THE ECONOMICS
AND EXECUTION
ELEMENTS OF RETENTION
A PRESENTATION FOR RYAN, BECK
ANAT BIRD
1
Agenda:
•
•
•
•
•
•
The economics of retention
Changes in customer behavior and
expectations
Why customers defect
Execution elements
A peek into the future
Takeaways
2
The Economics of Retention
The Economics of
Retention
$14
$12
Profit from Price Premium
Profit from Referrals
$10
Increase Number of Accounts
Increase Account Balance
Base Profit
Profit Scale
Lower Operating Costs
$8
$6
$4
$2
Substantial attention being devoted to task of
quantifying benefits of increased customer
retention; early research in area suggests at
least six potential benefits of improved
retention performance. 1. Increased retention
lengthens customer lifetime, 2. Individual
account balances grow across time, 3. Number
of accounts grows across time, 4. Cost
servicing may drop, 5. Customer’s
conversations yields referrals, 6. Loyal
customers less price sensitive. Source: Bain &
Company
$0
($2)
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
3
The Economics of Retention
What is 1% Retention
Improvement Worth?
• Allstate
$1 Billion income improvement per 1%
increase in retention*
• Industry
27% NPV improvement per 5% increase in
retention **
• $100B Bank $22 million profit improvement per 1% increase
in retention ***
• $9B Bank
$1.2 million profit improvement per 1%
increase in retention ***
*
Source – Reichheld, "The Loyalty Factor"
** Source – Advisory Board
*** Source – Internal Company Analysis
4
The Economics of Retention
Cross Sell and
Retention
Customer Retention Based
on Services Used
Odds
Chance of First Year
Customer Loss
Checking account only
2-1
50%
Savings account only
3-1
33%
Checking and savings
10-1
10%
Checking, savings and investment
18-1
8%
Checking, savings and mortgage
50-1
2%
Checking, savings, loan and safe
deposit box
200-1
½%
Banking Service
Source: Bank Marketing Association
5
The Economics of Retention
Cross-Sell and
Retention Profitability
Household
Annual Profits
$450
$391
$400
$350
$300
$245
$250
$174
$200
$150
$113
$100
$50
$41
$0
Acct/HH
2
4
6
8
9+
6
The Economics of Retention
Household Profitability and
Cross-Sell Success
Are Linked
Why 8+ Products per Household
Profitability Tier
Average Cross-sell
Premier (>$1,000)
7.64
Excellent ($200 - $999)
5.61
Moderate ($0 - $200)
3.73
Potential (<$0)
3.33
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The Economics of Retention
Cross-Sell and Profitability
One Bank's Story
•
8+ Product Households Represent 10.5% of Total
Households and Contribute 31% of Total Retail
Household Profits
•
35% of Premier Households Annual (profit $500 $1000) have 8+ Products
•
58% of Premier and Excellent Annual (profit >$1000)
Households have 8+ Products
•
Only 7% of Unprofitable Households have 8+ Products
8
The Economics of Retention
Cross-Sell and
Retention
Retention
90%
80%
80%
83%
6
8
74%
70%
60%
58%
50%
40%
30%
20%
10%
0%
2
Accounts Per HH
4
Product Per HH
9
The Economics of Retention
Where Is
The Opportunity?
• Average Households Have 8 Different
Financial Service Providers
• Households With Income Greater Than
$100,000 Have 12 Different Financial
Service Providers
10
The Economics of Retention
Life Cycle Profitability in
Credit Cards
$ of Profit
150
100
50
0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15
-50
-100
Age of Accounts (years)
11
Customer Behavior
Customer Satisfaction
Scores Do Not
Predict Defection
Overall Satisfaction Average
Rating: 8.5
0.00%
20.00%
40.00%
9 - 10
6-8
5
1-4
60.00%
80.00%
 Most of the customer (86%)
who recently closed an
account, appear to be
somewhat or very satisfied
with Bank's services overall,
giving the Bank a score of 6
or higher on a 1-10 scale
where 1 means Extremely
Dissatisfied and 10 means
Extremely Satisfied.
 On average, these customers
rated their overall satisfaction
level
at 8.5
on At
a All
1-10
scale.
