Improve Top Line Revenue with the Right Customer Risk Analysis: Rethinking Customer Profiling after the Recession

Originally published January 18, 2010

The Recession is Over

Fortunately the word is out – the recession is over! And with the Dow popping back through the 10,000 mark, who is going to argue? Companies who have been holding their breath until consumers’ buying power returned have the opportunity to work on their top line revenue again. This should be good news for everyone! But wait until they see what their consumers’ profiles look like now…what used to be a 700+ credit score consumer is now the transitional employee with less than a year at his/her current company. The 600-700 scorer now has a couple of late payments because their credit card interest spiked, forcing them to make painful choices between partial versus late payments. The lower ranks of the credit-worthy consumer, under 600, who didn’t have a lot of financial savvy to begin with, now find themselves with serious credit issues. Companies will find that the consumers they expect to grow their top line revenues will be more financially challenged than ever before.

Keys to Success

As Pollyanna-ish as it may sound, it is possible for companies to profit under these circumstances. By tweaking their credit philosophy as the economy emerges from this deep recession, companies can maximize revenue opportunities. It only takes the right attitude and a reasonable amount of data to do it. A survey of some profitable companies in “fiscally risky” industries can provide valuable insights for companies with a much less risky business model. The keys to success at the industry leaders appear to be the same things upon which most companies pride themselves: respect for the customer, honesty, a good product and an equally good risk assessment. The winners are the companies that recognize:
  • Your consumers need your product to better themselves

  • Your consumers need your price to match their budget

  • Your product at the right price, especially on credit, can improve their circumstances

Tiered Products

No, not everyone will qualify for the product they love at the company’s price. That’s why companies have tiered product features with discounted prices to match the budget-conscious consumer and premium prices for the high-end consumer. By combining tiered products with a proprietary consumer risk analysis based on the company’s historical receivables data, a company can prosper from many consumers who might have previously been rejected. Think about the revenue impact of keeping just 10% of your customers who fell one rung on the credit-worthiness ladder!

Real Life Results

A leading car financing company was confronted with rapidly changing customer qualifications that threatened to significantly impact their profit opportunities. Their existing financial assessment models yielded recommendations that did not fully capture the current and emerging risks of customer financing, resulting in unacceptable loan charge-off rates. The financial performance trends of the company demanded an in-depth analysis of this rapidly changing situation to provide specific data-driven solutions.

Leveraging the customer information stored in their historical receivables data, the company created a new credit-risk scorecard to provide real-time assessments of the rapidly changing customer credit-worthiness. The newly developed scorecard algorithm enabled the company to significantly improve the percentage of credit-worthy loans and greatly reduce customer charge-offs.

The results? A $24 million annual improvement in monthly charge-offs! By a combination of real-time analysis of the quality of the customer loan applicant pool and early warning reports for deterioration in the existing customer profiles, the company was able to craft a profitable strategy for extension of rates and terms for new loans to an underserved customer market.

How To Do the Analysis?

What kind of investment will it take to keep just 10% more customers at minimal increased risk? No one can answer that question in a vacuum, but here are some guidelines for your company to follow as you evaluate your options, in increasing order of complexity:

Applied Analytics Engagement – If you’ve got the data but you need help creating the proprietary algorithm, that’s an “applied analytics” engagement. This usually takes 1-2 months in a 'once-and-done' format and averages around $12,000–$20,000 depending on the data volume and quality.

Technical Design Review Engagement – If you’ve got a data warehouse but it doesn’t seem to meet your needs, then you’ll benefit from a short “technical design review” to understand the steps to get you there. This usually takes 1-2 weeks and averages around $5,000–$12,000 depending on the platform and data quality.

BI Strategy Engagement – If you don’t have a data warehouse and are starting from scratch, it’s important to realize that the design is more important than the platform or tool which will house the data. Business intelligence (BI) is the next generation of data warehousing. A business intelligence strategy can be done in 3 weeks and averages around $25,000–$60,000 depending on the breadth of the interviews and depth of initial design. This investment is intended to provide a fairly accurate estimate of a targeted BI implementation.

Targeted Business Intelligence Implementation – Assuming you have completed the strategy engagement, this targeted BI Implementation will take approximately 90 days and averages around $200,000–$700,000 depending on the company’s current technology infrastructure, resource skill sets and need for consulting assistance.

Full-Scale Business Intelligence Implementation – The sky’s the limit.

Two Avenues to Expand Sales

The recession may be over. Or it may be replaced by a “jobless recovery.” But one thing is sure, most financial consumer profiles have deteriorated. Consumers’ buying power has been damaged by the recession and companies have two avenues in order to expand sales: 1) Tier products to match the consumers’ budgets, and 2) improve receivables risk assessments.

Product tiering is the bread and butter of marketing, but the most profitable leaders will also use proprietary consumer risk analysis based on the company’s historical receivables data. Combining the right product for the consumer’s situation with a “personal affordability assessment” offers the best formula for profitable growth. The additional top-line revenue of this approach should more than offset the cost of implementation.

SOURCE: Improve Top Line Revenue with the Right Customer Risk Analysis: Rethinking Customer Profiling after the Recession

  • Christina Rouse, Ph.D.Christina Rouse, Ph.D.

    Christina is the Chief Architect at  Incisive Analytics, LLC. An improvement catalyst, Chris applies business intelligence strategy for performance improvement. Leveraging two decades of data experience on a broad range of technical platforms, she developed a technology-agnostic approach to business intelligence consulting. Clients rave about Chris' unique blend of business acumen, technical architect and trainer skills. She may be contacted at  Christina.Rouse@IncisiveAnalytics.com.

  • Janet Kuster, MBA, PMPJanet Kuster, MBA, PMP

    Janet is the PM & Delivery Manager for Incisive Analytics, LLC. As the leader of the core delivery team, Janet ensures high quality delivery on all client projects. She is well known for pushing her client teams’ thinking forward while maintaining focus on the client’s integrated strategic priorities and, of course, the critical path. Janet’s collaborative and diplomatic style consistently enables her to deliver excellent product value and achieve superior knowledge transfer in organizations focused on innovation and performance improvement. She may be contacted at Janet.Kuster@IncisiveAnalytics.com.

    Editor's Note: More articles and resources are available in Janet's BeyeNETWORK Expert Channel. Be sure to visit today!

Recent articles by Christina Rouse, Ph.D., Janet Kuster, MBA, PMP



 

Comments

Want to post a comment? Login or become a member today!

Be the first to comment!