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BirdsEye View

customer retention facts and fiction

This week's article trains the limelight on customer retention, core to consistency of earnings yet omitted from many incentive compensation and corporate goal programs. Unlike the Ritz Carlton, with its Big, Hairy, Audacious goal of 100% customer repeat business, our industry shies away from putting a stake in the ground regarding customer retention. Further, we boast high retention rates for our most loyal and profitable customers, yet fail to push the envelope further, in the area where every percentage point improvement counts the most.

As always, I'd be grateful for any thoughts and comments on what works and what doesn't in this all-important arena. Looking forward to hearing from you,

Customer Retention Facts And Fiction

It took the industry a decade, but bankers have finally realized that generally keeping a profitable customer is more profitable than acquiring a new one. Not only does one avoid acquisition costs, but seasoned customers are significantly more profitable than green ones for several reasons:

  • Seasoned customers keep much higher balances than new acquisitions.

  • They tend to have multiple accounts, which lowers the operating costs and Customer Information File maintenance significantly (for example, a five account customer's CIF costs are 20% of five single account customers' CIFs)

  • They help attract new customers through word of mouth, which is less costly and has much higher close rates than advertising, and also attracts customers who are less likely to be rate surfers

  • They have higher tolerance for slightly lower rates. This is a big item, since a 25bp rate tolerance, i.e. the willingness to accept 25bp less on your CD or pay 25 BP more on your loan, is worth millions of dollars to any banks. One cannot achieve such yield improvement through improved investment portfolio management without incurring greater risk, but CAN get this yield premium by retaining loyal customers and providing them value well beyond the cost/yield of their relationship

For these and other reasons, customer retention is rising to the forefront. One major contributor to this ascent is the preponderance of free checking mailing programs, particularly those with attractive gifts, which has resulted in huge checking account growth for many banks, but also increased attrition. As a result, banks started looking into root causes of customer attrition.

What banks found out is simple and overwhelmingly consistent:

  1. Customer inertia is a strong force. It takes an overt act, a stimulus, for a customer to leave their bank. This implies, though, that the customer considers you their primary bank. In the age of free accounts and gifts, there are more customers who do not consider their checking account bank the primary financial institution, since they have several accounts and might have opened this one solely for the gift. If cross selling and customer true cross over does not occur, the likelihood of defection in the first year is high.

  2. Customer attrition occurs during the early stages of the relationship, mostly within the first year, and even more so, within the first six months. Equally importantly, customer attrition occurs more among single service households than any other category.

  3. Attrition among loyal customer takes place when the bank has done something specific to incur the customer's ire and did not recover effectively from that mistake. Events such as long wait times at the teller line that exceed the customer's own expectation of what is a reasonable wait time; error that cannot be corrected quickly; the need to touch several people within the bank to resolve a problem; all lead to customer defection. Customers expect efficiency and accuracy, and do not consider these performance characteristics to be special. They are part of their basic expectations. However, problem handling and resolution is the great differentiator between a retained-for-life customer and one that will never forgive you.

Following countless studies, focus groups and customer surveys, dozens of banks around the country concluded that they need to change some of their processes in order to improve customer attrition. Here are some of the steps they are taking internally:

  • Quantification of the current situation and the impact of improvement. Many banks still don't know their current attrition rates by product, nor do they know how much revenue and profit benefit they will incur should their attrition improve by 1%. Fred Reicheld has pioneered this research in his book, The Loyalty Effect, and the results were staggering. In my previous life I, too, found that curbing attrition by only 1% accrues millions to the bottom line. Understanding the current volumes and patterns of attrition as well as the dollar value of retention is the first step toward improvement.

  • Inclusion of retention performance in incentive compensation. Part of the reason for intensifying attrition in banks has been our own creation. The growing focus on effective sales performance has resulted in taking the eye off the back door. Many banks are as efficient in their account closing process as they are in account opening procedures. Customer attrition simply has not been on their radar screen for years. Incentives and glory are focused on the best acquisition performers, i.e. those folks that sell the most accounts or create the greatest volumes, and not necessarily on those who accrete most to the bottom line by combining effective sales with a growing portfolio base. This has been true for both commercial and retail sales forces, and it is slow to change. Compensating a loan officer or a star retail banker on net growth in their portfolio (vs. gross goals) as well as on overall portfolio profitability is one way to begin addressing the issue of attention to attrition. Another, which I have employed successfully in the past, is grossing up each branch, department and even banker goals by their individual attrition rate, thereby bringing the point home each and every day. In other words, if one's portfolio is $100, and their attrition rate is 20%, and growth expectations are 10%, their goal is not 10% growth or $10 but 30% growth or $30. As they curb their attrition, say to 10%, their goal shrinks to $20, to reflect improvement in their customers' attrition rate. Whichever method you select, incorporating attrition into your incentive plan will improve overall retention and portfolio profitability, and will reduce the painful and expensive churn some highly successful sales organizations have experienced.