Index Scale:
1 = "Not
Satisfied"
to
100.00%
120.00%
10 – "Extremely Satisfied"
Source: Internal Bank B Analysis
12
Customer Behavior
Changes in Customer
Behavior and Expectations
•
•
•
•
•
As more customers use the internet, the branch's role in building
retention diminishes
Internet per se isn't a solid retention tool; bank sites need to be
enhanced to achieve improved retention results
Customers' definition of convenience is shifting from physical
facility to a portfolio of channels; implications to future branch
expansion and staffing levels need to be considered
Current mystery shops generally are not aligned with retention
results
Current banker behavior expectations are not aligned with
customer expectations, particularly regarding problem resolution
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Why Customers Defect
Primary Reason for
Closing Account
Account
Opening
Ethics
Price
Personal
Status
Change
Accuracy
Convenience
Customer Tenure
Total
Respondin
g
(n=434)
Less
Than
1 Year
(n = 105)
1–5
Years
(n = 191)
6 or More
Years
(n = 112)
Don't Need the Account
12 %
13 %
15 %
4%
Consolidated Accounts at Other Bank
6%
4%
7%
6%
Consolidated Accounts at Community
Bank
Service Charges / Fees too High
6%
7%
5%
5%
6%
2%
6%
8%
Marital Status Changes
6%
1%
7%
9%
Legal / Trustee / POA / Deceased
5%
0%
4%
13 %
Moved In or Out of State
5%
6%
5%
4%
Needed the Money
4%
9%
4%
1%
Lost Job
3%
3%
2%
3%
Bank Error
3%
7%
2%
2%
Location Is Not Convenient
3%
3%
5%
1%
• Not Needing the Account was the most frequently mentioned reason for
Source: Bank C Analysis
closing an account at this Community Bank
• Most reasons do not show response rate differences based on customer
tenure
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Why Customers Defect
Factors in
Account Closing
Importance of Factors in Decision to Close
Account
(Top-2-Box Scores on 7-Point Scale)
Experience With Bank's Branches or Branch Personnel
Error/Problem Experienced on Account
Personnel Changes
Bank Experience
Change in Account Features
Experience With Telephone Banking Center
Web Banking Issues
Miscellanous Fees
Monthly Fee
Price
Better Interest Rate/Rate of Return Elsewhere
Mininum Balance Requirement
Any Changes That May Have Resulted From Merger
Number or Location of Bank's Branches
Convenience
Number or Location of ATMs
ATM Malfunctions/Problems
0%
5%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Source: Bank A Internal Analysis
15
Why Customers Defect
Factors in
Account Closing
Problem Resolution Experience
(Among those who had a problem)
Satisfaction with Problem Resolution
(Top-2-Box Score on 7-Point Scale)
Closed (C) (n=41)
4
15%
Open (0) (n=37)
3
30%
0%
5%
10%
15%
Mean # Times
Contacted Bank
to Resolve
Problem
20%
25%
30%
35%
Source: Bank A Internal Analysis
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Why Customers Defect
Reason for Moving to
Other Financial Institution
Good Reputation
22%
Lower Fees
25%
Friendly / Pleasant
25%
Convenient Locations
26%
Good Service
29%
Had an Account There
0%
 Nearly four out of ten (37%) of
the respondents who opened
a new account with their funds
(with this Community Bank or
other institutions), chose that
financial institution because
they Already had an account
there.
37%
10%
20%
30%
40%
 •
•
•
•
Service – 54%
Service & reputation – 77%
Convenience – 26%
Price – 25%
Adds to more than 100% due to multiple responses
allowed n = 171
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Why Customers Defect
Overall Relationship
with Bank
Overall Satisfaction with Bank
(Top-2-Box Score on 7-Point Scale)
Closed (C) (n=199)
26%
Open (0) (n=207)
67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
18
Execution Elements
Problem Resolution
•
Banks are not organized toward effective problem resolution
•
The challenge: get the initial customer contact person to own the
problem
•
This is a true differentiation opportunity on the defection variable
that matters the most
•
The change is major enough to require an organization-wide
mandate for success
19
Execution Elements
Convenience
•
Differentiation on convenience is difficult among all but the mega
banks
•
Internet and phone banking are putting most banks on an equal
footing regarding convenience
•
Improved "stickiness" on internet and phone sites can become an
important differentiator
20
Execution Elements
Pricing
•
Customers don't mind paying fees; they mind being gouged and
nickel and dimed
•
Review your fee structure to ensure you have the right balance
between optimizing your fee income and turning off your
customers
•
Develop a desired position for your fee income levels relative to
the competition
•
Improve responses to customer fee inquiries and offering account
alternatives to fee-sensitive customers
21
Execution Elements
Cross-Selling
•
Cross-selling isn't about lip service — it is about doing
•
Executing cross-selling is difficult
•
Product packages ("Happy Meals") are a good path to success
•
Mass customization of cross-selling works
22
Execution Elements
Service
•
World class service — what does it really mean?
•
Everyone claims they offer it, so few truly do
•
Can you compare yourself to Disney or the Ritz-Carlton hotels? If
not, why not?
•
Identify major service defects and address those first
•
Mystery shop for the right stuff vs. the easily measurable
behaviors
23
Execution Elements
Bank Intervention
•
Less than 25% of all customers report that the bank has made an
effort to salvage their account
•
We lack processes to ensure that every account closing is
handled consistently with the intent of recovery
•
Customers welcome account recovery initiatives by the banker,
even at the point of closing (which is generally too late)
•
Some sales efforts bring about inappropriate account openings,
which result in more account closings
24
A Peek Into
the Future
•
The big banks will figure retention out; some are already working
on it. Waiting on this issue is a losing proposition.
•
Website sophistication and stickiness, as well as phone bank
activities, will become more important in retention management as
customer usage increases
•
Learn from non-banks about customer loyalty; they are ahead of
us
•
Customers are looking for a bank they can trust. Winning that
position will gain you long-term retention
25
Takeaways
•
Customer retention is clearly tied to shareholder value, both in
terms of current income as well as earnings predictability
•
Improved retention must touch the employee wallet, not just their
heart
•
Align what matters to customers with what employees are trained,
paid and measured to do
•
Root causes for defection are consistent across the industry;
spend less time on fact finding and more on fixing, measuring,
rewarding
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Takeaways – Cont'd
•
Correct sales process to ensure that only needed accounts are
open; i.e. reward only for fully-funded accounts, back out sales
incentives for zero balance accounts
•
Measure both cost and benefit of account retention; advertise
results throughout the system
•
Show your employees why retention matters; they ultimately are
the number one cause for retention OR defection
•
Goal controllable attrition levels and reward for them
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My Family
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Isabella
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