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Understanding the customer's true preferences to improve profits

Migrating banking customers to more profitable products increases checking account revenues by 20 percent.

Challenge

The low profitability of some of checking account plans offered by a retail bank in Europe was dragging down the bank’s overall performance. How could it eliminate poorly performing plans without losing the customers that held them?

Complicating the matter was the widely held belief, both inside and outside the bank, that checking account shoppers had strong preferences for competing brands and wouldn’t choose the bank’s products in the absence of steep discounts.

The bank turned to McKinsey for help shifting customers to more profitable plans without reducing the number of new customers coming in the door or resorting to heavy discounting.

Discovery

Two customer groups were of particular interest to the retail bank: those who already held checking accounts with the bank; and cross-bank shoppers—customers looking for a new checking account and willing to consider multiple brands.

We used McKinsey’s proprietary choice-based marketing methodology to segment these two groups at a granular level according to their preferences for different elements of the bank's offers. For instance, were monthly fees more important to them than deposit interest? This approach helped identify target segments that the client could serve cost-effectively, create tailored products for those target segments, and assess the impact of the proposed changes on market share and financial performance.

This analysis yielded some surprising results. We found that the percentage of the bank’s potential customers who would outright reject any offer from the bank because of its perceived weaker brand was smaller than the bank had assumed. In other words, the addressable market was bigger. Furthermore, the size of the discount the bank had to offer to convert many customers was considerably smaller than expected. There were in fact relatively few customers who would require a discount deep enough to become unprofitable to the bank.

Our findings showed that even though the bank’s brand didn’t perform as well as many of its competitors', there were packages of benefits that would allow them to compete effectively and economically in different customer segments. We were able to identify, for instance, exactly which customers valued overdraft protection above other features and services, and then define the precise range of interest rates on the overdrawn amount necessary to win them over.

This new information allowed us to help the bank design a new portfolio of products and to clearly market the precise benefits of each.

Impact

The segmentation analysis helped the bank shift customers for poorly performing plans to more profitable ones while boosting sales of new plans. This shift created an overall revenue increase from checking account plans of better than 20 percent.

Moreover, the study soon began having a transformative effect on the bank. Armed with a tool to simulate the reality of their marketplace—one that could be used for 12 to 18 months without updating—the bank began testing and refining new products and carrying out their decisions more effectively and with greater confidence in the results.

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