How Morgan Stanley Uses Database Marketing Tactics to Avoid the Customer Attrition Death Spiral

“By not understanding a premier client’s value, companies often do not offer these clients the appropriate level of service and offerings commensurate with their value. This can result in the premier clients effectively 'subsidizing' the less profitable and unprofitable clients," says Tony LoFrumento, Executive Director of Business Intelligence and CRM for Morgan Stanley.

"In this situation, premier clients are far more likely to be 'cherry-picked' by knowledgeable competitors. If this occurs, an organization mix of clients will move more towards the lower value clients.”

In effect, it's a “slow death spiral.”

Companies compound the problem by basing marketing campaigns on those inaccuracies: in the mistaken belief that a certain type of client is profitable, they target that type of consumer, and may end up decreasing overall profitability even while bringing in new clients.

So how can you be sure that the clients you *think* are your most valuable are really the most profitable?

LoFrumento shared the steps he takes to calculate client profitability/lifetime value, and how Morgan Stanley uses that data to offer the appropriate level of services to clients.

-> 4 Steps to determine each client's profitability

Step #1. Bring all account data for each client into one place.

"Say you're at a big bank, you have a credit card, an investment account, a mortgage, and a checking account," LoFrumento says. "If [the bank] doesn't have the ability to view you holistically, they'll view you as four different clients. That's underestimating your value to the firm."

Everything that has to do with one client -- all the different accounts and transactions -- needs to be brought together into a single repository.


Step #2. Assign every dollar of revenue and expense to individual clients.

Revenue is relatively easy to assign, and most companies do it well, he says. But when it comes to expense, companies find it difficult to pull together accurate cost information.

Doing so "can cost money and time, but without good cost information, it's 'garbage in, garbage out,'" he says. "The quality of client profitability results are only as good as the cost information used in the calculations."

To allocate cost information, make sure that both fixed and variable expenses components are attached to each client.

"Say you have a P&L with 50 lines of expenses. You develop an allocation methodology for each of those 50 rows," LoFrumento explains. "Some of those are easier, like transaction expenses."

For example, if a client uses the ATM five times with a transaction cost of X amount each time, you apply a variable expense to that client of the transaction cost times five.

"The harder ones are like the corporate headquarters," LoFrumento says. Those are the fixed costs, which also need to be allocated to individual clients. "So, say every client is assigned $30 fixed."

Apply your methodology logically and consistently, LoFrumento says, and you'll get an accurate look at the profitability of each client.


Step #3. Calculate profitability down to the lowest account level

When you're building a calculation engine that can run through all accounts to determine profitability, make sure you start at the lowest level (for example, a single account rather than a household.)

"If you do that at the lowest level, you can build it up for any way management needs to see it," LoFrumento explains.

For example, you can organize records by client segment to see the most profitable segments to target in marketing campaigns, but you can also look at them on the level of a single account.


Step #4. Model out the lifetime value of clients

Once you've become relatively sophisticated at calculating current profitability for each client, you can begin to look at lifetime value by applying demographic, attitudinal, and retention information.

"Two clients could have the same level of current profitability. But one is a young surgeon just coming out of his residency and the other is a 70-year-old about to retire (and begin withdrawing funds). The projected lifetime value of the two clients from today going forward would be dramatically different," says LoFrumento.

Again, this is useful in truly evaluating how successful your marketing campaigns are: "You can say, We're going to bring in X number of this type of client, Y number of this type of client," he says, and quantify the total profit/value they will generate for the organization. "Then you have meaningful measures of the campaign’s results."


-> Share info company-wide and use it effectively

Once you have a true picture of each client, score the database with levels of profitability (for example, A, B, C, with A being most profitable and C being the least), then share the data across all levels of the company.

This could be a central warehouse that all personnel can access, from top-level management to client service reps.

To make the most of the information down to the client level, management can develop protocols and procedures to address each level of client (such as what fees can be waived, etc.).

"A person could have only $1,000 in their account, but their spouse could have $2 million," LoFrumento says. "So the household should be coded with the A, and with that knowledge, you'll make better decisions."

"This information helps you know who your top clients are and who to target," he explains. "It helps to focus the organization on shifting the client mix going forward."