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 ban s with !ocused product o!!erings" ! RBC is unique in how it computes the li!etime value o! its customers. a. #hat additional insights are li ely to come !rom li!etime value computations !or customers as opposed to annual customer pro!itability numbers" b. $hould RBC compute li!etime values at the segment level or the individual customer level !or strategy !ormulation" %ow about strategy e&ecution" " 'o you agree with RBCs decision to withhold pro!itability( potential( and segment in!ormation !rom its !ront-line employees" # $hould Reich ma e the car loan to )*iece+ and i! so at what interest rate" $ #hat should RBC do about customers who are unpro!itable because they use the retail branches and ,B- machines !or bill payments" % .ne o! the new concepts we have covered in this case is pro!it potential. It is sometimes called li!etime value o! a customer. /he case tal s about two methods to compute pro!it potential. /o concretize our understanding o! these two methods we will analyze the !ollowing two numerical e&amples. a. ,ssume RBC has only three segments o! customers based on age0 123 45 to 67 years old( 143 68 to 85 years old( and 163 82 to 97 years old. /he distribution o! average annual customer pro!itability in dollars !or each o! the three segments is given in the /able below. #hat is the pro!it potential or li!etime value o! the niece i! the ban estimates that she is in the 65th percentile !or current pro!itability" Recall that the niece is currently aged 46. :se a discount rate o! ;< and the !irst method described at the bottom o! page 24 o! the case. ,ssume that there is a 7< chance o! customer attrition each year.

A&erage annual customer profitability distribution

b. /o understand the second method( we will consider the !ollowing e&ample. ,ssume that RBC has only two products = Car >oan 1C>3 and Credit Card 1CC3. /he annual pro!itability !or the two products !or the niece is li ely to be 1?2553 and ?2555 respectively given her pro!ile. /hus the pro!itability i! the niece too both products would be ?@55. RBC has made the !ollowing observations !or customers in the aged 45-67 years segment0 I! they have only a car loan at the end o! a given year( the probability o! acquiring a credit card during the !ollowing year is 75<. /he probability o! losing even this one product is 45<. /he probability that the customer retains the same product !or the subsequent year is 45< and there is a 25< chance that the customer swaps products. , customer who buys both products in a given year has a 95< probability o! buying both products in the subsequent year and a 25< probability each o! dropping either or both products. , customer or e&-customer who buys no products !rom the ban has a negligible probability o! buying any product !rom the ban in the subsequent year. /hese observations are summarized in the matri& o! probabilities in the /able below. I! the niece had only the car loan in year 2( what are the e&pected pro!its !rom her in year 4" #hat would the e&pected pro!its !rom her be in year 6" #hat is the present value o! the pro!its during the three years using an ;< discount rate" Arobabilities !or year tB2 product mi& !or all possible combinations o! product mi&es !or year t.

c. #hat in!ormation could RBC use in the real world to estimate the probabilities that we have assumed in the table above" d. #hat does the matri& o! probabilities above imply about cross-selling potential and customer loyalty as a !unction o! number o! products purchased" e. #hat are the pluses and minuses o! the two methods described above" !. %ow hard will it be to implement the second method !or 45 products" RBC computes only a !ive-year value o! each customer 1instead o! li!etime value3. #hy do you thin that is"