Embed Size (px)
Citation preview
Faculty of Economic Sciences
Master Thesis in Service Management Research
Guo Qingyu
Strategies of Customer Relationship
Profitability in Retail Banking
Date: June, 2009
Supervisor: Lars Haglund
1
KARLSTAD UNIVERSITY
Faculty: Service
Degree Program: Master Program in Service Management Research
Author: Guo Qingyu
Title of Thesis: Strategies of Customer Relationship Profitability in Retail Banking
Supervisor: Lars Haglund,
Date: June, 2009
Keywords: relationship marketing, relationship revenue, relationship cost, customer
relationship profit
Abstract
The thesis aims to explore the strategies or tactics which make the retail banking
profit from customer relationship. Through analyzing RR (relationship revenue) and
RC (relationship cost), the report gets the strategies or tactics for the profitability in
customer relationship base (CRP - customer relationship profitability).
Relationship is the basis for the customer between the retail banking. The stable and
sound long-term relationship makes retail banking profit RR (relationship revenue)
from it. And in the same time to maintain and enhance customers‘ relationship will
incur RC (relationship cost). Certain of RC (relationship cost) it is compulsory if the
banks try to get RR (relationship revenue) from customer relationship. The point is to
find out the strategies which will make retail banking can benefit its CRP (customer
relationship profitability) and still serve their customers effectively and efficiently by
their limited resource simultaneously.
2
Table of Content
1. Introduction...................................................................................................... 3
1.1 Customer Relationship............................................................................... 4
1.2 Relationship problems in Retail Banking...................................................5
1.2.1 Invaders..............................................................................................5
1.2.2 Cross-subsidizing...............................................................................6
1.3 The Aim of Study.......................................................................................7
1.4 Outline of Thesis........................................................................................7
2. Methodology ..................................................................................................... 10
2.1 Method of Research ................................................................................. 10
2.2 Data Collection ........................................................................................ 11
3. Customer Relationship................................................................................... 12
3.1 Background and Concept......................................................................... 12
3.2 Relationship Marketing ........................................................................... 13
3.3 Service Production Process...................................................................... 16
3.4 Relationship-based Profitable Elements .................................................. 19
4. Analysis of Customer Relationship Profitability ........................................... 23
4.1 Relationship Revenue.............................................................................. 23
4.2 Relationship Costs................................................................................... 27
4.2.1 Relationship Cost Typology..............................................................28
4.2.2 Relationship Cost Calculating..........................................................28
4.3 Strategies in increasing RV and decreasing RC...................................... 32
4.3.1 Increasing Relationship Revenue.....................................................33
4.3.2 Decreasing Relationship Cost..........................................................38
4.4 Access Channel ....................................................................................... 40
5. Further Analysis and Interpretation ............................................................... 43
5.1 Relationship Market Analysis .................................................................. 43
5.2 Customer Portfolio Analysis .................................................................... 46
5.2.1 Segmentation based on RR and RC.................................................46
5.2.2 Volume-based Segmentation............................................................48
5.2.3 BCG Growth Matrix Segmentation..................................................50
5.2.4 CRP-based Segmentation.................................................................55
6. Conclusion ..................................................................................................... 57
6.1 Summary .................................................................................................. 57
6.2 Further Research ..................................................................................... 60
Reference .............................................................................................................. 62
Glossary ................................................................................................................ 65
3
1. Introduction
―Banking is usually divided into wholesale banking and retail banking. Retail
banking serves private consumers and small-scale business, a characteristic feature
being a large number of small transactions‖ (Channon, 1986).
The banking market changes fast. Over the last ten years, many banks, such as KBC,
Unicredit, RBS, and Société Générale, have focused on internationalization, and some
new entrants, such as PayPal, exploded on the financial market scene and quickly
became intermediation giants. PayPal is revolutionizing the payments systems
industry, attracting significant, fast-growing financial flows. Other IT providers have
become payments leaders in Europe. Non-banks, including retailers and insurance
companies, meanwhile, are also distributing more and more banking products and
they constitute real competitive threats as they win market share. The sub-prime
turmoil of 2007, which led to a cash shortage in Europe and the US and froze
inter-bank credit, has ushered in a new era in which banks will no longer be able to
rely on real estate or capital market bubbles to fuel their growth. The low interest rate
period seems to be finished, and with it the easy lending market. Banks will need to
develop a growing and sustainable retail business to avoid being an acquisition target
open to attack from larger banks or even non-banks. Middle East funds entering
Citigroup‘s or UBS‘s equities, or Chinese banks entering the top 100 assets ranking,
have taught banks a hard lesson. From now on, banks will be living by the mottoes,
―There is no easy money‖ and ―Get back to basics‖ (Capgemini, EFMA, ING, 2008).
Successful banks will rely on stable and loyal private customers and do a better job of
managing credit risk, while finding and adopting renewed ways to support continued
growth in their domestic markets. Banking‘s golden past, therefore, may be over.
―The US led the way, with the Nasdaq 100/bank index falling off precipitously in
June 2006 (see Figure 2.10). The three other major indexes—EuroStoxx 50/bank
(Europe), Nikkei 225/bank (Japan), and ASX 200/bank (Australia)—soon began to
follow suit. The continuing US tailspin over the past six months clearly indicates the
need for retail banks to sit up and take notice. The rise of risk and shrinkage in
liquidity is now limiting growth opportunities for banks in high income markets.
Some forward- looking banks will focus on retail banking as a stabilizer. To succeed,
however, they will need to understand and respond effectively to structural changes
resulting from legal and regulatory constraints, radical advances in technology,
changing customer behavior, and new competitive threats‖ (Capgemini et el, 2008).
4
1.1 Customer Relationship
In the past a few years, the service firms just do its business in a market-oriented way,
but the new service concept trends concentrate more on customer-oriented way. Firms
compete with services instead of physical products; in the past, service firms have
always done so, but there are few of exception within all of the firms today. ―Service
competition can be defined as a situation where the core solution of a firm—a service
or a physical good—is a prerequisite only for a competitive advantage, but where
firms compete with a number of services surrounding the core solution (Grönroos,
2000). Firms in order to be successful in its business, they have to view their business
and customers relationships from a service perspective. Services are inherently
relational, managing customers out of service perspective benefit from a customer
relationship management approach.
Relations between individuals and organizations present some difficult conceptual
issues surrounding the ―existence‖ of those organizations and the ability of an
individual to have a relationship with an organization. ―The difficulties step from two
problems: (1) the problem that organizations are abstract entities, which makes it
difficult to relate to them as a consumer and; (2) the problem that the relationship
between organizations and individuals is asymmetrical or unconscious (consumers
may not be aware of the existence of their relationship with a provider)‖ (Czepiel,
1990).
Customers do not look for goods or service, they look for solutions that serve their
own value-generating process. How to produce a useful product, solution or to say
value-in-use product or service? This refers to the quality of service, normally
customers‘ expectation and satisfaction are perceived as the norm. ―Service quality is
thus perceived and determined by the customer on the basis of co-production, delivery,
and consumption experiences‖ (Edvardsson, 2005).
Relationship refers to the connection between service providers and consumers. How
to provide consumer satisfied service or to say a satisfied solution, first we should
analyze connection with consumers. According to Kaj Storbacka (1994), there are
three stages, ―the first stage can be called the prospective customer stage, which ends
when the prospective customer makes his/her final choice of service provider and a
customer relationship is established; the second stage is the customer relationship
stage, during which the customer has an ongoing relationship with the provider (the
customer relationship), and is engaged in several interactions involving exchange of
5
values and during which the provider can indulge in relationship development efforts
(maintain and enhance relationships); the last stage is the post customer or lost
customer stage, which starts when the customer decides that he no longer needs the
provider‘s services or when he selects another provider from within the same
industry‖. Basically, the customer becomes a prospective customer at the same time.
And normally, it is more difficult to regain a lost customer than to get a new customer.
1.2 Relationship problems in Retail Banking
―All financial needs deal with handling imbalances between production and
consumption and the transaction of these between different actors‖(Normann &
Haikola, 1986).
1.2.1 Invaders
―One driving force for development in retail banking has been that new actors entered
the retail banking industry. The new actors can be called invaders. Invaders market
entry was made possible by imperfections in banking caused by the regulated business
environment, i.e the invaders have managed to gear their offering to fit the needs and
wants of those bank customers who have been very profitable to banks. The invaders
often work with a different cost structure, with unbundled products and with
innovative use of access channels to customers‖ (Storbacka, 1993).
As the example mention above, Paypal or some insurance company can be considered
as invaders. Paypal used a few innovative paying ways, which fits the needs and
wants of bank customers, which attracted huge quantity of customers and financial
flow.
6
1.2.2 Cross-subsidizing
―Customer relations involve both of the logics – one saves or loans money form the
bank (balance sheet business), using the payment brokering services. The fundamental
problem for banks facing a deregulated environment is that the two businesses have
been bundled into one offering and sold to customers at a single price. In practice this
means that banks have charged for the balance sheet business while payment
brokering has been free. The income-generating mechanism is based on the idea that
banks make money on the interest margin between deposits and lending. Thus the
income from a customer relationship is a function of the volume of deposits and loans
and the interest rates. Each customer relationship also generates costs. The cost of
serving customers is a function of the amount and types of interactions that are carried
out during the relationship‖ (Storbacka, 1993).
The balance sheet business has thus come to subsidize the payment brokering
business. And as individual customers use different proportions of the two logics,
customers have come to subsidize each other, a customer who uses only savings and
loans services subsidizes a customer who uses only payment brokering services,
creating a situation where a large portion of the customer relationships of a retail bank
are unprofitable (Channon, 1986). And, the fundamental problem for banks facing a
deregulated environment is that the two businesses have been bundled into one
offering and sold to customers at a single price
Usually, retail banking in a regulated market, price and the core of the product
(interest rate) were regulated in a fixed level. Thus it is difficult to make differences
for the competition, so the peripheral service – Place and Promotion – developed into
the main competitive tools. For this reason, access to the bank was considered to be
the most import elements to become competitive, the density of bank branch networks
and the numbers of alternative deliver systems – such as ATMs, Internet bank, and
Phone-call bank – were developed.
There are huge differences in customer profitability between the different customers
groups served in retail banking. Customers who in their relations mostly use services
related to the balance sheet logic are profitable, while customers who mainly use
services related to the payment brokering business are unprofitable. ―Retail banks face
the threat that they will loose customers who use mainly the balance sheet business,
and will be left with customers using the payment brokering business‖ (Storbacka,
1993).
7
1.3 The Aim of the Study
In the past a few years, the service firms just do its business in a market-oriented way,
but the new service concept trends concentrate more on customer-oriented way. Firms
compete with services instead of physical products; in the past, service firms have
always done so, but there are few of exception within all of the firms today. The core
solution became to the key element which firms compete with each other. Firms in
order to be successful in its business, they have to view their business and customers
relationships from a service perspective. Services are inherently relational, managing
customers out of service perspective benefit from a customer relationship
management approach.
―Customers do not buy goods or services, they buy the benefits goods and services
provide them with‖ (Levitt, 1980). To give customer needs or to say satisfy customer
want, it is can be considered as the basis of customer relationship. Good customer
relationship definitely tries to be profitable. What relational approach can maintain
and enhance relationships at a profit or to say to have profitable custo mer
relationships? This is the aim of the thesis tries to explore.
The main purpose of the thesis tries to explore the strategies or tactics which make the
retail banking profit from customer relationship. During the procedure of figuring out
the strategies or tactics, this thesis tries to illustrate the developed theories by applying
it into a real world context.
The research questions are:
How value is produced? What are the relevant issues related to improving customer
relationship profitability? What are the solvencies for the retail banking to face their
deteriorate profitability loss on customer relationship base?
As the report tries to analyze profitability of retail bank on customer relationship base,
this report will be a useful reference for the mangers, work on retail banking field,
when they want to increase customer relationship profitability.
8
1.4 Outline of Thesis
1. Introduction
First chapter of the whole thesis, it is to present you an overview for the thesis on
retail banking status in the market, the developing of new relationship marketing
theory and the aim of this thesis.
2. Methodology
In the second chapter, it will show you how this research be done, the research
method – descriptive way was used in this report, there are five different alternatives
can be used but in this report only the linear-analytic and the theory-building structure
alternatives were used – and the data source.
3. Customer Relationship
In this chapter is tries to present a comprehensive viewpoint for the customer
relationship, the background, the development, and be used by the service enterprises.
And it is a chapter to connect theoretical relationship marketing concept with the
empirical adopting in the retail banking.
4. Analysis of Customer Relationship Profitability
This chapter it is the core part of the whole thesis. In this chapter it introduces the
relationship revenue and relationship cost configuration and then from both of RR
(relationship revenue) and RC (relationship cost) elicit the key concept in this report –
CRP (customer relationship profitability). Through analyzing RR (relationship
revenue) and RC (relationship cost), to increase RR (relationship revenue) and/or
decrease RC (relationship cost) will leads to the increasing of CRP (customer
relationship profitability), we can get the strategies or tactics for the profitability in
customer relationship base.
5. Further Analysis and Interpretation
The fifth chapter tries to further analyze customer relationship marketing and the
strategies in increasing CRP. In this chapter, a few of customer segmented methods
were demonstrated. Those methods, as managing tools, can help the management of
retail banking serve customer effectively and efficiently with the limited resource.
