You are currently browsing the tag archive for the ‘profitability’ tag.

Odds provide a useful frame for considering that important business question: where to set the score cut-off.

The basic business logic is to set the cut-off at the score where marginal profitability equals zero – i.e. if you moved the cut-off any lower you would be losing money on each additional applicant so approved, whereas if you set the cut-off higher you would be leaving money on the table. Easy to say, but not so easy to do, because the concept of marginal costs is a movable feast depending on accounting treatments and assumptions about fixed and variable costs, as well as the context within the current business strategy. 

But anyway, the odds allow one to frame the question in an easy-to-grasp way: how many goods does it take to offset one bad? If the answer is 15, it means that your tipping point is at 15:1 odds, which can be converted to the score as per previous post. This would then be the cut-off. This post assumes a simple automatic accept/decline score, ignoring ‘refer’ bands and contested decisions and overrides etc. 

To arrive at “15” would involve a full revenue/cost modelling through the product cycle (lifetime customer value?), for 15 goods versus 1 bad. Naturally the “cost” that dominates here is the credit loss of principal (LGD) for the default.

Don’t pay any attention to the example value “15” used above – it’s going to make a lot of difference what product is involved, secured vs unsecured, limits, etc.  

Google Advertisement

We get older

Some Rights Reserved


Get every new post delivered to your Inbox.

Join 388 other followers