Customer profitability analysis and organizational performance: case study of some commercial banks in Tanzania

This study aimed at understanding the use of Customer Profitability Analysis (CPA) and its contribution on profitability of commercial banks in Tanzania, which specifically includes identifying and examining the tools, models and techniques used by commercial banks to perform the CPA.Methodologically, the study used a convenience qualitative sampling strategy since the number of fully-fledged commercial banks in Tanzania is 40, and the researcher works in the banking sector, which simplifies access to the appropriate respondents. The study took place in Dar es Salaam for a sample of 10 commercial banks. The main data collection instruments were questionnaire, interviews, documentary reviews and researcher's own experience in the banking industry. Analytically, the research employed on a greater extent the qualitative and the nonparametric descriptive statistics method to develop the study findings. The study has four Findings. The first finding of the study show that commercial banks use CPA both at acquisition and during the lifetime of the relationship with the customer. Second, banks use the core banking system as a CPA tool with features to generate revenue and profitability reports at product and customer level, and analyzed on daily, weekly and monthly basis. Third, a relatively small number of highly profitable customers contribute to the profitability of the banks. Fourth, commercial banks use different strategies in conducting CPA including Customer Segmentation, Activity Based Costing (ABC), Computerized Software, Accounts Analysis and Time Driven Activity Based Costing (TDABC) The study recommends that; firstly, banks should conduct CPA at customer level rather than at product level so as to become more profitable and relevant. Secondly, commercial banks should employ a hybrid of the five CPA strategies to attain optimal analysis. Thirdly, commercial banks should invest in computer analytical tools to minimize manual process in performing CPA. Fourthly, commercial banks should improve on current CPA to generate more accurate and meaningful analysis. Finally, commercial banks should continuously review internal processes to address main points in order to meet satisfaction of their most profitable customers if they are to remain competitive, efficient and profitable over a long term. New knowledge from the study shows that; first, commercial banks use independent survey companies' information to maintain high quality services to the highly profitable customers. Second, commercial banks use the Target Market Criteria (TMC) for customer acquisition and maintaining existing profitable customers. Third, Price for financial services to customers is determined by using cost of fund (deposits), yield on government securities (Treasury Bills) and the level of risk in a particular segment. Fourth, all customers are important and served based on their preferred services. Finally, most revenues are generated from a relatively small number of customer save for concentration risk.