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# Customer Profitability and Customer Relationship

## Management at RBC Financial Group (Abridged)

Assignment Questions
1. Evaluate RBCs strategy and organizational structure. Is RBC well equipped to
compete with niche operators such as Internet-only banks with focused product offerings?
2. RBC is unique in how it computes the lifetime value of its customers.
a. What additional insights are likely to come from lifetime value computations
for customers as opposed to annual customer profitability numbers?
b. Should RBC compute lifetime values at the segment level or the individual
customer level for strategy formulation? How about strategy execution?
3. Do you agree with RBCs decision to withhold profitability, potential, and segment
information from its front-line employees?
4. Should Reich make the car loan to Niece and if so at what interest rate?
5. What should RBC do about customers who are unprofitable because they use the retail
branches and ABM machines for bill payments?
6. One of the new concepts we have covered in this case is profit potential. It is
sometimes called lifetime value of a customer. The case talks about two methods to
compute profit potential. To concretize our understanding of these two methods we will
analyze the following two numerical examples.
a. Assume RBC has only three segments of customers based on age: (1) 20 to 35
years old, (2) 36 to 60 years old, and (3) 61 to 75 years old. The distribution of
average annual customer profitability in dollars for each of the three segments is
given in the Table below. What is the profit potential or lifetime value of the
niece if the bank estimates that she is in the 30th percentile for current
profitability? Recall that the niece is currently aged 23. Use a discount rate of 8%
and the first method described at the bottom of page 12 of the case. Assume that
there is a 5% chance of customer attrition each year.

## b. To understand the second method, we will consider the following example.

Assume that RBC has only two products Car Loan (CL) and Credit Card (CC).
The annual profitability for the two products for the niece is likely to be (\$100)
and \$1000 respectively given her profile. Thus the profitability if the niece took
both products would be \$900. RBC has made the following observations for
customers in the aged 20-35 years segment: If they have only a car loan at the end
of a given year, the probability of acquiring a credit card during the following
year is 50%. The probability of losing even this one product is 20%. The
probability that the customer retains the same product for the subsequent year is
20% and there is a 10% chance that the customer swaps products. A customer
who buys both products in a given year has a 70% probability of buying both
products in the subsequent year and a 10% probability each of dropping either or
both products. A customer or ex-customer who buys no products from the bank
has a negligible probability of buying any product from the bank in the
subsequent year. These observations are summarized in the matrix of probabilities
in the Table below. If the niece had only the car loan in year 1, what are the
expected profits from her in year 2? What would the expected profits from her be
in year 3? What is the present value of the profits during the three years using an
8% discount rate?
Probabilities for year t+1 product mix for all possible combinations of product
mixes for year t.

c. What information could RBC use in the real world to estimate the probabilities
that we have assumed in the table above?

d. What does the matrix of probabilities above imply about cross-selling potential
and customer loyalty as a function of number of products purchased?
e. What are the pluses and minuses of the two methods described above?
f. How hard will it be to implement the second method for 20 products? RBC
computes only a five-year value of each customer (instead of lifetime value). Why
do you think that is?