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Projection Model Helps Card Issuers Choose Customers
A tool is at your disposal to assist you in limiting your marketing efforts to only those customers who show the greatest potential for generating revenue in the next 12 months. This tool will also help you tailor your offers to customers on the basis of their future earning potential.
This portfolio management tool offered by Trans Union Corporation (Chicago) can help credit card issuers target new and existing customers who represent the greatest potential for revenue generation. This tool, called Revenue Projection Model (RPM)® was introduced in 1993 for the prescreen environment and in 1995 for the account management and on-line credit report environments.
Trans Union is North America's leading consumer information service company.
It is a network of more than 250 credit bureaus. The company's products include credit reports, risk scoring models, target marketing systems, preemployment evaluation reports, collection tools, skip tracing and search tools, customized lists, transaction services, and other information-based products and services for a broad range of industries.
"RPM is designed to project 12 months of revenue by rank order," explains Michelle R. Blechman, director of the Acquisition and Risk Management Services Division. "That is, it rank orders consumers by the amount of revenue they are likely to produce over the next twelve months.
The program was developed using bank card data, but it has also been validated for other types of revolving credit portfolios. Credit characteristics in RPM include categories such as time since credit was established, current levels of activity, current levels of credit utilization, and payment information. Each element is weighed, and the values are added together to arrive at a final composite revenue-generating potential score.
Before discussing how RPM can be used in the three specific environments, Blechman emphasizes the importance of using RPM in conjunction with an effective risk scoring tool. "RPM projects accumulated revenue, not necessarily realized revenue," she explains. For example, if a particular consumer revolves a lot but doesn't pay, this person would have a high RPM score but would not be considered profitable. "Again, use the two scores together to determine the appropriate risk/revenue trade-off," she says.
Prescreen Environment
Using RPM in the prescreen environment helps issuers determine, prior to mailing a credit offer, whether the individual will likely produce revenue for them. RPM can be used in three different ways in the prescreen environment:
- Universe expansion. Many issuers report that they are running out of names to solicit, because most eligible consumers have already been solicited to the point of saturation. By using RPM, issuers may now be able to cautiously go outside their risk score cutoffs, attracting a slightly riskier consumer whose revenue potential is sufficient to outweigh his or her risk level. In other words, the possible profits outweigh the possible risks.
- Weeding out. Issuers can also use RPM to eliminate consumers whose revenue potential is so low that they would never be profitable. "Issuers can cease mailing to people with the lowest revenue scores and focus their attention on the medium-to-high score range, and then determine risk level," Blechman explains.
- Target marketing. Issuers can combine risk information with revenue potential to begin targeting offers accordingly. For example:
- If a consumer has a high revenue potential and is somewhat risky, an issuer may be able to attract this consumer with a minimal offer, thus limiting exposure.
- If a consumer has a high revenue potential and a low risk potential, but tends not to respond to offers, an issuer may be able to attract this consumer with a premium offer that would encourage a response.
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Existing Portfolio Environment
Using internal master file data, issuers can often gauge the ongoing profitability and value of existing accounts if there is sufficient activity and balance information.
However, if an account has been inactive or only seasonally active, or traditionally carries a low balance, the internal data may underestimate the potential of that account. "RPM can give the issuer a more complete picture of those customers," explains Blechman. If RPM shows that some customers evidence greater potential, such as using another company's cards more actively, the issuer may want to implement some balance-building strategies with them, such as offering higher limits, more attractive interest rates, balance transfer opportunities, additional "bells and whistles," waiving annual fees, upgrading the account, or even cross-selling.
The issuer can also target specific customers for account retention. "If the consumer is generating a low amount of revenue for the issuer, but that consumer has a high RPM score, it indicates that the issuer has a 'small share of wallet' and may need to implement some aggressive retention activities," she notes.
On-Line Environment
Finally, issuers can use RPM with hard-copy credit reports to assess risk in conjunction with revenue potential. Then they can make the determination as to what the appropriate line of credit is to assign.
Validating RPM
When using RPM, it's important to validate your scores internally. "RPM does not offer a 'good-bad' prediction," emphasizes Blechman. "There are no absolute odds attached to the score. Rather, it simply rank-orders the consumers. It lets you know, relatively speaking, who has a high revenue generation potential and who has a low revenue generation potential." Since the program is not tied directly to the issuer's own portfolio, the issuer cannot initially identify any particular score by revenue dollars.
"Over time, you can do you own validation, helping you identify, in terms of actual dollars, what each score means," she continues. Thus, if a consumer has an RPM score of 3, an issuer can determine whether this represents sufficient revenue compared with the risk. (RPM scoring is 0 to 9, with 9 being the highest).
Blechman recommends doing occasional mailings to the lowest revenue generating groups, using them as a control group. "This allows you to continually revalidate," she explains.
Results -- RPM has received good responses from its users. "They are able to continually refine their strategies as a result of our system," Blechman states. "They are having success weeding out accounts that are not going to be profitable, and are instead designing strategies around the accounts that do have profit potential."
Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.
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