9
6. Conclusion
The last chapter is to summarize the whole report and propose the further research
questions.
10
2. Methodology
In this Chapter describes the processes and methods I used for approaching the
research for this paper.
2.1 Method of Research
Methodology is the theory of the creation of methodical procedures and methods. It
connects the theoretical and substantive domains in research and plays crucial role in
determining the validity and reliability of a study.
In this thesis, the focus is on exploring strategies or tactics for customer relationships
profitability in retail banks. To better describe the strategies or tactics, the words will
be in descriptive way. According to Yin (1989), ―there are five different alternatives
for descriptive cases: linear-analytic, comparative, chronological, theory-building, and
unsequenced‖.
The linear-analytic is the most usual structure of research reports. The consequence of
choosing this way would be the traditional sequential structure of a research report:
problem, aim, research method, theory, data, and conclusions. For this point, the
linear-analytic was used in the thesis primarily.
The theory-building structure also has been used. In this alternative, the present theory
was applied into the thesis, which would help us better understand the developed
theories application in the real world context.
A comparative structure would be best if I can get more data from different banks
which from different countries. But, for me this is real difficult to do it, so this
structure was not used in this thesis.
A chronological structure would be possible if the aim of the thesis is to show the
development of the profitability of retail banks. But this obvious it is not the aim of
this thesis, the structure was not used either.
An unsequenced structure is suitable when describing case organizations‘ history etc.,
but not when it comes to illustrate generated theory. So this obvious it‘s not suitable
for the thesis.
11
2.2 Data Collection
As the data collection method is critical in the whole research process, I tried my best
to collect more multiple sources of information.
The two books, Customer Relationship Profitability in Retail Banking and the Nature
of Customer Relationship Profitability, was written by Kaj Storbacka are the main
source for this thesis. In Storbacka‘s books, the author propose a few new ways to
measure profit and cost which we cannot capture it from the financial sheets depends
on traditional accounting way. Traditional accounting calculation is:
Profit= Total revenue – Total cost
In customer relationship point of view, the author proposes profit is customer
relationship profitability. So the customer relationship profitability (CRP) is :
Customer relationship profitability= Relationship revenue (RR) – Relationship cost
(RC)
Keeping Customer relationship profitability (CRP) in positive number, the
Relationship revenue (RR) should bigger than Relationship cost (RC). If we wanted to
increase the CRP, we need to increase Relationship revenue (RR), or to decrease
Relationship cost (RC), or the best it‘s to increase Relationship revenue (RR) and
decrease Relationship cost (RC) simultaneously.
The thesis aims to explore strategies or tactics for customer profitability in retail
banks, the formula can be considered as the basis for all of the strategies.
The other source includes a few books about customer relationship, journals and some
electronic source. Thanks for the Journal, The International Journal of Bank
Marketing, which make me get abundant material for the retail banking.
World Retail Banking Report 2008，World Retail Banking Report 2006，gave me an
overview about present trend of the whole world retail banking.
12
3. Customer Relationship
The aim of this part is to understand the nature of relationships and the development
of theories, as well as to widen horizon for analyzing customer relationships.
3.1 Background and Concept
―Since the 1970s a new marketing approach notion — interaction, buyer-seller
interaction, has emerged which are important elements in marketing. And the way
these interactions are managed has an impact on the purchasing behavior of customers.
The focus on interactions between producer and customer, which in addition often are
ongoing, either on a continuous or discrete basis, makes it possible for the marketer to
view the customer not only as someone who from time to time buys from the firm, but
as relationship partner‖ (Grönroos, 2008).
With the development of the new theoretical concept, the service provider or suppliers
of goods realize the service process leads to some form of cooperation between
customers and service providers.
―And, historically, when mass production was made possible by new production
methods and the increasing wealth of the quickly growing middle class led to mass
consumption, mass distribution and mass marketing was needed. The traditio nal ties
between producers and manufacturers and consumers who were geographically far
away were introduced on a large scale. After World War II, the consumer goods
oriented marketing models that dominated marketing were largely adapted by service
firms as well. This has led to a situation where service firms used their marketing
budgets for mass marketing and the facilitation of exchanges, instead of spending
marketing money on the management of ongoing interactions with their customers ‖
(Sheth & Parvatiyar, 1995). Now, the mass marketing approach is less effective and
less profitable. ―As more and more markets are mature and oversupplied, new
customers are more and more difficult to find. Therefore, it is becoming increasing
important to keep a firm‘s existing customers. And as the tough competition, the
customers will choose any service provider who can offer better service than their
present provider, so how to keep customer become more difficult than before. Low
price may keep the customers for some time, but in long-run the competitor and their
economy scale will make this approach become more and more ineffective. In this
situation, the firm should concentrate on managing the whole customer relationship
13
including the quality and value of their goods and service and their level of overall
service to the customers‖ (Grönroos, 2000).
The concept of ―relationship‖ is the different from the ―transaction‖. According to Kaj
Storbacka (1994), he identified four dimensions in defining relationships:
(1) the frequency of interaction over a given time period;
(2) the regularity of interactions;
(3) the time elapsed since the first interaction, and;
(4) the monetary or other content of the interaction;
This means to say, for a fixed time period, for example, how many interactions a
customer with the service provider (bank) during a year, or a month; what kinds of
service a customer get involved with the provider; how much the interaction get
involved? If the provider has only one interaction with a customer during a year we
might be inclined to regard this not as a relationship but rather as a single transaction.
If on the other hand the provider has one interaction with the customer every week for
a years we can say that there is a customer relationship; but if the customer has had
one interaction every year with the customer and that the monetary value exchanged
in this transaction is very high we again might be prone to talk about a customer
relationship.
In modern business society, the customer may have interactions with several different
individual bank employees, or may have interaction with a number of different
resources of the provider, such as ATM, internet bank, phone-call bank.
3.2 Relationship Marketing
The term ‗relationship marketing‘ was first used by Berry (1983), who first
emphasized the importance of relationship building strategies in retailing and banking.
The emergence of relationship marketing with its emphasis not just on getting
customers but on keeping them, then this can turn to profitability for the companies.
―The logic of relationship marketing perspective is that a focus on relationships will
generate customer loyalty and commitment – and eventually profits‖ (White &
14
Schneider, 2000).
Historically the traditional marketing emphasizes the 4Ps strategies, product, price,
promotion and place as the cornerstone of strategy development. In this environment,
retail marketers can come to believe that profits come from products, not from
customers. The focus then becomes selling more products and increasing market share.
A new customer is treated as though he or she is equally as valuable as a long-term
loyal customer. Some retailers, however, have recognized the drawbacks of the
product-based approach. They know that certain customers are more valuable than
others. Some customers are regular purchasers and are relatively easy to serve.
Therefore, they cost the retailer less. Other customers, particularly new customers, are
more expensive to look after. They demand more information and make more store
visits or ask for more sales assistance before they buy; and they buy in smaller
quantities, even though the cost of processing a small transaction is often the same as
the cost of processing a larger one. These customers cost the retailer more to serve.
They are therefore less profitable. For this reason, ―loyalty programmes are widely
used in retailing. Loyalty programmes are a sign of a shift to a customer (relationship)
focus from a product focus‖ (Ryals, 2002).
Relationship refers to two parties, service provider and customers. With the
development of the new service concept, companies concentrate more on
customer-oriented way instead of market-oriented way like before. Then customer not
only a purchaser but also they are the co-producer too. According to Rmirez (1999),
―the goal of a service provider is not so much to make or do something of value for
the customers but to get customers involved to create values for themselves‖. This
process called ―co-production‖. Value can be defined as the amount of information,
knowledge, and other resources that an economic actor has access to in order to
leverage the actor‘s own process of value creation. Scheneider and Bowen (1995),
―proposed that service firms literally select, train, and motivate customers so that they
can effectively play service production roles. The coproducing customer not only as (a)
an input or resource in production but also as (b) a user, buyer, and product of
production as well‖. As users of the service that has been produced, customers are
invaluable as feedback mechanisms for organizations. A service firm can benefit from
having complete information on how customers experience what they buy – if they
take advantage of such information to improve their service. As buyers of the service
produced, customers who are viewed as resources and are included in the production
of a service might be expected to develop deeper relationships with the firm – and to
keep buying services (transaction with bank) from that firm (bank) in the future.
But coproduction does not eliminate the variability that customers bring to the
production process. Managing variability in service delivery should be attached more
importance to solve this problem. According to Chase and Stewart (1994), there are
15
three important steps of customer participation should be noticed; ―(1) preparation for
the customer encounter, (2) the customer encounter itself, and (3) resolution of the
encounter‖. Preparing the customer for the encounter is frequently overlooked as a
tactic in reducing customer variability, but it can be an important step in efforts to
approach uniformity in service delivery. Customers do not usually have prior
information about what their roles are or should be, or what knowledge, paperwork or
other tangibles they must bring to the encounter. In other words, customers are often
unaware of the requirements for an encounter, so they do not prepare. Differences in
preparation in turn yield differences in service delivery. Finally, the service providers
can evaluate the encounter itself and derive bases for action from these assessments.
Customer gain experiences in all types of interaction. The more personnel and
personality intensive the interactions are, the more the actual experience of the
interaction dominates the total value from the interaction. During the interaction, it
refers to the customer loyalty and customer satisfaction. Different customers group
has different demands and attitudes for the providers. Some customers are quite
ignorant for the service, but some customers are expertise. ―Customers with lower
expertise may be loath to change partners because to do so is to reestablish risk. The
costs of switching may easily outweigh the marginal benefits of establishing a new
relationship. Thus, the lack of expertise increases customer dependence on the service
provider‖(Bendapudi & Berry, 1997).
Every interaction between the customer and the service-provider has the potential to
strengthen, weaken or even destroy the relationship between them.
―Services vary in the frequency of interaction between the customer and the service
provider. Greater frequency of contact typically implies greater transaction costs
when each encounter is handled as a discrete transaction. Frequency of contact can
thus increase customers' dependence on the relationship partner, assuming the
contacts are perceived as inter-related and as affecting one another‖ (Bendapudi &
Berry, 1997). Frequency of interactions may also affect trust in the relationship
partner. Frequent interactions may create greater trust in two ways. ―First, the more
the customer interacts with the partner, the more opportunities (s)he has to evaluate
the service. To the extent that these interactions are satisfactory, frequency should
lead to greater trust. Second, more frequent interactions can strengthen social bonds
with the partner. Person-perception literature shows, for example, that when
individuals expect repeated interactions with others, they are more attuned to them
and make a greater effort to know them than when they believe the interaction to be a
one-time encounter‖ (Neuberg and Fiske, 1987).
The ‗customers as assets‘ analogy suggests that these assets needs investment, just as
tangible assets do, but customer relationships are not assets in the sense that tangible
16
assets are. They are not owned in the same way. In fact, if they chose, they can defect
to competing suppliers. This has led to an ―interest in valuing and in managing
customer relationships‖ (Ryals, 2002). For example, to enhance customer relationship
the retail banks improve the front-counter service, shorten service time, update its
service computer system, and increase its branch and ATM teller. All of these
investments on the tangible or intangible assets are the concrete moves to increase
customer satisfaction then keep customers. Because the process of building and
maintaining customer relationships involves both investment and opportunity costs,
service firms can benefit from identifying those customers who are most receptive to
maintaining relationships. Investment costs in relationship building include the costs
of prospecting, identifying customers' needs, modifying offerings to meet these needs,
and monitoring performance. Given these costs, firms must make choices concerning
which customer groups to target for relationship marketing.
Traditional marketing strategies based on conventional profit-based thinking focus on
increasing the returns from low value customers. Returns are increased by increasing
the income from those customers (weight of purchase, frequency of purchase, etc.)
and/or reducing their costs (incentivizing them to shop at off-peak times, introducing
self-checkouts for loyal shoppers, switching them to Internet or telephone ordering
rather than counter service and so on).
The relationship marketing, in this thesis, tries to present a relationship-based
profitable mode.
3.3 Service Production Process
―The service production process is the process by which a particular service package
is delivered to the client. It consists of the resources necessary to produce the
particular service package, and the management systems necessary to govern the
production process in order to achieve the planned quality level and maintain efficient
utilization of the resources available‖ (Grönroos, 2000). And there are three types of
resources are involved in the production of services: the customer and his/her
resources (intellectual, time etc. resources); contact resources (employees and
equipment); and physical resources (equipment, surroundings and goods).
17
Chase & Bowen (1991) proposed that a production process has three components
considering production from an operations management perspective:
1) people, the selection and training of employees;
2) technology, process technology; physical facility; the extent of routine operations;
reliability and consistency of transformation process;
3) systems, primarily production control systems, and procedures for routing inputs
to the transformation process, particularly the customers themselves;
Most of the innovations pertaining to payment instruments and transaction
instruments in retail banking are technology driven. Technology makes a new type of
service possible, and the banks try to introduce these new services on the market.
Technology is also the main driving force for creating possibilities to shift activities in
time and space, means to shift some activities to be performed by the customer.
Technology is therefore certain to be an important ingredient in the management of
customer relationship profitability. Technology-based systems usually require new
types of performances from customers. A key concept in analyzing service production
processes is therefore ―customer participation‖, by which is meant the various ways in
which the customer participates in creating the service that the customer has
purchased.
