Table 17.5 Six Credit Card Customers and 1 Month of Data

Estimated revenue is a good way to compare different customers with a single number. The table clearly shows that someone who rarely uses the credit card (Customer 1) has very little estimated revenue. On the other hand, those who make many charges or pay interest create a larger revenue stream.

However, estimated revenue does not differentiate between different types of customers. In fact, a transactor (Customer 5) has very high revenue. So, does a revolver who has no new charges (Customer 6). This example shows that estimated revenue has little relationship to customer behavior. Frequent users of the credit card and infrequent users both generate a lot of revenue. And this is to be expected, since there are different types of profitable customers.

The real world is more complicated than this simplified example. Each customer has a risk of bankruptcy, where the outstanding balance must be written off. Different types of cards have different rules. For instance, many co-branded cards have the transaction fee going to the co-branded institution. And, the cost of servicing different customers varies, depending on whether the customer uses customer service, disputes charges, pays bills online, and so on.

In short, estimating revenue is a good way of understanding which customers are valuable. But, it does not provide much insight into customer behavior.

Segmentation by Potential

In addition to actual revenue, each customer has a potential revenue. This is the maximum amount of revenue that the customer could possibly bring in each month. The maximum revenue is easy to calculate. Simply assume that the entire credit line is used either in new charges (hence transaction revenue) or in carry-overs (hence interest revenue). The greater of these is the potential revenue.

Table 17.6 compares the potential revenue with the actual revenue for the same six customers during one month. This table shows some interesting characteristics. Some not-so-profitable customers are already saturating their potential. Without increasing their credit limits or interest rate, it is not possible to increase their value.

Table 17.6 Potential of Six Credit Card Customers