What Banks Should Do Now By Jim Alcott, Partner at Alcott Whitney
These are extraordinary times for us all. But they are especially challenging for banks. Many of today’s bank marketers have navigated through previous recessions and the S&L meltdown, but the circumstances today are more acute and the effects more far-reaching. In the face of continued economic uncertainty, restricted budgets, and substantial consumer anxiety, many are asking, “What should banks do now?”
The answers are more clear than you might think. 1. Banks must continue to market. I’m well aware that budgets are being cut to bolster loan loss reserves at many institutions, but cutting marketing too much is perilous. A recent survey by Ad-ology Research found that nearly half (48%) of US adults believe that a lack of advertising by their bank during a recession indicates the bank is struggling. In fact 12% believe their bank may not be in business much longer. On the other hand, when their bank continues to advertise frequently, 43% of consumers believe their bank is committed to do business and 30% believe their bank is competitive. The issue banks should wrestle with is not whether or not to continue to market—but which marketing activities are the most appropriate for these times.
hen consumersâ€™ banks continue W to advertise frequentlyâ€Ś
The issue banks should wrestle with is not whether or not to continue to market â€” but which marketing activities are the most appropriate for these times.
2. Help buyers buy. This may not be popular, but I believe it’s time for banks to act more responsibly. Popular perception is that banks have taken advantage of consumers by selling them products that were ultimately harmful to them. We all know that a few bad apples spoiled the bunch (or a few bad bunches spoiled the orchard), but every bank should work to improve its credibility. We in the agency business have contributed too by using our skills to “sell”. In these times, banks should provide the products consumers want — those that are good for the consumer and the bank. And rather than “selling,” we need to help buyers buy.
Nearly every bank touts in some form a “relationship” approach to doing business, yet they lack much of the information necessary to relate. 3. Customer retention. Now is the time to be focused on customers. Recent trends show that in spite of the financial crisis and pressures on marketing budgets, many banks are doing just that. Mintel Comperemedia reports that retention-related direct mail sent by banks increased by 42% in Q3 2008 over the previous quarter and 83% over the same quarter for the previous year. We all know additional product sales can be secured at a lower cost from existing customers than from non-customers, so be sure you’re looking within your customer base to achieve your product sales goals. Particularly in challenging times, customers need to be “resold” on their purchase decisions — help them to know they made the right choice by banking with you.
R ecent studies by both Forrester and S1 Enterprise indicate that relationships between banks and their customers are strained particularly in the area of trust. Banks need to be paying attention to and strengthening these relationships. 4. Build the knowledge-base. Due to the technological advances of the late-80s and 90s, bank marketers have a tremendous amount of data available about their customers. Product usage, balances, number of services, recency, household profitability, demographics— these are available at most banks. But how many of these banks have email addresses for customers other than on-line banking customers? How many know their customers’ goals? Their customers’ attitudes toward the bank? How many know their customers’ contact preferences? Nearly every bank touts in some form a “relationship” approach to doing business, yet they lack much of the information necessary to relate. We need to retain what our customers tell us about themselves, so we can think intelligently about their best interest and be more and more relevant in our subsequent interactions. Now is the time to be building your knowledge-base about your customers. We’ve observed something else interesting. Not only is the specific data you collect important (to improve your understanding of the individual needs and desires of the customer), the fact that they engage with you and reveal information in the first place is a critical datum. In the case of a large regional bank, new customers that responded to a survey regarding financial goals and needs were retained at a significantly higher rate (15 point improvement in retention rate) than non-responders. The survey responders were also significantly more likely to increase their number of deposit accounts and loan/credit accounts over the following twelve months. This improvement in performance was not related to how these customers were subsequently treated. Receiving basically the same contacts
as non-responders, the difference in performance indicates that these customers had simply self-identified themselves as being more positively disposed to dialogue and a deeper relationship with the bank. That’s valuable information. You should know who these people are among your customers.
Smart marketing has always been about disproportionately allocating precious marketing resources against the targets that represent the greatest value. 5. You can’t just turn the spigot off. We all know that we can’t rely on customer retention alone unless we’re content for the customer base to shrink. In ordinary times, a bank loses 15-25% of its checking accounts each year. Our buckets have holes in them, and unless we are continually filling the top with as much as leaks out, we lose ground. So banks must continue with efforts to acquire new customers. In fact, if you’re one of the fortunate banks that have fared the financial storm better than your competitors, now is a great time — a time that doesn’t come around very often — for you to leverage your advantage and grab market share.
6. It’s ALL about profitability. The single most important point in this list is this one. And all that was said above should be informed by what follows. Timothy Keiningham and Lerzan Aksoy recently authored a short Conversation Starter on the HarvardBusiness.org website in advance of their forthcoming book, Why Loyalty Matters. The gist is that efforts aimed at building customer loyalty without regard to customer profitability are foolishness. “The fly in the ointment is that typically only 20% of a firm’s customers are actually profitable. And many — often most — of a company’s profitable customers are not loyal,” the authors assert. Consider the following data from a mid-sized financial institution: the top 20% of customers contributed 450% of the bank’s profits, the next 20% contributed 50%, and the bottom 60% of customers contributed -400%. Because these percentages can seem confusing, assume the bank’s profit was $1 million. The top 20% of customers generated a $4.5 million contribution to profits, the next 20% of customers contributed an additional $.5 million, and the bottom 60% of customers generated a $4 million loss. In other words, the top 20% of customers provide all the bank’s profits—plus they subsidize the loss the bank incurs on more than half its customer base. The implications of this data are profound. Don’t follow the knee-jerk urge to focus all your resources on the currently profitable. To do so would be a self-fulfilling prophesy—the currently profitable would remain so, and the others would never become profitable. The appropriate response is a little more nuanced. Apply a value-based segmentation strategy to your business that incorporates both current and potential profitability (based on modeling). Apply efforts to retain the valuable, grow the potentially valuable, and save
Top 20% of customers contributed 450% of the bankâ€™s profits The next 20% contributed 50%
Total bank profits
The bottom 60% of customers contributed â€“400%
Efforts aimed at building customer loyalty without regard to customer profitability are foolishness.
costs by not wasting them on those of little value to the company. For one bank’s customer on-boarding program, we used attrition modeling not to take remedial action to stem attrition but to remove approximately 10% of new customers from the program who would likely be gone within 90 days—saving marketing dollars to be used more effectively elsewhere. Modify your customer acquisition efforts to target consumers most likely to be profitable even if they cost more to acquire. This takes courage and discipline, but why should we be happy to acquire more customers who are a drain on profits just because they are the cheapest to acquire? Smart marketing has always been about disproportionately allocating precious marketing resources against the targets that represent the greatest value. And that maxim couldn’t be any more important than it is right now.
Jim Alcott is co-founder of Alcott Whitney (www.alcottwhitney.com), a results-focused marketing agency that moves the meter for its clients through a combination of superior strategy and analytics, relentless innovation, and a strong commitment to partnership. Previously, he was co-founder and CEO of Alcott Routon, a database and direct marketing agency that served more than one-fourth of the nation’s 50 largest banks.