From the present theories concluded, one of the key characteristics of the customer in
present service business, the customers are closely involved in producing the service
that he purchased they are the co-producer. The participation of the customers is the
opportunity, from marketing, quality and production angel, for service providers. With
the provider, the customers are co-creating service with them. So, from this point of
view, customers are regarded as partial employees of the organizations.
Lehtinen (1988) reports that hotel business customers in which it became evident that
large proportion (80%) of the customers had made their buying decision on the basis
of recommendations from business associates or friends. And he concludes that the
customer can function as marketing resource in two different ways:
1) Customers who perform marketing functions implicitly, without being aware of it.
The marketing functions of these customers is usually word-of-mouth
communication;
2) Customers who are explicitly recruited as marketing resources, i.e. customers who
combine their customer role with an entrepreneurial role ;
The customers of a service provider always function as quality managers giving their
subjective perception of the quality produced. Within a service firm, employees
usually try to produce the kind of service experience that they think customers expect.
18
It is the job of the management to use internal marketing to ensure that employees
have the right ideas about what customers expect. An essential part of internal
marketing is to find effective ways to communicate the customer satisfaction
information that is gathered.
Both the provider‘s employees (contact resources) and the customer have a certain
role behavior in the service encounter, and they try to act out their role to their own
satisfaction. ―The ―code‖ that influences the role playing is called a service script.
Both parties to the encounter have their own script. The more experienced the role
player is, the more elaborate the script is and the less explicit it is to the role player.
This would indicate that changes in the service script should encounter greater
resistance from the experienced role player‖ (Storbacka, 1993). After the employee
knew the service script of the organization, the service employees and the
organization share common role expectation, role clarity and job satisfaction increase.
In here the code or to say the service script can be say it is core part of the corporate
culture of an organization.
―Culture means values that can be thought of as residing deep in the
organization‖(Bowen D.E & Schneider B, 1988). ―Corporate culture is used to
describe a set of common norms and values shared by people in an organization.
Hence culture is an overall concept that explains why people do certain things, thinks
in common ways, and appreciates similar goals, routines, even jokes, just beca use
they are members of the same organization‖ (Grönroos, 2000). In service organization,
corporate culture can be labeled as service culture. Service culture exists to serve and
interact with the customers. Customers are a part of the service culture.
In strength intensity of corporate culture, there two kinds of corporate culture: weak
corporate culture and strong corporate culture.
―A weak corporate culture, where there are few or no clear common shared values,
creates an insecure feeling concerning how to respond to various clues and how to
react in different situations‖(Grönroos, 2000). In this situation, the employees do not
have any clear or ambiguous norms to relate, some skills like, sales training, service
skills course then they do not know how to response an unexpected request or
complaining from the customers.
―A strong corporate culture, however, enables people to act in a certain manner and to
respond to various actions in a consistent way‖ (Grönroos, 2000). A strong culture
which makes employees be confident to handle some unexpected situation. A strong
corporate culture service organization not only can guide employees behavior with the
company‘s culture values but also can attract bunches of service-oriented employees
enter into this organization and be influenced in a favorable way by the existing
service culture. Of course, every coin there is two sides. A strong culture is not always
19
good. When corporate culture is not consistent with current strategies and service
concept, the strong corporate culture may lead to resistance to change which make it
difficult for the organization to respond to external challenge. In such situation, a
strong culture may become a hindrance to change. Above mentioned, change in the
service script will cause encounter greater resistance from the experienced role player
which it‘s the hindrance was paid for its strong corporate culture.
Shared values and norms by people within the organization are the foundation for the
corporate culture. According to Deal & Kennedy, an organization with strong shared
values there are three common characteristics:
1. The shared values are a clear guideline for task performance;
2. Managers devote much of their time to developing and reinforcing the shared
values;
3. The shared values are deeply anchored among the employees
(Deal T.F & Kennedy A.A, 1982)
Strong corporate cultures can attract service-oriented employees then all of the
employees with shared value in the same organization can improve their performance.
Because managers and employees, were inspired and motivated by the shared values,
devote themselves more to issues and ways of performing that are emphasized by the
shared values.
As the service employees, with common role expectation, role clarity, they increase
the customer satisfaction. Customer satisfied for the service, and then they would be
active to participate for the service script and changes of service script. ―They even
can act themselves as ―part-time‖ manager or employee of the organization through
helping other customers. A customer with clear view of the script of the service
interaction usually performs his/her role more productively than a customer who does
not know the presumed script‖ (Storbacka, 1993).
3.4 Relationship-based Profitable Elements
Loveman (1998) presented us a relative complete test of his version of the service
20
profit chain (retailing banking).
Above, Loveman shows us a process about customer relationship with the profit.
Service quality, employee satisfaction and loyalty then its customer satisfaction and
loyalty, then the firms (retail banking) can get profit. In this chart, we can see the
service quality it‘s the basis for all of the processes.
In Loveman‘s article it describes the service profit chain ―is a theoretical concept and
teaching framework that contains a set of hypotheses about how service companies
make money. The chain hypothesizes that profit and growth, particularly but not
exclusively in service-providing organizations, is directly linked to customer loyalty
and satisfaction, the value provided to customers (measured in terms of the value of
results provided), the productivity and quality of the work of employees, employee
loyalty, employee satisfaction, and the capability (measured in terms of job latitude,
care in selection, training, technical and other support, and results-related
compensation) with which employees are able to deliver a service‖. A simplified
customized version of service profit chain can be expressed as
―employee-customer-profit chain‖.
In this thesis, it aims to explore the strategies and tactics of retail banking profitable
from customer relationship, so it will focus mainly on customer-profit facet.
In order to describe the behavioral aspects of a customer relationship we should
understand a few important concepts, within retail banking customer relationship
profitable system.
The relationship generates a certain income that we call relationship revenue (RR).
The relationship revenue in a retail banking context is based on two revenue streams:
volume-based revenue and fee-based revenue. Volume based revenue is generated on
the different types of relationship volume (RV) that the customer has with the bank.
Relationship volume is the share of the total volume that the customer spends in the
particular industry (for instance retail banking) – the total industry volume (TIV). For
instance, the customer may have deposits in several banks, or may have other means
of saving, such as retirement insurance or investments in bonds and shares. The total
industry volume, in turn, is a segment of the total amount of money that the customer
Internal
Service
Quality
Employee
Satisfaction
Employee
Loyalty
External
Service
Quality
Customer
Satisfaction
Customer
Loyalty Revenue Growth
&
Profitability
7
21
has at his/her disposal, the customer‘s total volume (CTV) and they divide this money
among many different sectors of their life, including saving, housing, food, clothes,
hospitality services, etc. An important part of the CTV is the volume that customers
choose to invest in other financial services industries, such as insurance, stocks, bonds,
and mutual funds.
Figure 1.
Customer
RR
(Storbacka, 1994)
Relationship volumes include, for instance, deposit volume (DV) and lending volume
(LV). Each account type has its specific role relative to the client‘s general financial
needs. The deposit account can be divided into two main categories: payment
accounts and savings accounts. The payment accounts are used as a basis for the
payments of different bills using the bank‘s payment infrastructure. Due to this the
funds in payment accounts are liquid and the account balance changes frequently. The
customer usually ties different types of payment media to the account, such as ATM
or bank cards. The deposits to a payment account are for most customers‘ regular
salary or pension payments. As the money is basically used to make payments the
interest levels are usually low on this type of an account.
―Saving accounts are basically to be regarded as investments. The customer invests a
certain volume and expects a certain return on the money; a certain interest rate. The
saving account can be divided into two variants based on the customers‘ situation:
long-term saving and target saving. By long-term saving we mean saving which
relates to customers‘ needs to generate a certain buffer of liquidity, which can be
utilized when needed, for instance after the customer is retired; target saving is related
to the customers‘ need to generate financing for the purchase of a product or service,
for example a car or a holiday trip.
Loan accounts can be divided into two main types of loans: housing loans and
consumption loans. Consumption loans are used to finance the purchase of a
investment product or service, like a car or a holiday trip. The duration of the loan is
usually short, months or a couple of years, and many of the variants are so-called
CTV
Service
Provider TIV
RV
22
blanco loans, i.e. without any security. Housing loans usually have a long duration,
ten years, and the purchased house or apartment inevitably functions as security for
the loan‖ (Storbacka, 1994).
Each account type has its specific role relative to the client‘s general financial needs.
In service, we call it as ‗heterogeneity‘. For example, one customer might enter a
bank wanting to make a deposit, while another wants to make a withdraw
simultaneously; one has several accounts with large balances and the other only uses
his or her account for cashing checks. Each of these bank customers is availing
himself/herself of ‗bank service‘, but they present different sets of demands,
expectations, and desires, and the service delivery staff must continually adapt to
these differences. In the other side, the different bank tellers may give customers
different service. One teller might be new to the bank and unable to process the
withdrawal without assistance form another teller, while another teller might process
the transaction with no assistance at all. Because service production and delivery, due
to the frequently interactional nature of production and delivery, is less standardized
than the production of goods. Heterogeneity makes services more difficult measure
and to do quality-control checks ahead of time to ensure that they meet uniform
standards.
This also can be other evidence to show, some service require expertise of customers,
if customers are not expertise at it, which will increases customers dependence on the
service provider
23
4. Analysis of Customer Relationship Profitability
In previous parts, this report discussed issues of customer relationship and some
concepts about banks in its relationship. In this chapter, it will focus on describing
relationship profitability.
Relationship revenue (RR), income of the account, and relationship cost (RC), costs
of serving.
The fundamental formula was demonstrated before,
CRP (customer relationship profitability) = RR - RC
The simple equation gives us the basic dimensions by which we can analyze customer
relationship profitability.
4.1 Relationship Revenue
The relationship revenue in retail banking consists of the interest margin that the bank
earns on the relationship volume, like the deposits and loans of the customer and the
fees that the customer pays for transactions, counseling and specialist services, and
the fees that customers pay for other components in the relationship (such as bank
cards).
The relationship revenue that is based on the relationship volume is called
volume-based revenue (RRv). ―RRv (volume-based revenue) is a function of the
interest margins in use. The interest margins depends on the funding to the bank, or
the average cost of capital (COC) that the bank has as the starting point for its
calculations (also called the internal interest rate)‖ (Storbacka, 1994) .
RRv (volume-based revenue) includes deposit volume (DV) and lending volume (LV).
To calculate both the volume based revenue, we can refer to the Table 1 below.
24
Table 1.
Relationship
volume type
Volume
variant
Interest
rate
Interest margin Volume based revenue
DV DVi...n DIRi..n IMdvi..n=COC-DIRi..n RRDV= 𝐷𝑉𝑖 ∗ 𝐼𝑀𝑑𝑣𝑖𝑛𝑖=1
LV LVi...m LIRi..n IMlvi..m=LIRi..m-COC RRLV= 𝐿𝑉𝑖 ∗ 𝐼𝑀𝑙𝑣𝑖𝑚𝑖=1
IM= interest margin, DIR= deposit interest rate, LIR= lending interest rate
(Storbacka, 1994)
From above table, we can see the number of RRDV (deposit volume based
relationship revenue) depends on the DVi (deposit volume variant) and IMdvi (interest
margin of volume variant). If we can increase any number of DVi (deposit volume
variant) or IMdvi (interest margin of volume variant) or increase them both, then we
can increase the number of RRDV (deposit volume based relationship revenue), or to
say we already increase the revenue of deposit volume.
To increase DVi (deposit volume based relationship revenue), the key point is how to
increase the volume of transaction. The tactics can be adopted to expand its service
categories; for example the retail banks can offer customers more various service or
service packages, which will expand retail banks market, and attract more new
customers. And as talked before, the number of branches and ATM tellers are the
important competitive edges of retail banks. Increasing number of branches and ATM
tellers, on the other way, will augment bank‘s investment.
Increasing IMdvi (interest margin of volume variant), from the equation
IMdvi..n=COC-DIRi..n, we can see, the interest rate play an important role in this
equation. COC (cost of capital) usually keeps a stable level, so the changing elements
it‘s DIRi..n; if the interest rate too high it may leads IMdvi..n (interest margin of
volume variant) to a small number or even to a negative number, so the interest rate
can be considered as the key elements to decide how much of IMdvi..n (interest margin
of volume variant) it is. In this point of view, the higher interest rate to attract
customers, it is not a good idea for the deposit volume of relationship revenue
(RRDV).
RRLV (lending volume based relationship revenue), if to increase this number, similar
to the RRDV (deposit volume based relationship revenue), the number of LVi (lending
volume variant) and IMlvi(interest margin of volume variant) are the very important
25
elements.
The rise of LVi (lending volume variant) will leads to the increasing of RRLV (lending
volume based revenue). The lending volume can be decided by the lending rate,
service package and related business with the customer. The lending rate decides the
price of the lending, how much money the customer has to pay for the banks when
they ―purchase‖ the mortgage. According to Matzler, Wurtele and Renzl (2006),
―price transparency, price-quality ratio, relative price, price confidence, price
reliability, and price fairness all of these constitute the customer‘s price satisfaction. It
explains - in price level- why the customers would prefer to lend a loan from a
specific bank‖. Service package means what kinds of service package were offered to
the customers. There are lots of service which be bundled together offered the
customers, if a customer save money or do some transaction in the banks, for the
bundled package service they may prefer to lend loan the bank. Related business, for
some customers, banks it‘s an intermediary of business, they transfer money or some
transaction from the banks to their customers. So, the customer‘s customer can be the
customers for the banks. For some related business, the banks can expand its business
(lending business) with some potential customers.
