American Investment Management Services - Case Study Example

The HNW should be by the bare minimum at least 2% unprofitable. The company needs to look at its segmentation once more. The most profitable segment of the company is those trading between 0.5 to 2M at a value of $96.6 followed by core clients trading between 100K and 500K. The other segments are producing minimal profits except for a section of retirees, and it can be estimated that these segments will be in losses once managerial costs have been deducted. From the company`s perspective, the bottom 10% of the households in all segments were making losses. Retirees trading less than 100K produced the highest loss of ($16.1) which meant that this segment had 55% of unprofitable clients. From this data, it is clear that there is a section that either need revamping or the company stops putting so many resources on them.

One of the segments that the company needs to put its eyes on is the core segment whereby there are large portions that are hugely in losses. An example is the young professionals where 82% of the clients are in losses. Whereas the strategy is to maintain these clients and they become future HNW clients caution should be taken to ensure that they are not consuming a big portion of the profits. From the 80/20 rule chart, it is clear that only 50% of the clients are making the company profits whereas it is expected that 80% would be making profits. This needs to be looked at with the aim of reducing the loss-making segments.

Loss per household

HNW

AT

RETIREE

CORE

2M+

0.5M - 2M

(60-200)

(100-500)

YP

BOOMER

Revenue Per Household

Mutual Fund Feeds

1,381

1,415

192

335

120

420

Brokerage Fees

1,404

1,586

1,452

155

275

269

Total Revenue

2,785

3,001

1,644

490

395

689

Cost

$4,174

$4,665

$3,221

$773

$1,271

$2,112

Profit/Loss

-$1,389

-$1,664

-$1,577

-$283

-$876

-$1,423

There are two conventional strategies that the organization can apply. The company could opt to increase its pricing so that the revenue caters to the expenses. The company could also choose to come up with strategies to reduce the expenses and this would lead to more revenue. In this case, we present that the company needs to have different prices for the different segments depending on the volumes. These new prices need to cater to the expenses so that there is a small profit per household or the company breaks even. This would result inro more price increase for HNW clients and a minimal increase for retirees. This is because retirees are the ones with the least losses while the HNW are contributing the largest losses per household together with boomers.

Scaling Back the Excess Capacity

            The company is proposing to scale back its clients back to 3,000,000 households as a method of reducing costs. From the case study, the expenses base grew faster from the year 1995 to the year 1999 as the company anticipated more growth in the future. This was a misstep as the households went ahead to grow by 21% whereas capacity had grown by 26%. This led to excess capacity in 1999 across all branches, call centers, online activity, and transaction processing. This meant that a lot of operations activity was being devoted to unprofitable customers which should not be the case. By reducing 3,000,000 clients it is expected that the costs will be reduced by approximately 21% as this is what had been gained in anticipation for the growth.

Recommendations

            Based on the customer profitability information it is clear that some business segments are not ideal for business but rather for strategic reasons. A good example is the young professional's segment. The company needs to maintain this segment to ensure that it retains these clients for the future. The company should then maximize its profits for HNW clients and retirees. The company can achieve this by having a different pricing segmentation for each segment where it will charge the HNW clients more than it charges young professionals. The company could also reduce the excess capacity by either applying technology or laying off employees. The number of branch visits should be reduced by conducting more transactions online.