A breakthrough for Capital One took place when the company used what it called “test and learn” models to determine which combination of product, price and credit limit could be profitably offered to customers who could be segmented by a wide range of publicly available credit and demographic information. Through the test-and-learn tools, Capital One found that it could offer a balance-transfer product, which offers a lower initial annual percentage rate (APR) to card applicants who transfer balances from a competitor’s card.
“It turns out that this transfer of balances by customers from higher APR credit cards to a lower one provides the card issuer with an important signal,” Clemons and Thatcher write. “Customers who do not carry balances find no value in a lower APR and will not take the time and effort to switch cards. More importantly, the customers that the balance transfer product will attract are those customers who have a balance they cannot presently pay off but which they will eventually pay off slowly. Therefore, they care about the lower APR.”
Customer-segmentation techniques such as these have paid off handsomely for Capital One and eroded the market share of once-dominant players in the credit-card business. Since 1992 the dollar value of loans managed by Capital One has risen from $1.7 billion to $56.9 billion, and Capital One is now one of the top 10 credit-card companies in the U.S., according to The Nilson Report's 2002 ranking of the top U.S. issuers of general purpose credit cards.
The lessons of Capital One’s success can be extended to many other industries, says Clemons. He adds: “If companies in an incumbent industry can’t fire the kill yous, and a new entrant can go after the love ‘ems, incumbent industries can fall apart.”
A Multi-industry Perspective
Here are examples of how other industries are managing customer profitability:
Wireless telephony. Dominic Endicott, a vice president in Booz Allen’s Boston office, says wireless companies have wonderful opportunities to segment customers by profitability. He cites several reasons. First, each wireless player has between 10 million and 30 million customers, which means they have many chances to increase the value of each customer. Companies can target certain segments and offer a new value proposition, while improving the value of calling packages for existing customers.
According to Endicott, any business with lots of customers with a subscription history is ripe for this sort of segmentation, including cable TV operators and Internet service providers. Wireless companies even have the ability to reach customers any time by sending messages to their phones. If a customer has experienced a lot of dropped calls, a company not only knows this but can compensate her for the trouble, say, with an additional hour of peak-time calls. By contrast, Endicott says, “With a product in a supermarket, you’re lucky if you get scanner data telling you that a person buys soap once a month.”
Despite these ready advantages, wireless companies have yet to take full advantage of customer profitability management. Since their inception, wireless firms have pulled out all the stops to acquire customers but have placed little emphasis on managing the value of the customer base.
|“Companies have difficulty analyzing the profitability of customer bases at the level of the individual person... However, it is a long-accepted practice to make predictions about groups of people.”|