IMlvi (interest margin of volume variant) was decided by the LIRi (lending interest
rate variant), according to the equation LIRi..m-COC. It means higher interest rate can
get a big number of IMlvi (interest margin of volume variant), which it‘s contrary to
the DIRi..n (deposit interest rate variant). But for the competitive reason and
saving- lending related reason, the lending rate can not be increased at random. ―If
customers have price comparisons available during the decision-making process, they
will compare the price of the product or service with that of the competitor, and the
outcome of this comparison process will directly influence price satisfaction‖
(Matzler et el, 2006). The customers definitely will have comparison of lending rate
with other retail banks. Saving rate and lending rate are related to each other tightly,
increase/decrease one factor will definitely leads to other factor goes up /down too.
That‘s why we can not augment IMlvi (interest margin of volume variant) by increase
lending rate unilaterally.
The relationship revenue that is related to the fees earned by the banks is called
fee-based revenue (RRF). The fees that the provider collects for performing
transactions, counseling, and specialist services are more complex to model, since
they are often treated in a different manner. Some of the transactions are bundled with
the deposit and lending services, and often all of the transaction types have different
price carriers.
26
Table 2.
Interaction
category
Variants Demand Price level(of
each variant)
Fee based revenue
T T1..n NT1..n PT1..n RRT= 𝑁𝑇𝑖 ∗ 𝑃𝑇𝑖𝑛𝑖=1
DL DL1..m NDL1..m PDL1..m RRDL= 𝑁𝐷𝐿𝑖 ∗ 𝑃𝐷𝐿𝑖𝑚𝑖=1
CO CO1..r NCO1..r PCO1..r RRCO= 𝑁𝐶𝑂𝑖 ∗ 𝑃𝐶𝑂𝑖𝑟𝑖=1
SS SS1..s NSS1..s PSS1..s RRSS= 𝑁𝑆𝑆𝑖 ∗ 𝑃𝑆𝑆𝑖𝑠𝑖=1
IS IS1..t NIS1..t PIS1..t RRIS= 𝑁𝐼𝑆𝑖 ∗ 𝑃𝐼𝑆𝑖𝑡𝑖=1
T= transaction, DL= deposit and lending services, CO= counseling, SS= specialist
services, IS= investment services, N= demand, P= price, RR= relationship revenue
(Storbacka, 1994)
From above table 2, we see the fee-based revenue is demands (each variant) multiply
price (each variant). So, demands and price, the two elements, are the key factors
which will affect the final number of fee-based revenue. Either increasing of demands
or price will make the fee-based revenue goes up.
But, as described before, if customers have price comparisons available during the
decision-making process, this process will influence the final purchasing decision. It
means to say under present competitive circumstance, there is no way to boost price
randomly. Attribute to this reason, rely on normal service, the price it‘s quite stable.
Of course, each bank can develop some new service or service package for the
customers or the specific customers, which would make them benefit higher than the
normal service. According to Devlin (2000), the retail banks can ―deliver offerings
which comprise a competitive bundle of benefits, or value... the process of adding
value, in essence differentiating one's offerings effectively... through investigation
which covering the nature of customer needs, customer evaluation of offerings and
27
even elements of relationship marketing.‖ Offering differentiated service will
definitely add benefit for the retail banks. The question it‘s not is there added value
from the differentiated service; the question is how to differentiated service to add
value. Service characteristics -- perception of consumer, consumer evaluation of
service -- can be considered as the basic factors for the banks which want to achieve
differentiation in service.
Besides price, the other important factor for the RRF (fee-based revenue) is the
demands. How to increase customers demands, it sounds like an old question. Above,
this report already described a few tactics to achieve volume demands.
According to the Table 2., RRF (fee-based revenue) can be expressed as:
RRF = RRT + RRDL+ RRCO+ RRSS+ RRIS
The relationship revenue (RR) of a particular customer thus consists of the sum of the
revenue from the customer‘s deposits and the revenue from the customer‘s loans
(volume-based revenue RRv) and the total fees paid by the customer during the period
under consideration. This can be expressed as:
RR= RRv+ RRF
4.2 Relationship Costs
To maintain and enhance customer relationship all will incur cost for the retail
banking. Like it described before, the increasing number of branches and ATM tellers
will maintain and enhance customer relationship for the banks, but it will augment the
cost of banks too. But from customers‘ point of view, the increasing number of
branches and ATM tellers will decrease their travelling time and waiting time from
shopping site, home or anywhere they departure, which will decrease customers‘ cost
to have transaction with the banks. So, this will increase the switching cost for the
customers if they want to change a new bank. From this point, we can see some cost
for the banks it is inevitable.
28
4.2.1 Relationship Cost Typology
Relationship costs can be divided into two basic types of costs, the direct costs
(production costs) and the indirect costs.
―Direct costs, consists by direct variable cost and direct fixed cost.
a) Direct variable cost, caused by the delivery, invoicing, technical service,
complaining handling etc;
b) Direct fixed cost, meant the costs related to the management of the relationship
such as service training, product development, delivery systems development;
Indirect cost,
a) Indirect variable costs (quality costs), meant the costs of poor quality pertaining,
for example, mistakes during work which need to be corrected, unclear invoices
that need to be clarified, or phone calls that need to be returned;
b) Indirect fixed costs (psychological costs), meant the cost of the mental efforts
related to problems in the relationship;‖
(Storbacka, 1994)
Although the cost for each customer it‘s same, the profit from different customer it‘s
not same, this makes opportunity cost of certain customer relationship it‘s different.
For example, ―20% of a retail bank‘s customers may account for more than 100% of
its profit‖ (Hartfeil, 1996). If these are new customers, buying infrequently and in
small amounts, they may become profitable as the relationship develops and sales
increase and/or costs reduce. What if those are not new customers? In this angle, we
can see it is important to choose right customers for the banks. Then the bank can
allot limited resource to the maximum profitable customers.
4.2.2 Relationship Cost Calculating
In chapter 4.1, we see there are different kinds of relationship revenue, relative to the
different RR (relationship revenue), there are different kinds of RC (relationship cost)
too. The different types of interactions incur different costs.
29
The New York Times published an article on November 1, 1992, in which the Gemini
Consulting/Mac Group is quoted regarding the banking industry‘s average costs for
each type of transaction. The figures are shown in Figure 2.
Figure 2.
(USD)
(According to our previous cost categories, this chart only refers to the direct variable
cost.)
From the Figure 1, we find, normally, a teller (bank employee service) transaction is
about four to five times as expensive as a Telephone or ATM transaction.
In order to allocate the customer-specific cost of different interaction types and
variants of each interaction type, the customer-specific demand for the different
variants must be calculated as table below. Table 3, shows the calculation of the
relationship cost for different interaction types and variants.
0 0.2 0.4 0.6 0.8 1 1.2
Teller
Check
Telephone
ATM
Pre-authorized transfer
30
Table 3.
Interaction
category
Variants Demand Cost (of each
variant)
Relationship cost types
T T1..n NT1..n CT1..n RCT= 𝑁𝑇𝑖 ∗ 𝐶𝑇𝑖𝑛𝑖=1
DL DL1..k NDL1..k CDL1..k RCDL= 𝑁𝐷𝐿𝑖 ∗ 𝐶𝐷𝐿𝑖𝐾𝑖=1
CO CO1..m NCO1..m CCO1..m RCCO= 𝑁𝐶𝑂𝑖 ∗ 𝐶𝐶𝑂𝑖𝑚𝑖=1
SS SS1..r NSS1..r CSS1..r RCSS= 𝑁𝑆𝑆𝑖 ∗ 𝐶𝑆𝑆𝑖𝑟𝑖=1
IS IS1..s NIS1..s CIS1..s RCIS= 𝑁𝐼𝑆𝑖 ∗ 𝐶𝐼𝑆𝑖𝑠𝑖=1
T= transaction, DL= deposit and lending services, CO= counseling, SS= specialist
services, IS= Investment service, N= demand, C= cost, RC= relationship cost
(Storbacka, 1994)
Corresponding with the relationship revenue (especially with RRF, Table 2), Table 3,
relationship cost, it‘s the same category of cost for the creation of revenue.
Relationship cost is that demands multiply cost (of each variant). To decrease either
demands or cost, it will reduce the relationship cost. But the demand of cost it‘s
corresponding with the demand of revenue, it can be say it‘s nearly same number for
both categories. The decreasing number of demand will cut cost down, but also can
cut revenue down too. Obviously, to reduce demand it‘s not a regular alternative to
lower the relationship cost. The other factor is cost. Reducing cost, it‘s the most
popular way to reach the goal of relationship cost decreasing.
According to Figure 1, the different types of transaction cost differently. From this
point of view, it demonstrate us a good alternative to lower cost from each
non-decreasing demands transaction. Phone-call bank, internet bank and ATM
transaction, all of these kinds of transaction will reduce the cost of bank effectively.
―The role of technology in service organizations has been predominantly employed to
reduce costs and eliminate uncertainties‖ (Kelley, 1989). The advantage of technology
not only on cost reducing, but also on the convenient and flexible too. Internet bank or
ATM teller can be used 24 hours a day, seven days a week, which beat every
employee service up. There is no any bank can provide teller service for 24 hours,
seven days a week. So, in this angle, we are not surprise that technology improve
service quality and customer satisfaction levels.
31
Normally, demands in cost can not be changed as the corresponding relation with the
demanding in revenue. But in previous part of this report, the report also presents the
data ―20% of a retail bank‘s customers may account for more than 100% of its profit‖
(Hartfeil 1996), this means the retail banks should recognize customers rightly. Who
are the right customers, who are the profitable customers? Then build up closer
relationship with those customers. To do this, the retailer has to be able to decide
which of his customer relationships will create the most value for him. In other words,
the retail banking has to be able to value the relationship. Valuing a relationship
involves collecting data about customer behavior and having the financial tools to
analyze that data. From this process, the banks can decide which customers is the
more profitable customer then increase transaction number with them or decrease
number of transaction with less profitable or non-profitable customers, or even cut off
the relationship with those customers. Through this tactics, it will make retail ba nks
get more revenue or reduce more cost than before. In order to manage relationships as
assets, companies need to know which are their most valuable and which are their
least valuable relationship assets so that appropriate marketing strategies can be put in
place. The most valuable customer assets have to receive priority and be defended
from poaching by the competition.
However, each relationship is unique; its value may vary over time in ways which are
hard to predict; and customer relationships are not saleable and can be hard to transfer.
And some less profitable or non-profitable customers, though they contribute less or
non-profit for the retail banks, but they cover banks‘ cost like other profitable
customers too.
For example, assuming there are 100 customers for a bank, 20 are more profitable
customer, 50 are less profitable customers, and 30 are non-profitable customers. If the
bank invests 10,000 SEK for improving bank‘s service – such as more teller service,
ATM tellers‘ quantity, better internet or phone bank equipment – then each customer
will bear 100 SEK for the investment. But if the bank abandon the other 80 less
profitable and non-profitable customers, all the investment will be on the left 20
profitable customers, each of 20 customers has to pay for 500 SEK which will cover
all the cost the bank‘s investment. This may be lead to the consequence that the
profitable customers become to less profitable or even non-profitable. So, base on this
reason, the bank should be careful for choosing or abandoning customers.
From Table 3, we see the total relationship equation is:
RC = RCT + RCDL + RCCO + RCSS + RCIS
The point to come up a formula of relationship cost it‘s to calculate which transaction
will be more economic for the banks and which kinds of transaction it‘s now. Then
32
the management of bank can collect data from the daily operating, analyze these data
and figure out strategies or tactics to handle this situation and try their best to make
customer to use the cheaper variant.
4.3 Strategies in Increasing RR and Decreasing RC
On the basis of the previous discussion, the profitability of a particular customer
relationship – customer relationship profitability (CRP) – for a specific time period
can thus be expressed and calculated as:
CRP = RR - RC
Based on the above formula, a customer‘s CRP (customer relationship profitability)
should be analyzed in two dimensions: RR (relationship revenue) and RC
(relationship cost).
Increasing RR (relationship revenue), it can be increased either by adding RV
(relationship volume) by increasing interest rates (increase RRV- volume based
revenue), or by pricing previously complementary components in the relationship
(increase RRF- fee-based revenue).
Decreasing RC (relationship cost) requires that the customer uses less interactions or
changes to cheaper interaction variants during a certain period of time. It may also
mean that the transactions now in use are produced at a lower cost.
Figure 3.
33
Relationship
Revenue
Relationship cost
(Storbacka, 1993)
A customer (C) of retail bank can be positioned in a two-dimensional space as in
Figure 3. As the logic reveled from the Figure 3, we can identify the generic strategies
for improving relationship profitability:
(1) the horizontal logic
(2) the vertical logic
The horizontal logic starts with the assumption that customer can be moved to the left
of the figure. Decreasing the relationship costs requires that the customer uses less
transactions or cheaper types of transactions during a certain period of time. It may
also mean that the transactions now in use are produced at a lower cost.
The vertical logic assumes that its is possible to increase relationship revenues either
by adding volumes of deposits or lending, by increasing the interest rate of the loan or
lowering the interest rate on deposits, by pricing previously complementary
components of the service packages, or by selling more specialist services for a fee.
