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POINT OF VIEW
CUSTOMER LOYALTY
HOW TO RETAIN CLIENTS AND INFLUENCE PROFITS
AUTHOR Dieter Staib, Partner
1. Introduction
In recent years customer retention has been a low priority for many financial institutions that have instead focused heavily on acquiring new customers. These institutions then tried often unsuccessfully to offset the high cost of new customer acquisition through cross-selling tactics. However, in our experience improving customer retention has a major financial impact on results through:
Increased customer numbers: by increasing the ratio of customers gained vs. lost, and by building up a larger source of satisfied customers who refer products and service to others
Longer customer relationships: by increasing the duration of product holdings and by allowing firms to anticipate and capture future needs through deeper understanding of their customer base
Higher margins per customer: loyal customers buy more, are less price-sensitive and require less support, avoiding costs associated with account closure, etc.
Longer relationships
Higher margins
Improved net balance of customers gained vs. lost Larger pool of satisfied customers that will recommend others
Increased product holdings Decreased price sensitivity Cheaper/more efficient to serve Acquisition costs are spread out over a longer time Lower closure costs
In general, it tends to be more profitable to invest in prevention rather than cure: banks will get a higher return from keeping an existing customer vs. acquiring a new one. The last three years have put the relationships between banks and their customers under considerable stress (greater competition, reduced availability of credit, higher fees, etc.) and this has taken a heavy toll on customer loyalty, especially for the traditional, incumbent banks. Many financial institutions are losing the equivalent of over two-thirds of the customers they capture, eroding the net value created by the costs and investment associated with customer acquisition. This can quickly add up over a three-year period: many banks can lose more than a quarter of their existing client base and find that over a third of their customers are new to the bank. Such outcomes are of course highly dependent on the definition of an active customer: metrics vary
from bank to bank and from product to product, but simple measures such as minimum balance and volume of transactions are typically used. How banks measure customer loyalty is similarly important, and can lead to different conclusions and resulting action. For instance, if a customer is defined as disloyal purely by closing their last remaining account with the bank, then this leaves little scope for resolution. However, setting internal thresholds for when a customer is deemed loyal or not using simple measures alone can be counter-productive at a customer level, as depending on where the thresholds are set results can vary drastically as customers oscillate either side of the boundary.
How/when is a Segment customers by customer dened loyalty and as lost value How many customers are leaving Examine current trends within and across segments
conventional wisdom
Prevention initiatives
Post-departure marketing Develop and introduce loyalty, retention and win-back programmes
Determining whether a bank still holds an active relationship with the customer will depend on the strategy chosen by the management. At a simple level, the relationship ends when a customer migrates their account from one bank to another. However, in practice the change is rarely so clear cut. Customers often have multiple accounts and may keep certain products with the original provider for convenience, shifting only partial balances and transaction activity from one institution to another. The different definitions of loyalty (such as by customer or product) can have a direct and substantial effect on the suggested scale of the issue. They may also impact the perceived causes of disloyalty that emerge from any analysis performed. In our experience, the best way to define loyalty is by using transaction volumes or balances for each different key strategic product, within the context of wider market trends and movements at a portfolio level. Such measures should be readily available to all institutions.
Is loyalty decreasing amongst high value customers? Are customers becoming more loyal as they become more valuable? How many high value customers are at risk of leaving?
A detailed breakdown by segment will reveal the main sources of value and, in all likelihood, show pockets of customers where it would be unprofitable to invest in strengthening their loyalty. Even a simple segmentation that divides customers into four quadrants according to their loyalty and value can prove a useful map at an initial stage.
What percentage of bank prots comes from each quadrant? What share of value is linked to losing customers from each quadrant? What is the trend between quadrants? Are customer value and loyalty increasing? What are the main reasons for leaving the bank in each quadrant?
Loyalty
Low Value
High
Increasing loyalty is not the same as increasing the cross-sell ratio. Customers that have multiple needs met by a product are typically more loyal than customers with multiple products focused on addressing a single need. Some products have a negative effect on loyalty (e.g. deposits from customers that were captured with aggressive offers). In any event, the relationship is not immediately clear: are customers who buy more products more loyal, or is it that loyal customers buy more? Targeting a sales push at unsatisfied customers could provide the required impetus to make them leave the bank. Other factors are likely to be of greater significance to loyalty than simply sheer number of products held. For example, young customers tend to be less loyal than older customers with a similar product portfolio.
Satisfaction is not the same as loyalty. Customers must have a minimum level of satisfaction, but levels above this do not necessarily promote loyalty, or even profitability. Further, the reasons customers give to justify their dissatisfaction are rarely the same as those that prompt them to leave. Leading banks invest in detailed and differentiated analysis of customer satisfaction and the root causes for leaving. We have observed at different banks how equally important issues for satisfaction, such as price and quality of advice, had a very different impact on loyalty (poor advice ranked far higher than price as a driver for account closures). Root cause analysis is often used to investigate the reasons for dissatisfaction, yet many banks fall into the trap of concentrating on small issues that are easily resolved rather than the bigger ticket items that are harder to crack.
In our experience, factors that distinguish the linkage and proximity between customers and banks have a strong impact on customer loyalty:
The intensity and depth of the customers transaction activity The combined portfolio (as opposed to simply the number) of products held by the customer
The initial product and channel used by the customer The level of personal contact the bank has with the customer (communication channels used, the relationship management model, face time with a Branch Manager, etc.)
Comments
Loyalty building: avoid a reduction in linkage Retention: increase the level of linkage
High marginal cost Hard to accurately predict the loss of a customer There is already an explicit sign of reduced linkage Balance between the accuracy in selection and the effectiveness of the actions Opportunity to learn Harder to retain Opportunity to learn What was happening 12-18 months ago to customers leaving us now? What events or actionable causes have occurred? What lessons can we learn from past desertions and apply to the current customer base?
Points of recovery/ Reactivate Deterioration can be gradual or sudden Gradual deterioration allows bank to anticipate and boost loyalty
Sudden deterioration may be hard to predict and usually requires retention/ recovery and learning
In order to create an appropriate system of alerts and subsequent actions, banks need to distinguish between two different types of reasons for customers leaving:
External events for which the bank has little or no responsibility, but which can still be well or poorly managed by the bank, e.g. offer from a competitor, change of circumstances, etc.
Actionable causes for which the bank has direct responsibility, e.g. uncompetitive terms and conditions, mistakes, poor complaint handling, etc.
A key point here is to distinguish between the key reasons and convenient excuses, and in the process obtain a degree of detail that allows the bank to take corrective action. This often requires the use of detailed research questionnaires.
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Proactive actions
Reactive actions
Desertion winback
Learning Specic team focused on retention Information support systems and measures used Best practice programmes: changing behaviours Changes in systems for evaluation/recommendation Multichannel integration
3. Conclusions
Managing loyalty is highly complex and involves dealing with concepts that need to be aligned with wider strategic issues; the modelling of customer value and loyalty indicators; the creation of alert systems based on events and actionable causes; the design, implementation and measurement of action plans; and the integration of the model within a system of continuous learning and improvement. The expected benefits are significant: not only due to the consequent rise in customer numbers, but also from the resulting improvement in overall economics by building more enduring and profitable customer relationships.
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ABOUT THE AUTHOR Dieter Staib is a partner in OliverWymans Retail & Business Banking practice. He is based in Madrid. His main areas of expertise are enhancing sales productivity through channel and customer information management. You can contact him at +34 91 432 8400 or by email: dieter.staib@oliverwyman.com
Copyright 2011 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. This report may not be sold without the written consent of Oliver Wyman.