This paper focuses on customer relationships in retail banking. Understanding customer relationships and especially the profitability of them requires the development of new concepts and tools. The paper discusses some concepts and tools available to support profitability analysis on a customer base level and on a relationship level. A tool in this context is the relationship configuration matrix, which enables us to investigate distinct relationships and segments of the customer base and develop products and pricing mechanisms in order to fully utilize the business potential of the particular customer or segment. The tools are illustrated by a case. Swedbank, the largest bank in Scandinavia, has carried out a comprehensive customer base analysis in which MIS data about 97.000 customers and market research data about 3226 customers was used. The aim was to calculate customer relationship profitability and develop strategies for ensuring the loyalty of profitable customers and enhancing profitability of the large number of unprofitable customers. Profitability was found to be a function of customers' interaction behavior and thus a pricing strategy was launched. The successful strategy was the first comprehensive and congruent pricing strategy in the Swedish market and has created a fair amount of debate.
This paper deals with profitability enhancement in retail banking. More explicitly we will focus on how banks can gain understanding of customer bases in order to enhance profits. We will argue for proper segmentation approaches, where profitability of the customer relationship is a central ingredient of the analyses. Segmentation will be a central theme and we try to show what developments are needed in order to cope with the turbulence in the business environment. The paper will be of a theoretical nature. Empirical observations will be limited, and serve more as illustrations of our approach.