4.3.1 Increasing Relationship Revenue
There are two revenue streams in increasing relationship revenue, RRV (volume based
revenue) and RRF (fee-based revenue).
Increasing RRV (volume based revenue) requires that we either increase the RV
C
34
(relationship volume) – DV (deposit volume) or LV (lending volume) – that we sell
loans to customers or get increased deposit volume from the customers or get
increased deposit volume from the customer; or change the price of the volume, i.e.,
change interest rates.
―Market share in retail banking consists to the aggregated RV (relationship volume)
of all customers in the provider‘s customer base, compared with the aggregated total
industry volume (TIV) of all customers in the defined market‖ (Storbacka, 1994).
Now in the mature market, retail banking tries to increase market share which means
they either have to acquire new customers or increase their present customers‘
interaction, RV (relationship volume).
Higher market share, transactions can be achieved either by more customers within
the bank, more customer with more relationship transaction, or more transactions
create a fixed number of customers, it means individual customer will make more
transactions with the bank averagely compared with other banks.
According to Storbacka (1994), ―it is important to note that the RV < TIV
(relationship volume < total industry volume), the customer has other relationships to
other providers in the same industry; the customer is only a partial customer. Partial
customers obviously constitute a key potential when trying to increase the relationship
volume and thus the relationship revenue. And in here, we should notice a concept,
patronage concentration, for customers with whom the banks have relationships,
RV/TIV (relationship volume /total industry volume) ratio. Based on patronage
concentration logic, the bank‘s best option to increase RV (relationship volume) for
individual customers is obviously to increase the patronage concentration, i.e. to
increase RV/TIV (relationship volume /total industry volume). The customer usually
use several banks, they are partial customers. Getting customers to concentrate their
bank businesses to one bank increase the relationship volume (RV), and the
relationship revenue (RR) increases provided that the volume is acquired at a
reasonable price‖.
For example, assuming the total industry volume (TIV) is 10,000 units, there are
banks A, B, C, and one of customer/or a group of customers does its transactions/RV
(relationship volume) in bank A is 30 units, in bank B is 50 units and in bank C is 20
units. Then we can see the patronage concentration in bank A is 0.3 percent, bank B is
0.5 percent and bank C is 0.2 percent.
The other alternative for banks to increase RRV (volume based revenue) is to price the
existing volume differently. Increasing the interest margin charged by the bank for the
business volume, lower interest rates on deposits or higher interest rates on loans,
obviously increases the relationship revenue, provided that the volume is constant.
35
Pricing of financial services already became the most popular business mode for the
retail banking. There are two main categories in pricing retail banks, pricing RV
(relationship volume) and pricing of other elements in the relationships, such as
transaction, different kinds of products etc. Pricing RV (relationship volume) is called
interest and the price level is called interest rate. The second mode is called ―fees
concept‖.
Interest rate is a complicated questions, it will be influenced by the Government
policy, fluctuations of market rates, the inflation rate of the society etc. In this report,
it won‘t analyze how to increase interest rate.
Within pricing of financial service, the second option to increase RR (relationship
revenue) is to price other elements in the relationships, to charge some specific
service, i.e. to increase the RRF (fee based revenue).
Increasing the RRF (fee based revenue) can be implemented in two ways, by selling
new types of service that carry a price to the customer or by charging more for the
existing services. By adding new services to the portfolio of services currently being
provided, the bank can dispose of a larger proportion of the CTV (customer‘s total
volume). This requires ―interindustry cross-selling – the bank must expand its
business outside its own industry and at least must provide other elements not
previously contained in its offering. Interindustry between different services and
goods is also common; finance is often offered bundled to different types of
household appliances, cares, etc. A typical example in retail banking is the addition of
insurance products to the offering‖.
―Increasing the fees that the bank charges for existing transactions, counseling, and
specialist services brings forward three pricing aspects: the need to choose the right
price carriers, the opportunities for price bundling, and the possibilities to influence
the demand of different transaction variants by pricing‖ (Storbacka, 1994).
The price carrier, price what kinds of service, activity which in the form of different
transaction. For example, goods that are a part of the offering can carry price, the
checkbook, check, credit card or debit card etc; access to different types of
transactions instruments can be priced, monthly, quarterly or annually.
According to Guiltinan (1987) ―price bundling is used as a tool to regulate demand.
Bundling together a service that the customer might not be interested in paying for
with a very attractive service may increase the demand for the less attractive service ‖.
Price bundling can be used to enhance the attractiveness of a specific service and thus
to increase RRF (fee based revenue). In retail banking, it is common to bundle an
account with some sort of debit or ATM card, or to bundle a loan with a life insurance
policy. Bundling banking services and insurance service creates a situation which
enables the provider to increase its share of the customer total business potential. And
36
Guiltinan divided price bundling into pure bundling and mixed bundling. In the pure
cased of bundling, the provider offers its offering in a standardized form, priced only
as a whole. It is not possible to purchase the components separately. Mixed bundling
implies that the offering can be offered as a whole for certain price, or that its parts
can be offered separately for different prices. And there are two alternative forms of
mixed bundling:
1) mixed- leader bundling, where a part of the service package is offered a discounted
price and the other parts at the regular price. If the parts are A and B, the regular
prices are Pa and Pb, and the customer can buy A at Pa* (Pa> Pa*) if customer
buys B at Pb
2) mixed-joint bundling, where the customer can buy A and B at price Pa+b if the
parts are bought as a bundle (Pa+b<Pa+Pb)
From Guiltinan price bundling, as a tool to regulate demand. Bundling together a
service that the customer might not be interested in paying for with a very attractive
service may increase the demand for the less attractive service.
And according to Storbacka (1994), ―price bundling is common in retail banking
because the high degree of fixed costs creates marginal cost thinking, and the demand
for different services is interdependent. The marginal cost of adding a customer or
adding a component to the offering is usually limited, and if the marginal income of
the customer is bigger than the marginal costs, it is always possible to motivate
customer acquisition. A typical example can be found in the airline industry, where
the marginal cost of adding a customer is fairly limited and thus it pays to sell low
fare tickets to customers who can buy them at the last minute‖.
(In relationship cost chapter, I described the less profitable, non-profitable customers
and more profitable customer. And set an example calculation for this logic.)
In retail banking environment, the marginal cost/income logic has resulted in a
situation where the majority of bank customers on average is unprofitable.
Bundling creates problems in the allocation of incomes between different parts of the
offering and between different customers. Customer behavior varies, though
customers pay the same price they use the resources of the provider differently. But
price bundling may also be used to enhance the attractiveness of a specific service or
to increase relationship revenue. In retail banking, it is common to bundle an account
with some sort of debit or credit card, or a loan with a life insurance policy. Bundling
bank service and insurance services creates a situation which enables the provider to
increase its share of the customer total business potential.
37
Pricing different financial service, to charge different kinds of service this will
increase the RRF (fee based revenue), and then increase RR (relationship revenue). It
has been claimed that customer participation is important in the development of new
services that are either relatively complex, or relatively long- lasting retail banking
field. This is the new trends of service mentioned before, the service providers get
customers involved into the business, and make customers are the co-producer.
Before banks want to create any new kinds of service or service package (bundling),
they have to know what the customers really want to have besides present service,
what kinds of service or service package it‘s possible for the bank can provide to the
customers. For those purposes, communication with the customers it‘s a real
important way to make it. As the customers are the co-producer of the service, they
are able to express their ideas or opinions to service providers/retail banking freely.
After communication, banks collect the information into their database, matching
information processing requirements and capacity, select and pick up useful
information; then they can form a new product based on the information deriving
from customers. Based on this process, the banks can present their new products
(service) to the market on time, targeted market and schedule.
This information collection process not only for the individual customers but also to
the corporate customers too. In the corporate market the complexity of demands is
commonly greater than in the personal market and there are more no n-standard or
bespoke elements in the product and services mix as one progresses away from retail
banking applications through to corporate of different size. Larger companies have
specific needs and can require complex products that are highly tailored in order to
solve the client‘s banking problem. The complexity of products generally has
implications on the level and frequency of contact between the client and the account
manager, particularly as to the number of accounts a corporate account manager can
handle. As a result, corporate financial services commonly require closer and more
frequent contact with customers than do retail financial services. Although this report
focus on the retail financial service, in here to mention a few of lines of corporate
service it‘s to present how the information collection can be workable for the larger
corporate client and the difference of implication between individual customers and
corporate clients.
The use of new technology is a particularly important issue in developer-customer
communication. New communication technology has transformed the way suppliers
interact with customers in terms of quality, extent and frequency of information
exchange. The advantages of cost and timeliness resulting from the use of new
communication technology can create a competitive advantage for banks. There are
no any banks will offer 24 hour 7 days teller service, but the technology can make it
to come true. In communication, the new technology system will absorb customers‘
38
opinions or feedbacks anytime and anywhere.
In expanding products/service of the retail banks, they can not only limit their
business to the innovative marketing ideas, but also to the existing business mode in
other area. For example, leasing is an important banking business for the corporate
clients, but retail bank can make it be possible, according to the current situation and
based on the communicated information from the customers, for the individual
customers too. As the corporate clients represent more profit form one customer, there
are lots of teams of specialists come in direct contact with customers especially at the
development stage where the specifications of the new product/service are decided.
But for the retail financial business, the individual customers cannot and unrealistic to
get a few of specialists of the banks appointed for them. Under this situation, it
requires retail banking to develop a few standard service packages for the differe nt
situation customers. It can be service categories A, B, C, D, E..., the customer can
choose one of it according to their own situation.
(Leasing means: Leasing companies (lessors) typically acquire assets and offer these
to customers (lessees) for a certain period of time. The lessee may have the option to
buy the asset at the end of the leasing period; re- lease it with substantially lower
payments, or give it back to the lessor. There are many types of leasing agreements
depending on the type of asset being financed (e.g. plant and machinery, cars, hotel
equipment, computers); the time period of the lease; the expected residual value of the
asset (e.g. finance leasing, operating leasing), and the type of debt with which the
asset is financed (e.g. single- investor leasing, leveraged leasing). There are also three
main types of lessors: independent leasing companies; captive finance organizations,
and lease brokers or so-called packagers.)
4.3.2 Decreasing Relationship Costs
Besides to increasing RR (relationship revenue) to increase CRP (customer
relationship profitability), the other way is to decrease RC (relationship cost).
According to Storbacka (1994), there are three alternatives can be carried out:
1) The bank can change the interaction configuration;
2) Try to make customers to use cheaper interaction variants;
3) Change the cost structure of present interaction type;
39
The bank change the interaction configuration is to decrease the intensity of
interactions. With development of business society, the explosion in transaction
numbers has been a considerable problem for retail banking. There are lots of
transaction will be made everyday, even though each transaction was made in a small
number of money. Trying to limit the number of transactions, some banks impose
policy like minimum money number withdraw or certain service fee was charged for
each transaction. But the normal way to deal with this situation, for all of the retail
banks, it‘s to diversify contact channels for the customers. For example, the
increasing number of shopping malls, super markets, and groceries accepted credit
cards, debit cards.
Counseling as one of interaction, which retail banks can decrease its interaction by
brochures, advertisement, bulletin etc. Through these ways, customers can be clear
bank service and a few simple questions they want to counsel the bank tellers.
Making customers change to cheaper interaction variants, which it‘s the main strategy
for nearly all of the banks tries to do right now. As showed before and the Figure 1,
there are big differences in production costs for the different variants of the same type
of interaction. The information value of an account statement by an ATM teller is
exactly the same as in an account statement produced by a teller, but the costs are
very different. Thus, for the banks, there is incentive to persuade customers to use the
cheaper transaction variants. Cheaper variants almost invariably mean changes in
access, contact channels. For example, the quantity of ATM tellers, the Phone-call
bank, the internet bank and even the accepted credit cards, debit cards in the big and
small shops.
Changing the structure of the present interaction type is other way to decrease RC
(relationship cost). As the technology, service develops step by step, from the
market-oriented service concept to customer-oriented, service perfect itself constantly.
With development of theories and empirical business, the retail banking also should
keep pace with them. Design an efficient and effective service process, and also
redesign it perennially. The effective service process will decrease the RC
(relationship cost) of banks and also can increase customers‘ satisfaction for the
service of banks.
Information technology is another alternative to change the cost structure. Information
technology already changed the traditional operating of bank and improved the
productivity of teller operations. The Phone-call bank and internet bank rely on the
information technology strongly. With the increasing number and demands of
customers tries to use phone-bank, internet bank, the banking should arrange its cost
structure keep pace with its development.
40
4.4 Access Channel
The access channel is the system by which the provider makes the service packages
available to the customer. The execution of an interaction can be dealt with in several
ways. According to Lovelock (1983), the interaction can be supplied through different
methods:
1. the customer comes to the provider
2. the provider goes to the customer
3. the customer and the provider interact at arms length – using mail, telematic/
electronic communication
Gummesson (1991) identified four (Gummsson list eight different types of service
encounter, in here just list four types service encounter which related to the retail bank
mostly) different types of service encounters in which the place for the encounter is
different and the configuration of activities between the resources is different.
1. Service production at the provider‘s site. This is the traditional branch office
access channel in which the customer enters the bank and interacts with the
physical resources and the contact resources of the bank.