  • Mystery shops have been integrated into many banks' evaluations and compensation program for years. The problem is, they all measure the same thing: did the teller stand up, did they smile, did they call you by name etc. , thereby leading to no differentiation. Further, improving scores on those mystery shops do not predict improved customer retention. The scores can keep going up, everyone feels great about progress, and the customers keep leaving the bank. We are measuring the wrong thing, because it's all we know how to measure, and it's easier to measure than the right thing, which is what truly leads to customer retention. Next time you stay at a top notch hotel, take a peek at their customer satisfaction survey. They ask few questions, many non-mechanical (e.g. "did you feel welcome" vs. "did the reception clerk use your name"), and the answers help them pinpoint trouble as well as predict customer behavior. It is important to align the mystery shop questions with what customers do, not what they say, so that you can correct the processes that cause them to leave your bank.

In addition, there are many things that can be done to improve retention vis-à-vis the customer. One popular approach that is a response to finding out that customer attrition occurs early in the account's life is the concept of on-boarding. It involves mandating a certain number of touches each new customer is supposed to experience from the bank during the first 90 days after account opening. It's a prescriptive and fairly mechanical process, yet it can be most effective. Banks require their employees, particularly on the retail side, to contact a customer with a courtesy call a few days after account opening, then a couple of weeks later to inquire whether all went well during the process, checks have been received, their debit card is working etc., to be followed by other calls and thank you notes designed to help the customer feel connected to the bank. In addition, cross selling efforts take place during that period, since banks have found that customers are most likely to make additional purchase decisions shortly after account openings, and that such activity slows down considerably after the first 90-120 days.

An interesting internal conflict in the cross selling and on- boarding effort is that many banks consider a "sales session" for the purposes of computing a cross sell ratio to be one day, the first time a customer enters the bank and opens an account. Yet, all studies, and the on-boarding process, indicate that more selling activity occurs after the initial visit and before 90 days are over. Therefore, keeping the "sales session" open for purposes of calculating cross sell ratios and compensating employees for a much longer period than the one day makes sense. Matching the cross selling sales session definition to the research finding and on-boarding process needs to be done in all banks that are practicing on-boarding. Otherwise, one measurement contradicts other mandated practices.

In addition to on-boarding, cross selling efforts have been long established in our industry. We have also graduated from selling customers products they don't need nor want, to selling products across product categories. In the past, selling anything to anyone who would buy it has been a common and unfortunate practice. This is costly both to the bank (since these products aren't being used yet they often entail a systems maintenance fee) and to the customer (who soon realizes that the bank isn't the trusted advisor they claimed to be, since they sold them a product that doesn't meet their needs). As banks realized that the number of inactive accounts has sky-rocketed, they looked further into suitability. Current research, consistent with old research that has not been looked into for years, indicates that the best way to retain a customer is by selling them products from various categories. For example, selling 7 CDs isn't nearly as valuable as selling one checking account and one loan to a customer. Combining product solutions from transaction, credit, protection (insurance) and asset accumulation product categories links a customer much more closely into the bank and increases retention exponentially. In addition, customers do have a need for products in all these categories, so the likelihood of them using the products is greater. Hence, the definition and expectations of cross selling are being refined to go beyond counting number of products, or even services, into assuring that the products sold cover a number of categories.

Another important component to the retention drive, and the most difficult one to execute, has been problem resolution. Banks are generally designed to get things done in the most efficient way for the bank, not necessarily for the customer. Our organizations are quite convoluted from the customer's viewpoint, which makes problem resolution exceedingly difficult, even when our own people get involved. A customer is unlikely, in most cases, to get a problem resolved by contacting only one person in the bank. Similarly, a banker couldn't solve a customer's problem by contacting only one internal bank person. They, too, typically have to navigate our internal maze until they find the right person to deal with the issue. This is due to the increasing complexity of bank products, the growing bureaucracy in many banks, and the inability of many bankers to identify who is the right person to handle what problem. Small community banks have the edge in this situation, often a function of their size and commitment to service, which explains why they typically experience lower attrition rates than their larger brethren.

The challenge for banks is to improve their problem resolution process. Other huge companies have found paths to success by empowering their people own the problem and spend a certain amount of money to help their customers. FedEx, for example, has a motto for years, "We rent helicopters", meaning that when it absolutely, positively has to be there, every employee is empowered to do what it takes. The Ritz Carlton had a similar policy, authorizing employees to spend several hundred dollars to keep the customer happy. Some banks are going down that path, but progress has been slow and painful. Some have established "problem resolution centers", where employees spend their days trouble shooting problems for customers. More on problem resolution in a future BirdsEye View.

Whatever the path to effective problem resolution is, it is essential, together with other steps, to achieving the customer satisfaction levels (and the retention associated with them) we are all looking for. Your competitors are already working on this issue. You need to do that as well, to ensure that your own customers will choose to stay with you and not be driven to a better service provider.