Infinity bank was one of the 10 largest banks in the UK with over 1800 retail branches. However, due to the change in the nature of the banking industry since the 1980’s Infinity bank had seen a consistent drop in its profitability. Deregulation of the industry had been one of the major changes that had taken place during this time which had increased the competition in the industry. Even though Infinity had followed other major banks in responding to this challenge by cutting costs, closing branches and making use of information technology, its results were far worse than others.
Since retail banking was a major source of their costs as well as revenue, they conducted a branch efficiency review which pointed out issues with underperformance and wastage of resources. Another issue that cropped up was that branches did not know which the most profitable products were. After conducting their first costing activity to understand product profitability they found out that Current accounts, which was their main product, were highly unprofitable. Mortgages and Credit Cards on the other hand were profitable. Details of the customer segments are given in Table 1. This led them to devise a strategy called the “Supermarket Strategy” which made branch manager responsible for their own P&L and be rewarded for selling profitable products.
Product Combinations| Accounts(in Millions)|
Current Account only| 3.70|
Credit Card only| 0.50|
Mortgage only| 0.11|
Current Account + Credit Card| 4.20|
Curent Account + Mortgage| 0.39|
Credit Card + Mortgage| 0.05|
All 3: CA + CC + M| 0.31|
Total Customers| 9.26|
Table 1: Customer Segment Details
However, some managers believed that this strategy would not work and that they needed to sell unprofitable products like Current Accounts to customers in order to build relationships which would lead to the selling of more profitable products later. Accordingly, a customer profitability study was done with a sample of a 1000 customers for each product category and cross-holdings.
In the light of this data will the “Supermarket Strategy” work for Infinity Bank?
Analysis of Customer Profitability Data
While it is good to have Customer and Product profitability data, the real value can only be extracted from this data if it can be used to devise a consistent strategy, control systems and operating procedures. Keeping this in mind, it is very important to analyze the Infinity bank customer profitability data to see whether the proposed “Supermarket Strategy” is really the way to go for them.
One way that we can analyze this data is to analyze the distribution of profitability. To do this, we can use the Stobachoff curve (Storbacka, 1998). This curve gives us a graphic view of how many customers are actually profitable. To plot this curve, we order the profitability data from highest to lowest. We then plot the cumulative profitability percentage on the Y-axis and the cumulative customer percentage on the X-axis.
Figure A: Interpretation of Stobachoff’s Curve (Raaij, Vernooij, Triest, 2003) Looking at this curve can give us an idea about what percentage of customers are subsidizing others and what are the kinds of risks associated with it. This is summarized in Figure A. The four quadrants are divided by the level of subsidizing effect and the dependence on customers.
In the case of Infinity Bank, this curve was plotted for each of the 7 customer segments mentioned in Table 1. These are shown below.
1. Current Accounts Only| 2. Credit Cards Only|
3. Mortgage Only| 4. Current Accounts and Credit Cards| 5. Current Accounts and Mortgages| 6. Credit Cards and Mortgages| 7. Current Accounts, Credit Cards and Mortgages|
The Stobachoff curve for Current account customers is shown in Figure 1. If we look at this curve we see that only about 20% of the customers who hold only current accounts are...