2. Self-service in the branches. This mode of service developed rapidly. The typical
of self-service it‘s the ATM machine. People can withdraw money nearly
wherever they want, in the shopping mall, park, CBD center etc. It is much easier
for the customers to do some simple transaction so conveniently.
3. Distance service using information-conveying media. Now, this service was used
by customer mostly. Phone-call banking, internet banking all belongs to these
kinds of service. Such as phone banking, if the transaction it‘s some simple and
standard service, the customer can just talk to the automatic system, interactive
voice response system. This not only save the banks cost of operating but also
makes convenient for the customers no matter where and when they call. The
customers just have to input some bank account information and PIN-code, then
they can log into their account. Same to the internet banking, but the net banking
are more independent than the phone banking. Because the phone banking still
needs the talker service employee to serve them if they ask for some complicated
service. Internet banking nearly can accomplish all customers‘ requirements
41
without helping of the bank teller. Internet banking it‘s the real one 24 hours/7
days bank and without location limitation for the customers.
4. Service production at a third party‘s site. Many interactions, especially
transactions, are actually performed on the premises of a third party, such as
shopping mall, super market, and restaurant. The key to these interactions is
debiting vehicles, such as checks, credit cards and debit cards. As Figure 1
showed, check processing is far more expensive than debit card processing. For
this reason, all banks aim to increase the usage of cards and to limit the number of
checks used. So, the banks have to persuade the shop to install debiting card
system for the customer to consuming. Of course, ATM were installed close to the
shops it‘s the other option for the banks to make customers use debiting card
more.
Considering customer needs, we can see that the majority of interactions involve
simple transactions for which the knowledge and systems of the branch network are
too expensive. On the other hand, the complex services are produced so seldom that
the employees are not equipped with the right sort or level of knowledge to carry out
those interactions in an efficient way.
The solution to the situation is to differentiate the delivery of the differentiate types of
interactions. The simple transactions should be dealt with through a short delivery
channel in which customers access the information processing system by using
support mechanism such as ATM machines, credit and debit cards, phone or internet
banking. The complex service should be dealt with by branches that specialize in
complex service.
Access barrier it is a common way to limit customers for one access channel in order
to encourage them to use other kinds of access channel. Access barriers can be built as:
(1) relationship volume barriers; (2) transaction behavior barriers; and (3) a
combination of the two (Storbacka, 1993).
The customer can get access to certain service or discounts on transaction instrument,
or more favorable rates on deposits or loans if this group of customer can reach
certain relationship volume. A typical product in this case is an account the interest
rate of which depends on the balance on the account. Often these accounts have
several interest rate levels, and the customer must achieve a certain balance to get the
higher rate.
Behavior barriers relate to both the number of transactions and the types o f
transactions used by the customer. Some banks use barriers of this type to force
customers to use self-service transactions, the idea being that approval for a lower
price requires the customers not use personnel- intensive services.
42
Changes of customer access channel also can change the customer relationship
profitability. It both increases the relationship revenue and decrease the relationship
cost.
43
5. Further Analysis and Interpretation
Financial institutions typically compete in broad markets with numerous customers
that may be geographically dispersed and whom seek a variety of different service
benefits. In addition to operational decisions pertaining to pricing, promoting,
distributing and product design can be addressed by understanding the market
structure in which the bank chooses to compete. Market structure can be viewed as a
profile of the market showing consumers‘ perceptions of different banks‘ important
attributes.
A primary purpose of marketing strategy is to develop a competitive advantage that
provides customers with superior value (benefits relative to costs) compared to
competitive offerings. In this chapter, the aim it‘s to describe constructs and measures
applicable for analyzing the profitability of customer relationships on a customer base
level.
5.1 Relationship Market Analysis
Relationship market is to establish relationship with the customers, or to say it‘s to
establish different kinds of bonds between providers with customers over a certain
period of time. According to Håkansson (1982), there are three kinds of bonds
between providers and customers: legal, social and technical bonds.
The legal bonds are the legal (implicit or explicit) contracts that govern the
relationship. The daily transaction, loans all refers to the legal bonds between bank
and customers. Service packages in retail banking often entail complex legal aspects
covering, for insurance, the granting of a loan or the principles of calculating interests
on deposits. Social bonds are established between the consumer and individual bank
employees. These bonds can sometimes be stronger than the relationship between the
consumer and the provider. If the employee starts to work for another bank, the
customers may follow the employee. The technical bonds relate to the fact that both
parties in a relationship adapt their processes to each other. It means the customers are
adapt to the access channels of banks, such as teller-based process, ATM machine,
phone-call bank system, internet bank system etc. Some access channels require more
adapting and learning than others, and thus customers can choose their own preferred
access channel based on their capability.
In social bonds, it mentioned loyalty to any one or specific service worker may leads
44
to the situation that the customers may follow the employee if the employee starts to
work for another bank. This has been discouraged by management due to the
vulnerability of customer retention in situations where key employees leave the bank.
But as mention before, service firms have many opportunities to utilize to their
advantage the relationships established between service personnel and their customers.
One such advantage is customer loyalty. ―Although relationships between service
employees and customers are generally encouraged, the development of strong
relationships between customers and one service employee is not‖ (Bendapudi &
Leone, 2001). This is because of the fear that strong relationships will lead to
―personal loyalty‖, that is, customer loyalty to the service employee as compared to
customer loyalty to the firm. Personal loyalty makes customer retention by the firm
vulnerable when the employee is transferred or leaves the organization. As personal
loyalty makes customer retention by the firm vulnerable when the employee is
transferred or leaves the organization, customer loyalty to one service individual has
actively been discouraged by firms. As for this reason, the companies make out a few
methods try to save this situation. The methods includes, ―not letting the service
worker serve the customer for longer than two years; job rotation; the use of teams;
ensuring the customer has multiple contacts with the business, and organizing
informal functions which expose customers to firm employees beyond those they
normally interact with‖ (Bendapudi & Leone, 2001).
Although the vulnerability of customer retention because of employee transfer,
according to Bove & Johnson (2006), ―We argue that managers should not place their
energy and concerns on discouraging personal loyalty because its benefits to the firm
far outweigh its risk‖. The encounter employees represent the critical link between the
service organization and the customer. They are responsible for understanding the
customers‘ needs as well as interpreting their demand in real time. Those employees
acquire experience in understanding the customers‘ wants in different situations and
therefore is an asset when new or existing services are to be developed.
―The benefit includes: first, the key benefit of personal loyalty is that it is a significant
contributor to service loyalty; second, personal loyalty may, enhance job satisfaction
for service employees and increase their empowerment and commitment to the
business; third, if personal loyalty did not exist, and service workers were not given
the opportunity to attend to the same customers repeatedly over an extended period of
time, service quality would likely diminish; fourth, if managers deliberately set out to
discourage personal loyalty they may run the risk of not attracting or keeping
customers who seek limited intimate contacts and therefore highly value continuity of
interactions with the same service worker; finally, researchers have suggested or
shown that personal loyalty, because it is built on foundations of trust and
commitment, has a greater influence on desirable customer behaviors such as positive
45
word of mouth than other forms of relationships or loyalty that can develop‖.
And in Bove & Johnson (2006) article, the authors emphasize there is considerable
opportunity for service business managers to both improve and protect service loyalty,
simply by ensuring all the service workers who work for the business appear credible
to clients. Given the loss of a favored service worker, the client must have confidence
in the remaining service personnel's level of competence. To improve service
personnel perceived credibility, as expertise reflects the mastery of relevant
competencies in service delivery, customers are more likely to trust a service worker
who is perceived as possessing greater expertise. Because the service skills or
expertise it‘s not easy to be known by the customers if they didn‘t do any transaction
with the unknown teller, in these situations managers need to seize promotional
opportunities to showcase the credibility of their personnel. This communication of
quality employees will increase clients' perceptions that they will receive a credible
replacement if their service worker were to leave. Further, managers must also invest
in their firm brand's positioning and reputation, ensuring it is perceived as credible by
clients.
Customer satisfaction as the most important element for the customer retention was
emphasized for several parts in this report. But, the dissatisfied customers may remain
loyal because of high switching costs. Establishing a new relationship represents some
sort of investment of effort, time, and money which constitutes a significant barrier to
the customer‘s taking action when dissatisfied with a distinct interaction during a
relationship.
Also, in here, we can see the function of social bonds. Because the social bonds which
customers with the employees/bank, this makes customers don‘t want to switch other
provider even thought they don‘t satisfied with present service. Social recognition,
identification for the customers, sometime it‘s an important reason for them don‘t
want to switch service provider too. In here, we can also say it as the barrier for the
customer of switching. Of course, according to Grönroos (2000), ―customers have a
zone of tolerance, as the difference between an adequate and a desired level of
service‖. If the service quality beyond the line of the customer zone of tolerance, they
will switch provider no matter how social bonds be fastened with
employees/providers.
After all the bonds function – legal, social, technical – as some sort of threshold or
switching barrier in changing customer behavior.
46
5.2 Customer Portfolio Analysis
As the limited resources prevent banks from serving all customers in the market
effectively, banks are increasingly developing marketing strategies that target a
specific segment that provides the bank with the greatest opportunity for success.
Strategic questions such as: Which criteria or characteristics should be used to
segment the market? Which segments provides our bank with the greatest opportunity?
What combination of benefits and costs provide the targeted segmentation the greatest
value relative to competitive offerings?
Several ways of segmenting the customer base are evidently possible. Segments can
be created by simply using any of the constructs or by combining two or more of the
constructs. There are four ways present below to segment customer bases:
(Howell, R. A & Soucy, 1990 and Storbacka, 1994)
In the following sections, it will discuss these ways to segment customer bases. The
interesting is that the different segmentation solutions emphasize different aspects of
the customer bases and different profitability drivers. Thus, the choice of
segmentation solution strongly influences the design of the strategic development of
the bank.
5.2.1 Segmentation based on RR and RC
According to the analysis of Chapter 4, we conclude RV (relationship volume) it‘s the
main element to affect RR (relationship revenue), and RC (relationship cost) affected
mainly by transaction types and numbers.
Then, we can segment four groups of customers:
Group I, profitable customers with high RR (relationship revenue) and small RC
(relationship cost);
Group II, customers with high RR (relationship revenue) and high RC (relationship
cost);
Group III, customer with low RR (relationship revenue) and small RC (relationship
47
cost)
Group IV, unprofitable customers with low RR (relationship revenue) and high RC
(relationship cost);
Figure 4. (Storbacka, 1994)
Relationship break-even
revenue
Relat ionship cost
In Figure 4, it shows the four segmentations.
Group I, the profitable customer who are considered to be the passive customers with
fairly big RV and limited transaction behavior (RRV (volume based on relationship
revenue) equal to RRDV (relationship revenue on deposit volume) plus RRLV
(relationship revenue on lending volume)). Group I customers bring lots of profit for
the bank, but meanwhile they didn‘t cost bank a lot, so for this reason, they are the
most important customers for every retail banking.
Group II, in Figure 4, from the break-even line, we can see there are profitable and
unprofitable customers, they both exist in this quadrant. Those customers are probably
active customers with high relationship volume and meanwhile creating many
interactions with the bank. Their frequent contact with bank can be translate into they
are the loyal customers to the banks, they are the satisfied customers or they have a
good relationship with the employees/ provider. Although they are the loyal customers,
their RC (relationship cost) are high, they are becoming unprofitable customer easily.
Of course, there is big possibility and potentiality that they will become the profitable
customers too. The key of changing for those customers it‘s to change their behavior
I
III
II
IV
48
with the banks. As we mention before, the changing access channel of customers it‘s a
good and effective way which make customers change their behavior to the retail
banking.
Group III, is the group of customers with low RR (relationship revenue) and small RC
(relationship cost). From the break-even line, we also find that there are profitable and
unprofitable customers. They also both exist in this quadrant. In Group II, we
conclude there is big possibility that the customers will change to the more profitable
customers, like customers in quadrant one. But, in this quadrant, the RR (relationship
revenue) is low; they do not represent the same profitability potential as the customers
in Group II. In previous part, it introduced the patronage concentration, and partial
customer. Usually, the customers in quadrant three, they are considered as the partial
customers, they still have other business with one of another or several banks. One of
option to increase RV (relationship revenue) it‘s to increase the patronage
concentration, i.e. to increase RV/TIV (relationship volume /total industry volume)
ration. Getting customers to concentrate their bank businesses to one bank increases
the relationship volume, then increase the relationship revenue, of course, the volume
is acquired at a reasonable price. So, the bank needs to know the possibility for
increasing the customers‘ patronage concentration. Suitable service package, price
bundling will be the efficient weapon to get partial customers become to the full
customers for a specific bank. For those who can not become to the full customers,
the bank can try to decrease their demand for interactions and increase service fee,
relationship fee revenue – RRF (fee-based revenue).
Group IV, are unprofitable customers, with low RR (relationship revenue) and high
RC (relationship cost). With the low RR (relationship revenue), similar to the
quadrant three, but with a high RC (relationship cost), comparing to the quadrant
three, they are not partial customers because of the high and active numbers of
transactions.
5.2.2 Volume-based Segmentation
The simplest and the most popular way to segment bank customer is volume-based
segmentation. The way is to use some indicators like, transaction, DV (deposit
volume), LV (lending volume) or combination of both as RV (relationship volume),
49
CRP (customer relationship profitability) etc. This way was adopted by the most of
the banks which try to find out who are the most profitable customers.
