Please Don't Shoot the Customer, Part 2

In this, the second of a three-part series on customer profitability management, we’ll look at a real-life case study in the retail brokerage business.

To recap part one: As many businesses look at changing customer mix as the key to improving profitability — attracting big accounts and shunning smaller clients — smart businesses are learning to streamline their internal cost structures and make their employees more effective to improve profitability and efficiency in serving all types of customers, large and small.

Killer Bees

Most readers of this column are probably already familiar with “barnacles” and “butterflies” as strategic customer segments, a concept popularized by loyalty guru Fred Reichheld.

For those not familiar with the terms, barnacles are loyal customers who tend to stick with the same vendor, due to personal preference or taste, affinity to the company or brand, or just plain inertia or habit. Butterflies are avid comparison shoppers who devote their time and energy jumping from one provider to the next in a never-ending search to alight upon what they perceive to be the sweetest deal. Many businesses foolishly spend money on big advertising campaigns and price discounts only to attract butterflies. Instead of wasting time and money to acquire one-time, fickle customers, firms would be a lot more profitable if they focused people, organizational culture, and operations on understanding, identifying, and attracting barnacles.

Here at Reuters’s global retail brokerage solutions group, where we help securities firms transform from transaction-based brokers to fee-based wealth managers, we’ve discovered a new customer type: “bees.”

Bees are high-maintenance (thus high-cost) clients. They demand lots of time and attention and dislike the concept (much less the practice) of self-service. The biggest problem bees create in the retail brokerage business (as in other service industries) is they rob professionals of their most valuable asset: their time.

As a result, bees can push the traditional 80/20 rule of customer profitability to dramatic extremes. At the private client group within a leading brokerage firm, an initial analysis of customer profitability indicated less than 10 percent of customer accounts represented over 90 percent of the firm’s profitability.

Reactive Low-Value Tasks Versus Proactive
High-Value Tasks

Why such an imbalance? One could say it was a “bee” problem. Another way to look at it is as a productivity and time management issue. Financial advisors were spending all their time on low-value, immediate (tactical) tasks instead of dedicating time to high-value, strategic functions.

The securities firm had invested a great deal of money to provide its advisors with a comprehensive, full-featured financial workstation that offers lots of content and sophisticated tools. Because there was so much content, most users spent their time looking for information. This drove up costs and lowered productivity. Since the sophisticated advisory tools were not integrated into any type of formal workflow, most financial advisors never learned to use them.

As a result, the advisors spent most of their time searching for information to respond to simple requests for real-time prices and research from the majority of their clients (serving the bees) instead of proactively pitching higher-end strategic accounts with new ideas (attracting the barnacles).

It seemed they always had time to perform these low-value, reactive task but never enough time to do what they should be doing: building high-value relationships by demonstrating value, such as proactively suggesting how to rebalance client portfolios to improve total return, maximize risk/return ratios, or improve tax efficiency.

Next, we’ll look at successful solutions and strategies to turn this situation around: workflow solutions for knowledge workers.

Got an interesting insight, opinion, or real-world example to share? What are your thoughts? Please write me at [email protected]. Stay tuned for part three.