Customer Profitability

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HARVARDBUSINESS SCHOOL9-602-104 REV: AUGUST 25, 2005FRANCES X. FREI DENNIS CAMPBELLPilgrim Bank (A): Customer ProfitabilityIt was February 2, 2001 and Alan Green was finishing his first month as an analyst in Pilgrim Bank’s online banking group. The words of his boss, Ravirlan, who had just left his office, lingered in his head. Alan, we have a meeting at the end of next week with the senior management team to discuss our Internet strategy. There is subst41ik4crilisagreement in our group on whether we should start charging fees for use of the online l ‘rig channel or if we should begin offering customer incentives such as rebates and 1 r r service charges to encourage greater use of the channel. The debate really hinges on wh f ther online customers are indeed better customers, and if adoption of the online channel actually produces better customers. Since year-end 2000 data won’t be available until next week, why don’t you spend the weekend looking over the relevant data from year-end 1999? Let’s meet Monday morning to discuss your findings. Although bolstered by Raman’s implicit confidence in him, Green was unsure how much he would be able to contribute. Green, who had just completed his MBA, enthusiastically studied the retail banking industry, but he still did not quite understand it. An hour ago, he looked at a chart on customer profitability that, among other things, demonstrated that more than half of Pilgrim’s five million customers were unprofitable. Green knew that before he could analyze the data he needed to understand more about the economics of retail banking. He decided to head over to Jane Raines’ office. Raines was an experienced analyst in the group and was sure to be of help.Later that Morning As Green sat in Raines’ office, he explained his assigned project. I need to do some analysis to figure out whether online customers are better customers for the bank and what the implications are for our online banking product. As a first step, I was thinking about comparing balance levels between online and offline customers.Raines responded, Balances are only part of the story. If you are interested in how profitable customers are, then look at profit directly. You don’t need to use balances as a proxy for profit, as balancesProfessors Frances X. Frei and Dennis Campbell prepared this case. Some information and identities have been disguised. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.This document is authorized for use only by Maja Micevska Scharf at Webster University Leiden until December 2012. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

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