―Developing a differentiated strategy based on RV (relationship volume) maybe a
good solution as it is obvious that the banks ability to help the customer to produce
value for her/himself is evaluated using totally different criteria among high volume
customers compared to low volume customers. High volume customers could be
expected to be much more interested in how the bank helps the customer to manage
her/his assets whereas the low volume customer is probably more interested in the
payment brokering services of the bank‖ (Storbacka, 1994).
Table 4.
RV Group Share of
customer base
Share of
Transaction
Share of DV Share of LV Share of CRP
Group CUM Group CUM Group CUM Group CUM Group CUM
0-999 10% 10%
1000-2999 6% 16%
3000-5999 7% 23%
...
...
>500,000 0.03 100%
(RV=relationship volume, DV=deposit volume, LV=lending volume, CRP=customer
relationship revenue, CUM=cumulative)
Table 4, it‘s a simulated table for the bank to do segmentation based on volume. (All
the number in the ―share of customer base‖ is made up; there is no practical number to
support it!)
From this segmentation, the management can follow up the changing percentage of
customer with the increasing of relationship volume. Usually, higher relationship
volume means less customer percentage, because there are not enough customers have
tremendous transactions with the bank. And usually, the customers‘ relationship
volumes will concentrate on a certain volume (higher than the minimum but lower
than the maximum, in the middle of the category), neither in 0-999 category, nor
in >500,000 category too. But this figure is not means to say the customer category
50
with medium volumes are the most important customers, because ―20% of a retail
bank‘s customers may account for more than 100% of its profit‖ (Hartfeil 1996). The
management of the retail banking cannot underestimate a few of important customers
even though they only account for less percentage within all of customers. Of course
it not to say the customer category with higher relationship volume (such as > 50,000
in table) will be the most important customer, managers still have to analyze the
relationship volume variants, what kinds of transactions those customers usually use,
teller in encounter, ATM teller or net-bank?
And share of DV (deposit volume), share of LV (lending volume), if needed the
managers can put more indicators in the table, all these number can give the managers
of the bank a clear mind to make a practical strategies or tactic s for the bank
profitable operating. For example, which product/service are more popular or
welcomed by the customers, what kinds of service should charge a certain fee for it,
what price level is appropriate?
5.2.3 BCG Growth Matrix Segmentation
What ever segmentation solution is chosen we can conclude that there are obvious
reasons to create differentiated strategies towards the chosen segments. The generic
strategy alternatives can be labeled Protection, Transformation, Observation, and
Expansion. The most profitable customers have to be protected against competitor
action, because these customers are high relationship volume customers. The most
unprofitable customers have to be transformed, the bank should change those
customers‘ behavior and the configuration among the whole CTV (customer total
volume). To observe those dynamic customers, they have quite high relationship with
the bank but profitability quite low. The banks have to observe those customers, and
then make a decision for those customers, to transform or expand. With lower
relationship volume, but generate relative higher profitability; those customers should
be treated as the possibilities or potentiality to expand their relationship volume by
improving the patronage concentration.
Below it‘s the BCG growth-share matrix, it can be used as a tool for the management
for viewing a corporation's business portfolio which will help the management of the
bank to have a quick view for the customer configuration and then make a quick and
right strategy based on this analysis.
51
The BCG matrix (Boston Consulting Group analysis) is a chart that had been created
by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations
with analyzing their business units or product lines. This helps the company allocate
resources and is used as an analytical tool in brand marketing, product management,
strategic management, and portfolio analysis. It is based on the observation that a
company's business units can be classified into four categories based on combinations
of market growth and market share relative to the largest competitor, hence the name
"growth-share". Market growth serves as a proxy for industry attractiveness, and
relative market share serves as a proxy for competitive advantage. The growth-share
matrix thus maps the business unit positions within these two important determinants
of profitability.
Figure 5.
BCG Growth-Share Matrix
This framework assumes that an increase in relative market share will result in an
increase in the generation of cash. This assumption often is true because of the
experience curve; increased relative market share implies that the firm is moving
forward on the experience curve relative to its competitors, thus developing a cost
advantage. A second assumption is that a growing market requires investment in
assets to increase capacity and therefore results in the consumption of cash. Thus the
52
position of a business on the growth-share matrix provides an indication of its cash
generation and its cash consumption. Cash required by rapidly growing business units
could be obtained from the firm's other business units that were at a more mature
stage and generating significant cash. By investing to become the market share leader
in a rapidly growing market, the business unit could move along the experience curve
and develop a cost advantage.
The four categories are:
Dogs - Dogs have low market share and a low growth rate and thus neither
generate nor consume a large amount of cash. However, dogs are cash traps
because of the money tied up in a business that has little potential. Such
businesses are candidates for divestiture.
Question marks - Question marks are growing rapidly and thus consume large
amounts of cash, but because they have low market shares they do not generate
much cash. The result is a large net cash consumption. A question mark (also
known as a "problem child") has the potential to gain market share and become a
star, and eventually a cash cow when the market growth slows. If the question
mark does not succeed in becoming the market leader, then after perhaps years of
cash consumption it will degenerate into a dog when the market growth declines.
Question marks must be analyzed carefully in order to determine whether they
are worth the investment required to grow market share.
Stars - Stars generate large amounts of cash because of their strong relative
market share, but also consume large amounts of cash because of their high
growth rate; therefore the cash in each direction approximately nets out. If a star
can maintain its large market share, it will become a cash cow when the market
growth rate declines. The portfolio of a diversified company always should have
stars that will become the next cash cows and ensure future cash generation.
Cash cows - As leaders in a mature market, cash cows exhibit a return on assets
that is greater than the market growth rate, and thus generate more cash than they
consume. Such business units should be "milked", extracting the profits and
investing as little cash as possible. Cash cows provide the cash required to turn
question marks into market leaders, to cover the administrative costs of the
company, to fund research and development, to service the corporate debt, and to
pay dividends to shareholders. Because the cash cow generates a relatively stable
cash flow, its value can be determined with reasonable accuracy by calculating
the present value of its cash stream using a discounted cash flow analysis.
(www.netmba.com/strategy/matrix/bcg, 2009)
53
In relationship marketing, usually, the customers are grouped into four groups: high
relationship volume/positive contribution, high relationship volume/low or negative
contribution, low relationship volume/positive contribution and low relationship
volume/low or negative contribution.
In BCG growth-share matrix, we category: the low volume, low profitability
customers as Dog; the low volume, high profitability customers as Star; the high
volume, low profitability customers as Question Mark; the high volume, high
profitability customers as Cash Cow.
In Dog marketing category, with the low volume and low profitability, in this category,
the customers do not consume lots of cost (money) from the service provider/retail
banking. But as their unfavorable transaction behavior and combine with their low
relationship volume, usually, they are the less profitable or unprofitable customers. As
the ―such businesses are candidates for divestiture‖, traditionally it‘s to abandon those
customers. But as described in previous part 4.2.2, the less profitable or unprofitable
customers are covering banks‘ cost like other profitable customers too. In protecting
profitable point of view, there are still quite important for the retail banking. So the
solution for those customers is to change their transaction behavior; for this purpose,
the retail banking can charge for a few transactions which will increase the
relationship fee revenue; price a few service, such as counseling service, though those
service are free for the profitable customers. Price discrimination may cause
dissatisfaction or even worse situation among customers, so the bank should be
careful for this move.
In Star marketing category, with low relationship volume, high profitability, they are
the profitable customers. Most of customers in this category are passive customers,
which they are doing limited transaction behaviors. Compare with its relative share of
relationship volumes, Star category market generate higher rate profit for the banks.
Refer to its high growth rate and large amounts of cash consumption, there are both
possibilities making it change to Dog market or Cash Cow market. The patronage
concentration maybe is the problem for this category of customers. They are just the
partial customers for a bank, they have two, three or more bank accounts scattered in
a few banks. Service package, price bundling the ways mentioned before maybe turn
them into the full customers, which will make them become the Cash Cow.
In Question Mark marketing category, with high relationship volume, low profitability,
they are the unprofitable customers. Because this category of customers using low
price or non-priced transaction which makes them use the transaction excessively,
eventually leads to the volume goes highly. Lots of volume means they cost bank a lot
– large net cash consumption – but in return they did not contribute lots of profit for
the bank. The solution for this group of customers, of course, is to decrease the
54
volume of transaction. The bank can set minimum withdraw money or a certain
service fee of transaction for the customers; multiple access channel for the customer,
persuade customers to use other channel of service.
In Cash Cow marketing category, high relationship volume, high profitability, these
customers are the profitable customers. This category customers bring lots of profit
for the bank, but meanwhile they didn‘t cost bank a lot (compared to its
profit-generating), so for this reason, they are the most important customers for every
retail banking. Cash Cow generates stable cash flow, make bank profitable. But as the
customer became to Cash Cow, it means it is nearly impossible to increase
relationship volume or CRP from this group of customers, because they already reach
nearly to the maximum point, they grow slow and there is no potential within this
group. For the most profitable customer group, the bank definitely should attach
enough importance to this category customer. But, for long-run point of view, the
managers must be aware of that the Cash Cow won‘t grow any more, they have to
develop the potential customer become to the Cash Cow, for example to develop the
Star category customers become to Cash Cow instead let them become to the Dog
category customer.
BCG growth-share matrix can serve as a simple tool for viewing a corporation's
business portfolio at a glance, and can serve as a starting point for discussing resource
allocation among strategic business units too.
Viewing the various financial services markets, the BCG (Boston Consulting Group)
also developed a matrix that distinguishes markets, which suggests that not all banks
have the same potential for successfully creating competitive advantages through
differentiated offerings.
Fragmented market: A market that has many opportunities for differentiation, but
each opportunity is small. Profitability tends to be unrelated to size.
Stalemated market: A market that has few potential advantages, each advantage
being small. Profitability is unrelated to market share.
Specialized market: A market that has many opportunities to differentiate and
each differentiation can have high payoffs. Profitability is unrelated to market
share.
Volume market: A market that has only a few but rather large advantages.
Profitability is correlated with company size and market share.
55
This segmentation also makes the bank management clear for its bank position in the
market and then makes a practical marketing plan to compete with other banks by
satisfying their targeted customers. This market structure analysis will assist the bank
in identifying potential opportunities in differentiation and in assessing the viability of
low cost as an advantage. Various determinants of bank selection can serve as the
basis for differentiation and help establish relative leadership positions within a
market. Conducting a market structure analysis can assist in identifying opportunities
for differentiation and can be used to monitor the success of implementing the
strategy over time.
5.2.4 CRP-based Segmentation
For the retail banking, CRP (customer relationship profitability) can be considered as
the most important criteria of profitability. But, usually, as the traditional accounting
calculating way, CRP (customer relationship profitability) won‘t appear in the balance
sheet, income statement and cash flow bookkeeping. So for the managers and the top
management of the retail banking, it is difficult to measure or calculate it. Based on
this reason, the report analyzes the way to calculate the CRP (customer relationship
profitability). But from the calculating formula, we cannot get the customer loyalty
and segmentation of different customer loyalty with the CRP (customer relationship
profitability). In here, it will present a segmentation connect customer
loyalty/relationship strength with CRP (customer relationship profitability).
In retention rate, we see the importance of relationship strength. Relationship strength
is the key ingredient which a service organization can keep customers within it. The
importance of relationship strength increases in proportion to CRP (customer
relationship profit).
56
Figure 6.
Relationship strength
low high
high Vulnerable Ideal
Situation situation
CRP
Indifference Wrong allocation
low/
negative of resources
(Storbacka, 1994)
From Figure 5, we see the ideal situation is that customer relationship with a high
level of CRP (customer relationship profitability) and high level of relationship
strength. If these customer relationships have a low level of relationship strength the
bank in a very vulnerable situation, because the CRP (customer relationship
profitability) maybe diminished because of competition with other banks. Under this
situation, the relationship should be enhanced by the bank. As mentioned before, how
to communicate with the customers it‘s the first step which the bank should do, then
according to the customers‘ requirements and opinions to make an improvement
getting customer satisfaction. Customer satisfaction definitely will increase customer
retention and enhance relationship strength.
If customers with negative profitability but have a high level of relationship strength,
the managers can first try to differentiate what categories these customers are, the
Question Mark or Dog? Then the management can make up a series steps to deal with
this situation.
57
6. Conclusion
Services are consumed or used on a continuous basis. ―The same customer meets the
same service provider over and over again‖ (Grönroos, 2000), especially, in retail
banking. The importance of service elements in customer relationships grows over
time and customers increasingly demand individual and flexible responses from the
service provider. Delight of customers will give the company feedback in form of
profits which should be reason to pay more attention to the customers needs, and
simultaneously improve a better communication continuously in the future.
Employees ought to act as consultants, who are prepared to do their duty when the
customer needs them and in a way the customer wants. Retail banking manages best
to do this strengthens its customer relationships and achieves the best profitability.
The organizational structure and managers, and explicitly defined service concepts
have to provide the guidance, support and encouragement needed to enable and
motivate customer contact personnel and support personnel alike to give good service.
―Contact employees or departments which have to interact with each other in order to
produce a service may be physically far part in the organization. Often decisions
concerning even minor details are made too far away form the service encounter,
which of course, can have a negative impact on the perceived service‖ (Grönroos,
2000).
