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New Account Prospecting Analysis

- A strategy for optimizing retail banking product mix

By: Raj Gaonkar

The U.S. banks have integrated into their product mix activities that extend well beyond traditional deposit taking and lending. They engage in a wider array of financial activities than at any time in the past. Banks have shifted their product mix toward fee-based financial services such as insurance and mutual funds. Fee-based products tend to improve profitability and to minimize revenue volatility. Bank customers are not all alike. Due to current product diversity, mass marketing becomes ineffective. Marketing to smaller homogeneous groups has proven to be more productive than mass marketing. Based on customer behavior and income, the customer population is subdivided into market segmentations. Accordingly, banks develop their marketing strategies to meet the needs of specific segments. Product mix, product cost and price are interconnected. Product mix is determined by the price and cost differentials of individual products. The usual tendency is to maximize the price and to minimize cost. Most banks use both cost and value based pricing constraints to achieve best pricing levels. The cost minimization is achieved by improving operational efficiencies. An optimal level of product mix is the most profitable mix that can be achieved through an effective new account prospecting strategy. The customer perceived value of products is the main factor that controls the product sales volume. Banks are making every effort to understand their customers and accordingly offer appropriate products. The product mix should be viewed as an integrated package of products that reflects the characteristics and needs of a market segment. The product mix objective is to maximize banks profitability by offering highest value products to their targeted customers. Banks are reducing excess capacity to minimize cost. If a bank is on the production-possibilities frontier (limited resources allocation to multiple products), then shifting resources to sell more of mortgage products results in selling less of deposit products. The dynamics of product mix or marginal rate of transformation (interchangeability of products) are based on product cost and pricing attributes. To achieve the highest-level of economical efficiency, product mix has to collectively generate maximum revenue at minimum product cost. Faced with gradually growing competition, banks are pressed to review their product mix and pricing strategies to improve profitability. To reflect dynamics of customer demand, banks continually change product prospecting strategy, which in turn changes product mix. The main objectives of account prospecting is to minimize the cost of account origination and maximize revenue by prospecting the most favorable product mix One of the complex issues bankers face is to develop account prospecting strategy. In most cases product mix analysis approximates the forward looking growth of revenue estimates. Then using a what if scenario, the estimates are adjusted to a desired level. Developing a new product mix is the most challenging part of an account prospecting analysis, as it involves improvising the account prospecting strategy to change the existing paradigm. An account prospecting strategy based on sound product mix analysis is the key to a banks profitability and business growth. Without proper tools, an account prospecting analysis is a time-consuming proposal. The retail banking business is technology driven with extremely advanced software applications and modern methods of operations. A sound optimization model supported by a well organized database containing accurate financial and operational information can arrive at the desired revenue goals.

A market analysis of product sales and cross sales is part of the Product Mix Analysis. It is required of a financial institution to maintain a certain asset and liability ratio, which constrains the product mix to maintain the ratio. Other factors such as customer loyalty, perceived quality, and brand recognition could also be important factors of product success. Commonly, product mix strategy is focused on economies of scale. Such a strategy can be a profitable one but may not be the best possible solution. A joint effort between marketing group and a cross functional team is an ideal approach for the account prospecting analysis. Marketing programs should actively involve branch staff to promote a profitable product mix. Assigned sales personnel should be on incentive programs based on product mix and not just on the quantity they sell. The data collection for a product mix analysis is time consuming. Many times the data can be obtained through other supporting studies. Gathering and structuring the necessary information requires an extended effort, depending upon the complexity of the data source and purpose of the analysis. The account prospecting analysis is an ongoing dynamic study. Every few months the study is repeated to update changing business scenarios. ProductFlow Consulting LLC has developed a model, the New Account Prospecting Analyzer (NAPA), which establishes the existing product mix baseline and provides the most profitable product mix solution, using best practice methods. The model develops unit costs for new account prospecting and projects revenue for an intended product mix. NAPA can be used to run what if scenarios. An optimal product mix is a theoretical solution, which is derived from the generalization of contributing factors. Exogenous forces that act upon banking business often affect optimal solutions. Costs and revenue may deviate from the ideal product mix solution. NAPA is an efficient and economical tool for repeatedly fine-tuning the product mix that enables one to micromanage the product mix objectives. Data collection and analysis are the most time-consuming periods of the product flow analysis. In order to avoid repetition of such efforts, banks tend to maintain the same product mix position for a prolonged time. NAPA standardizes data to minimize any ambiguity during the data collection phase. Due to a structured analytical methodology, the product mix solutions are iterated with little effort. New account prospecting strategy plays a critical role in the strategic and business planning process. NAPA can objectively translate a qualitative-natured strategic planning process to quantitative terms. It is a generic model, which can be implemented in a short time with minor modifications to meet the specifics of a given bank. The consultants of ProductFlow play a key role in implementing and training the bank personnel. The consultants are knowledgeable about the financial engineering methods in order to help generate valuable scenarios and to advise on relevant data collection for rapid product mix analysis.