business with?
Now suppose that instead of this ludicrous, frustrating experience, the customer had encountered something different. Suppose the manager he spoke to wasnÆt in charge of mortgages or a branch but was in charge of him and customers like him. The manager knew everything about the customerÆs relationship with every part of the bank and exactly how profitable he was because this information was available on a computer screen at any time. More important, this manager was accountable for the profitability of this customer and others like him. A few layers up in the organization was an executive whose entire job was to manage the customer segment to which this customer belonged (the bank might call the segment something like ôwealth buildersö). Other parts of the bankùmortgages, deposit accounts, brokerage services, branchesùfunctioned as internal suppliers of products, services, and distribution to this executive and the handful of other executives who were in charge of other customer segments.

Does this sound crazy? LetÆs get really radical: Suppose these segment executives had profit-and-loss responsibility. Suppose the bank could calculate the profitability of each individual customer or customer segment, and these executives were on the hook to deliver specific, budgeted improvements in their segmentÆs profit each quarter.

In this kind of organization, what kind of experience would our bank customer have had? Most likely one that was markedly betterùfor him and for the bank.

This fantasy bank is no fantasy. ItÆs Torontoûbased Royal Bank, which has reorganized its huge Personal and Commercial division in exactly this way. The results have been astonishing. The division has reduced expenses by $1 billion, in part because those product areasùmortgages, deposit accounts, etc.ùare no longer fiefdoms with their own separate administrative infrastructures and their own marketing efforts, which were often aimed in an uncoordinated way at the same customers; everyone in the bank realized that loads of money was being wasted as a result, yet it was virtually impossible to do anything about it. At the same time, the division is ahead of schedule in increasing revenues by $1 billion, a natural result of trying to meet customersÆ total needs rather than trying to sell individual products and services. ThatÆs a $2 billion swing, which the bank is sure resulted from its new approach to business. Because of the bankÆs high fixed-cost structure, most of that money fell to the bottom line. By contrast with the financial performance of the Bank of Outer Mongolia, Royal BankÆs Personal and Commercial division earns a return on equity of about 25 percent. If the division was a freestanding business, we calculate that its excellent profitability and growth prospects would win it a P/E greater than the S&P 500 averageùeven though most banksÆ P/E multiples are way below the average. And the stock of the corporation has outperformed that of most North American financial institutions over the period.

Other than these radically different financial results, whatÆs the difference between Royal Bank and the bank that failed so dismally in dealing with our unhappy customer? Not much, by most criteria. TheyÆre both giant, long-established banks offering a full line of financial services to millions of customers. Both have computers loaded with stunning amounts of potentially useful data about those customers. The most important difference between them is much deeper than matters of size, products, or even the business theyÆre in. It is that these banks conceive of the way they do business in profoundly different ways. Specifically, one of them, Royal Bank, has put customers at the center.

Do You Have Any Unprofitable Customers?
Maybe youÆre thinking, ôThatÆs fine for a bank, but my business is very different.ö ThatÆs just not the case. No matter what business youÆre in, the principles weÆre talking about apply to you. We believe that virtually every company in every industry will soon have to reconceive its way of doing business along these lines, with customers at the center. Why? Because the evidence is overwhelming that this is every companyÆs number-one opportunity to create new shareowner wealth, which is something all companies desperately need to do. Consider: Even when the U.S. economy was booming from 1995 to 2000, most of the biggest companies either failed the most basic test of businessùthey didnÆt earn their cost of capitalùor they passed by the slimmest of margins.

We know for sure that companies did much worse through the slowdown that followed the stock market bust in 2000, despite heavy layoffs, divestitures, and other heroic cost cutting. To put this in the starkest terms: Most companies are failing to achieve what they must achieve to make their share prices rise.

ThatÆs a big problem. In trying to solve it, the typical executive looks for troubles in the companyÆs products or business units or territories, which sounds sensible. But that kind of conventional analysis is no longer good enough because itÆs typically applied to all customers, profitable or not, high potential or low, in the same way. Ever more brutal competition, combined with demanding capital markets and suspicious investors, is challenging managers to rethink their businesses in a fundamentally new way. A number of companies are beginning to do so, using a crucial new insight: If a companyÆs return on capital2 isnÆt much better than its cost of capital, then its trouble is even deeper than bad products or business units or territories. By definition the company must have a boatload of unprofitable customers.

This is a huge idea: A company consists of both profitable and unprofitable customersù angels and potential demons. Some customers are making your company more valuable while some are draining value from it. Not that the demons are bad individuals; frequently theyÆre unprofitable simply because the company doesnÆt know who they are and is failing to offer them the right va...

One of the oldest myths in business is that every customer is a valuable customer. Even in the age of high-tech data collection, many businesses don't realize that some of their customers are deeply unprofitable, and that simply doing business with them is costing them money. In many places, it's typical that the top 20 percent of customers are generating almost all the profit while the bottom 20 percent are actually destroying value. Managers are missing tremendous opportunities if they are not aware which of their customers are truly profitable and which are not.
 
According to Larry Selden and Geoff Colvin, there is a way to fix this problem: manage your business not as a collection of products and services but as a customer portfolio. Selden and Colvin show readers how to analyze customer data to understand how you can get the most out of your most critical customer segments. The authors reveal how some companies (such as Best Buy and Fidelity Investments) have already moved in this direction, and what customer-centric strategies are likely to become widespread in the coming years.

For corporate leaders, middle managers, or small business owners, this book offers a breakthrough plan to delight their best customers and drive shareowner value.