Contact employees or any means of contacting channels or approaches is to establish,
maintain and enhance customer relationships, and that the key point of all
development efforts is the understanding of the configuration of the customer
relationship.
6.1 Summary
The aim of this thesis it‘s to explore the strategies or tactics which make the retail
banking profit from customer relationship. How value is produced it‘s the key topic
for this thesis. Different groups of customers contribute profit differently, so the
configuration of customer relationship is the basis to analyze profitability for the retail
banking. From a few authors‘ research and strategies explored in this thesis, the
58
managers of the retail banking can take this report into their account when they try to
increase the profitability on customer relationship base. The segmentation also will be
the useful for the managers to analyze the marketing and customer relationship
configuration.
There are two configurations mentioned in this report, volume configuration, and
access channel configuration.
Volume configuration constructs by CTV (customer‘s total volume), TIV (total
industry volume) and RV (relationship volume). Figure 1 (chapter 3.4) showed the
relationship of them. To compare the CTV (customer‘s total volume) as a big pie, the
TIV (total industry volume) and RV (relationship volume) are the different portions of
the pie.
In access channel configuration, there are four different types of service encounter
were introduced in chapter 4.4; service production at the provider‘s site, self-service
in the branches, distance service using information-conveying media, service
production at a third party‘s site.
As the financial services industry consists of a broad range of different institutions
providing services to individuals, business, non-profit organizations, governments.
The traditional division is : (1) banks, (2) insurance companies, (3) finance companies
and (4) card operating companies; and as well besides the traditional division, there
are new invaders into this field, especially in retail banking, such as Paypal mentioned
in previous chapter. For the multiple competitors for the retail banking, it is not
difficult to understand why there are CTV (customer‘s total volume), TIV (total
industry volume) and RV (relationship volume) divisions. The competition makes the
retail banking can only get a part of the TIV (total industry volume). And even the
total RV (relationship volume) one of retail banking got, the different interactions still
are handled by different departments of the bank also. With the development of IT
technology, the bank also develops its information system for better service. The
contradiction is that the different departmental units of the bank they have their own
information system, and they are not communicate or share it very well. For example,
the same customer to do daily transaction, like saving, withdraw, or mortgage,
normally, it is in the encounter of the bank, but if they do the investment, counseling
(legal or business), specialist service it will proceed by the other units of the bank.
The different departments deal with their business with their own information systems,
the different systems are not integrated with each other into one. Finally, the bank
even does not have the total RV (relationship volume) data (withdraw, mortgage,
investment or counseling data) for their customers. From this point of view, we can
see why the retail banking needs to develop more comprehensive information system
that enable the systematic enhancement of customer relationship as well as
59
differentiated customer service.
CRP (customer relationship profitability) is the most important concept in this report.
Strategies are around how to increase CRP (customer relationship profitability). From
CRP (customer relationship profitability), RR (relationship revenue) and RC
(relationship cost) were introduced in this report. Increase RR (relationship revenue)
or decrease RC (relationship cost) both means the increasing of the CRP (customer
relationship profitability). In chapter 4.1 and 4.2, how to increase RR (relationship
revenue) and decrease RC (relationship cost) were described comprehensively.
Pricing service, price barrier and patronage concentration are the common useful tools
which accomplish the goal to increase CRP (customer relationship profitability).
CRP (customer relationship profitability) can be said to be the result of the customers‘
actual buying behavior and thus the information used to calculate relationship
profitability is interesting for discussions regarding the segmentation of a customer
base. An authentic relationship marketing approach requires that customers are treated
as individuals and that the information gathered makes it possible. But in order to
make it possible to in a simple way communicate the key finding of the customer base
analysis it is instrumental to find a way to group customers. There were four
segmented ways were listed in this thesis.
To analyze CRP (customer relationship profitability), in customer base, firstly the
management should be aware of the portfolios and segmentation of customer.
Segmentation based on RR (relationship revenue) and RC (relationship cost), it‘s a
useful analysis tool for the management of the bank to analyze their customers based
on their revenue getting and cost consuming.
Volume-based segmentation it‘s the simplest and the most popular way to segment
bank customer. DV (deposit volume), LV (lending volume), RV (relationship volume),
CRP (customer relationship profitability) or any interested indicators can be added
into this category. Retrieving the data from the database, then the bank can conclude
the configuration/percentage of profitable customer among the bank.
BCG growth-share matrix is a simple tool for viewing banks‘ business portfolio at
glance. From the glance, the manager can make plan quickly to allocate resource
among customers and marketing strategies for the different status of customers.
Segmentation based on CRP (customer relationship profitability), in this segmentation
it analyzes relationship between customers relationship strength and CRP (customer
relationship profitability). What kinds of relationship strength and CRP (customer
relationship profitability) will be perfect or what kinds or relationship strength and
CRP (customer relationship profit) will be unfavorable for the retail banking? This
segmentation tries to show management of the bank another tool to scrutiny customer
relationship and the profit from it.
60
Although the proposed segmented methods are simple, they give indications
regarding how to allocate development resources within the bank thus form a
foundation for strategy development. They also showed that there are behavioral
differences among customers which affect the profitability of relationship. Because
the differences are behavioral which they can be influenced by product development,
distribution channels‘ development and pricing developments.
6.2 Further Research
In this thesis, in Chapter 4.1 and 4.2 it introduce comprehensively how to calculate
the CRP (customer relationship profitability) by calculation RR (relationship revenue)
and RC (relationship cost). The introduction of formula for those calculations is
because under present accounting system there is no direct bookkeeping to show the
CRP (customer relationship profitability). Of courses, the calculation of RR
(relationship revenue) seems to be less troublemaking, the revenues are important
accounting measures and thus the systems are built to accommodate the follow-up of
RR (relationship revenue), and most RR (relationship revenue) are based on products
which is revenues from different types of products such as deposit and loan accounts
or bank credit or debit cards. As the accounting systems are built in order to analyze
product profitability it is fairly easy to aggregate RR (relationship revenue) from the
revenues of each products. And as mentioned above, it is difficult to integrate the RV
(relationship volume) of different units of the bank into all of the customer
relationship‘s total volume, because of the different of the information system
construct. But with the development of information technology, there is room for the
improvement of bank information system. The new research should focus on the
integration of CRP (customer relationship profitability) data with the existing
management systems of retail banks. And the research also should focus on how to
extract CRP (customer relationship profitability) data from the traditional accounting
bookkeeping.
The development of information technology, also diversify the access channels hugely.
With the increasing ways of access channels, the retail banking needs more specific
precise segmentation of market, this also should be developed by the further research.
61
And with the precise analysis by segmentation of customer, marketing investigation,
the strategies to manage those channels also are the challenge for the management of
retail banking. The strategies for the managers should also be attached enough
attention by the further research.
For the limitation of my empirical investigation, if the future research can compare
Chinese retail banking and Nordic retail banking it will be an interesting exploration.
Because the population number reason, the retail banking operates their daily business
quite differently. Volume-based Segmentation, Table 4, can be a useful tool to
compare both country categories‘ retail banking. Of course, the Table 4 will be filled
up with the valid empirical number instead of simulated number as this report!
62
Reference
Bendapudi, Neeli & Berry, Leonard L. (1997), Customers' Motivations for
Maintaining Relationships with Service Providers, Journal of Retailing, Volume
73(1), pp. 15-37
Bendapudi, N., & Leone, R. P. (2001). How to lose your star performer without losing
customers, too. Harvard Business Review, 79(10), 104−112.
Berry, L.L., 1983. Relationship marketing. In: Berry, L.L., Shostack, G.L., Upah, G.D.
(Eds.), Emerging Perspectives on Services Marketing. American Marketing
Association, Chicago, USA, pp. 25–28.
Bove, Liliana & Johnson, Lester W. Customer loyalty to one service worker: Should
it be discouraged, International Journal of Research in Marketing 23 (2006) 79–91
Bowen D.E & Schneider B (1988) Service Marketing and Management: Implications
for Organizational Behavior, Research in Organizational Behavior, 10
Capgemini, EFMA, ING, (2008), World Retail Banking Report 2008, Capgemini
Consulting Technologies and Outsourcing Service
Channon, Derek F. (1986), Bank Strategic Management and Marketing, New York:
John Wiley & Sons Inc.
Chase, Richard B., & Stewart, D. M. (1994), Make Your Service Fail-safe, Sloan
Management Review 35, 35-45
Chase, Richard B., & Bowen, David E. (1991), Service Quality and the Service
Delivery System in Quality in Service: A Diagnostic Framework, Lexington Books,
Czepiel, John A. (1990), Managing Relationships with Customers: A Differentiating
Philosophy of Marketing. In D. E. Bowen, R. B. Chase, T. G. Cummings and
Associations (eds): Service Management Effectiveness – Balancing strategy,
Organization and Human Resources, Operations, and Marketing. San Francisco:
Jossey-Bass Publishers, 298-323
Deal T.F & Kennedy A.A (1982), Corporate Cultures: The Rites and Rituals of
Corporate Life. Reading, MA: Addison-Wesley
Devlin, James F. (2000), Adding value to retail financial services, International
63
Journal of Bank Marketing 18/5 222-232
Edvardsson, B. (2005), ―Service quality: beyond cognitive assessment‖, Managing
Service Quality, Vol. 15 No. 2,
Grönroos, Chirstian (2000), Service Management and Marketing—A customer
relationship management approach. UK: John Wiley & Sons, Ltd.
Grönroos, Chirstian (2008), Service logic revisited: who creates value? And who
co-creates?, European Business Review, Vol.20, No.4
Guiltinan, J. (1987), The Price Bndling of Services: A Normative Frame Work.
Journal of Marketing, April 1987, pp. 74-85
Hartfeil, G. (1996), Bank one measures profitability of customers, not just products.
Journal of Retail Banking Services 18 (2), 23–29.
Howell, R. A & Soucy S.R (1990), Customer Profitability – As Critical as Product
Profitability, Management Accounting, October, pp. 43-47
Håkansson, H. (1982), International Marketing and Purchasing of Industrial Goods:
An Interaction Approach, New York: John Wiley & Sons, Inc
Kelley, S. (1989), Efficiency in service delivery: technology or humanistic
approaches?, The Journal of Services Marketing, Vol. 3 No. 3, Summer, pp. 43-51.
Lehtinen, Jarmo R. (1988), Asiakasyrittäjä – liiketoinminan resurssi Helsinki, SMG
Kustannus Oy. Forthcoming in The Nature of Customer Relatioship Profitability
Levitt T (1980), Marketing Success Through Differentiation—of Anything. Harvard
Business Review, Jan.-Feb., pp. 83-91
Loveman, G. W. (1998), Employee Satisfaction, Customer Loyalty, and Financial
Performance: An Empirical Examination of the Service Profit Chain in Retail
Banking, Journal of Service Research, 1 pp. 18-31
Lovelock, Christopher H. (1983), Classifying Services to Gain Strategic Marketing
Insights, Journal of Marketing, summer 1983, Vol. 47, 9-20
Matzler, Kurt, Wurtele, Andreas & Renzl, Birgit (2006), Dimensions of price
satisfaction:a study in the retail banking industry, International Journal of Bank
Marketing Vol. 24 No. 4, 2006 pp. 216-231
Neuberg, Steven L. & Susan, T. Fiske. (1987), Motivational Influences on Impression
Formation: Outcome Dependency, Accuracy-Driven Attention, and Individuating
64
Processes, Journal of Personality and Social Psychology, 53: 431-444.
Norman, R. & Haikola, B. (1986), Winning Strategies in Financial Services, A
Multiclient Study, Helsinki: The Service Management Group Oy
Ramirez, Rafael (1999), Value CO-Production: Intellectual Origins and Implications
for Practice and Research, Strategic Management Journal, 20: 49–65
Ryals, Lynette (2002), Are your customers worth more than money, Journal of
Retailing and Consumer Services 9 241–251
Shneider, B., & Bowen, D.E. (1995), Winning the Service Game, Boston: Harvard
Business School Press
Sheth J.N & Parvatiyar A (1995), Relationship Marketing in Consumer Markets:
Antecedents and Consequences, Journal of the Academy of Marketing Science, 23(4),
pp 255-271
Storbacka, Kaj (1993), Customer Relationship Profitability in Retail Banking,
Swedish School of Economics and Business Administration, Helsingfors
Storbacka, Kaj (1994), the Nature of Customer Relationship Profitability, Swedish
School of Economics and Business Administration, Helsinfors
White, S. & Shneider, B. (2000), Climbing the Advocacy Ladder: The Impact of
Disconfirmation of Service Expectations on Customers‘ Behavioral Intentions,
Journal of Services Research 2(3), 240-253
[electronic] Business Knowledge Center, http://www.netmba.com/strategy/matrix/bcg>
(2009-5-12)
65
Glossary
CO: counseling
CRP: customer relationship profitability
CTV: customer‘s total volume
DL: deposit and lending services
DV: deposit volume
IS: investment services
LV: lending volume
RC: relationship cost
RR: relationship revenue
RRF: fee based revenue
RRv: volume based revenue
RV: relationship volume
SS: specialist services
TIV: total industry volume
Patronage concentration: In relationship marketing, instead of measuring market share,
to measure total industry volume, for customers whom the service provider have
relationships, both on a customer base level and on the level of the individual
customer relationship, RV/TIV ratio.
