Customer profitability has emerged as a key metric in financial services firms, driving decisions about individual customer relationships ranging from service tiering and product pricing to cross-sell and retention efforts.

*tiering-service plan in which customers can choose from several service packages with different prices and channels

Activity based management   is a system that enables an organization to manage activities and processes. Activity based management enables managers to get a true understanding of the costs and profits that are associated with a product, customer, service or business process.

Activity-based costing (ABC) is the basic tool of activity-based management.

 Activity-based costing more accurately tracks costs than traditional methods because ABC assumes the following:

Question:

How profitable are your company’s products? If your current cost-management methodology includes spreading the costs of each product over an entire product line, how do you know the true profitability of any single one? To get beneath the spread and unravel the profit mystery, consider activity-based costing/management (ABC/M).

Answer:

Sales revenue alone is an insufficient indicator of profitability. But an activity-based approach to identifying costs associated with each product or service can disclose how profitable each one really is.

Question:

How will a performance management information system employing activity based costing ("ABC") improve my bank's process of planning for, reporting about and analyzing retail customer profitability?

Answer: 
 
Your retail bank's financial success is determined by how well it chooses, attracts, and profitably serves and retains its customers. Profits derived from customers indicate how successfully this is being done. The process of planning for, reporting about and analyzing customer profitability is referred to as "the Customer Profitability Process" or "CPP".

1. What is the profit contribution from each of the served retail market segments (e.g. small business, high net worth, middle market consumers)?
2. How does customer profitability from the middle market vary by delivery channel (e.g. branch type or location, telephone, online banking)? Is there a clear mix of products/services and channels that maximizes current customer profitability (e.g. wealth management and mortgages through upscale branches and payments via online banking for the high net worth segment)?
3. Are there groupings within the customer classifications that show distinctly different profitability characteristics by product/service and channel combinations?
4. Is there significant variance from target profitability? If so, is it coming from a particular segment of customers? Is there a cost or revenue problem in serving particular segments? If so, is where is it located?
5. Does a given customer contribute enough profitability to merit enhanced service?
6. In what customer segments is the bank gaining or losing business?