for which they are willing to pay extra so that the service provider specifically targets

its services to meet such customer’s needs. Identification of high-value customers has
become rather easy through the use of computer technology; therefore, any failure of
the firm to identify such customers and provide them and personalized service can
severely harm the interests of the organization (Ibid).

Ross (2005) elaborates that Internet has an important role to play in delivering
customized responses in the market by distinguishing good or profitable customers
from the bad or unprofitable ones. Having established a customer base, it becomes
convenient for the business to provide individualized response based on the
expectation of customer profitability. A survey performed by Deloitte Consulting
found that leading banking companies keep a competitive edge by identifying their
most profitable customers and provide specifically individualized responses via
Internet to create “digital loyalty networks.” These networks enable the organization
to manage the investment and financial portfolio of the loyal customers and provide
them with services in the long term equivalent to their profitability (Ibid).

2.3.1. Profitability Segmentation

Storbacka (1994) insists on the importance of market segmentation as essential to the

spirit of marketing as has been emphasized by Smith (2006) in the Journal of
Marketing. Nevertheless, segmentation to be carried out on the basis of customer
profitability is a rather new development and his leads to differential treatment to be
handed out to different customers (Zeithaml et al, 2001; Leverin & Liljander, 2006)

Gurau (2003) states that since customer profile and transactional history is required
for the application of CRM system, it becomes important for the company to collect
all possible information about its customers. Therefore, application of CRM
procedures is based on the existence of historical data as pre-requisition for the
identification of important market segments and accurate profiling of customers. This
involves using either online automated systems that record history of customer-firm
interactions i.e. the historical data or procuring the necessary information from a third
party like a specialized market research agency (Ibid). Thearling (1999) and
Wundermann (2001) concur about the aspects that need to be addressed while using
profiling and segmentation methodology:
• Healthy data about transactions collected systematically and updated
regularly;
• Presence of strong databases and data storage abilities;
• Established systems of data retrieval and data delivery;
• Efficient data mining tools specially designed to meet the requirements of the
business;
• Complete information about costs involved, which include the process cost,
the cost of the physical product and the service cost;
• A representative business model signifying the company-customer interaction
and the variations in the customers’ life cycle or that of the business. (Gurau,
2003)

Storbacka (1997) conducted an empirical study involving two Nordic retail banks and
discovered the segmentation strategies of both banks to be based on relationship
volume and absolute profitability. The total worth of the customers’ annual average
deposits and loan balance amounts to the relationship volume, while customer’s
relationship revenue less the relationship costs over a year can be taken as the
measure of absolute profitability. Based on different levels of all volume and
profitability six important segments were ascertained. The low volume, unprofitable
customers formed the least valuable segment. Storbacka (1997) advised pumping up
efforts for improving the volume of such customers or to alter the nature and/or price
of transactions with such customers in order to enhance the relationship revenue and
reduce the relationship costs. This has been reiterated in various other studies
(Zeithaml et al, 2001). Conversely, high volume, profitable customers comprised the
most attractive segment and epitomized a major chunk of total profits derived from
the overall customer base Storbacka (1997) underlines the importance of forestalling
any possible customer defections from this group so that the overall profitability of
the customer base can be maintained or even enhanced. In a yet another study,
Reinartz and Kumar (2003) advise grouping the customers on the basis of share-of-
wallet and profitable lifetime duration, and creating specific strategy to meet the
needs of each group (Leverin & Liljander, 2006).

Gurau (2003) posits that when segmentation is made on the basis of profitability, it is
important to highlight the strategic priority of each segment:
• Customer A, represents high-value with little or no loyalty, underscoring the
need greater attention, since there is immense risk of profitable and valuable
customers being lost.
• Customer B, represents the strength of the company. This group requires
attention by way of appreciation for their contribution to the success of the
organization.
• Customer C, symbolize low value with no loyalty and do not represent long-
term potential. Their defection to the competitors would not amount to a
major economic loss for the company. The customers of this group are rather
opportunistic and price oriented.
• Customer D, represent a group of lower value but loyal customers, where the
company ends up over servicing such customers leading to unprofitable
situation for the company in the long-run.

Gurau (2003) accepted that it was the firm’s profile and its strategic objectives which
determined the definition and analysis of each customer segment in terms of its
profitability. It is possible that the company may find some of the low value/loyal
customers to become highly profitable customers in the long term, either by
increasing their overall purchases or by word-of-mouth endorsements.

Leverin and Liljander (2006), however, contend that any bank has only a small group
of profitable customers who hold immense importance for the bank, and therefore,
need to be given special attention while meeting their needs and requirements
compared to the members of other customer groups (Ibid). It is a matter of general
perception that merely 20% of the bank’s customers contributes to 150% of its profits
(Sheshunoff, 1999). Therefore, it becomes imperative for financial institutions to
enhance their profitability by allocating their valuable resources to these important
customer segments. As a matter of fact, banks can enhance the utility of Internet
banking by targeting the 20% customers with their Internet services. Cisco Systems
(1999) and Brennand (1999) found in their research studies that compared to the
traditional banking customer, Internet banking customer contributes two or three
times more profits. Higher deposits, availing large number of banking products, low
attrition and lower service cost mark Internet banking customers vis-à-vis the
traditional banking customers in a similar demographic profile. These customers are
typically better educated and belong to higher income groups (Ibid). Thus, it can be
safely said that for banks to develop lucrative market segments, it is important to
identify the most profitable Internet banking customers and target their services to
such customers. It is paramount to actively consider such customers or else face the
danger of competitors overtaking the potentially profitable segment (Siaw & Yu,
2004).