ASSIGNMENT: BUS253a, Marketing Research. Wang Pilgrim Bank How do retail banks make money from their customers?

How do retail banks deal with variation in profitability across customers? Based on sample of customer profitability for 1999, what can Green conclude about the profitability for PilgramBank's entire customer population? Run following two regression analysis on consumers with complete records and interpret the results: a). use Profit as dependent variable, and Online as independent variable. What do you find? b). use Profit as dependent variable, Online and demographics as independent variables, what do you find? How would you compare this with first regression? You may wonder if there is any systematic difference between consumers with complete demographic records and those who don't. Think of a proper method and see what you find. Based on analysis results, what strategies would you recommend? Pilgrim Bank is a retail bank, that is in business to make money by performing a service in exchange for money. The relationship between the bank and the customer is symbiotic; each is dependent on the other. Profitability is determined on financial as well as operational management by 1) the level of passive revenue generated through invesment income on deposit balances; 2) fee based income; and 3) loan interest income. Determining the profitability of the average customer however is not a simple task, since the correlation between a customers bank balance and profitability appears to be skewed. Analysis of profitability of customers shows that 10% of the customers generated 70% of

the profits. In other words, the customer(s) with fewer personal transactions was more profitable than the labor intensive customer, regardless of the maintained balance. Pilgrim must decide: 1) which customers are profitable and 2) what to do with the unprofitable customers. Additional channels add cost to the bank in terms of capital investment. Pilgrim wants to encourage high cost low margin customers to migrate to online banking, yet the dilemma is whether to charge for the service to cover costs or to reward the customer to do so without charge. Regardless of the migrating customers the existing channels will continue to incur costs. The cost per transaction would be decreased while volume is expected to increase. Whether online customers are more profitable per se categorically is at issue. The research challenge is to obtain data to determine whether online banking generates additional income or is offset by cost savings to justify it as a channel. The research objective is to determine whether there is a causal relationship between the profitability of bank customers based on the channel of online banking. a). use Profit as dependent variable, and Online as independent A random sample of 30,000 was drawn . Green can conclude sample is not small. Random srss state sample random simple random sampling Population that should survey or worst case scenario p = FORMULA b). use Profit as dependent variable, Online and demographics as independent variables, what do you find? The mean from this population is positive 1.11, the whole population However, huge SD shows a large discrepancy around the average 272 , based on a number of possible factors Recommendations During an economic recession it may seem counterintuitive to get rid of what may be a lifetime customer. A possible solution would be to segment the customers by profitability, charging fees for low-end customers and waiving fees for high-end customers. A number of banks have instituted minimum balance deposits in order to discourage the unprofitable customer and reward points to loyal customers. Managing the business relationship is crucial. Having access to demographic information would enable

Pilgrim Bank to enhance the customer relationship and experience, in an effort to channel the unprofitable customers to profitable channels and allocate the banks resources accordingly.