January 31, 2019

Data Rich and Information Rich: Customer Retention, First

Susan Carroll, Ph.D.

Susan Carroll, Ph.D.
President/CEO/Words & Numbers Research, Inc.

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The conventional wisdom is that most community banks incorporate market share growth into their strategic plans. After all, customer expansion is essential to financial vitality. In pursuit of this goal, banks have become vulnerable to the aggressive selling of both software packages and consulting. “Big data, data analytics, predictive modeling” are positioned by vendors as critical data-driven marketing tools that most community banks lack. Claritas alone offers 68 market segments for customer prospecting (i.e., young digerati, kids and cul-de-sacs, township travelers).

The level of data literacy and demographic analysis required to make these sophisticated databases become the marketing powerhouse envisioned is often beyond a community bank’s expertise. Substantial financial investment encompassing staff recruitment, training and organizational restructuring are also part of the equation.

There is another data-driven tool that can support a bank’s effort to systematically increase its market share. Cost-effectiveness is one of its hallmarks and its usage prepares a bank to eventually incorporate a powerful data-based software system. It is the rich internal customer database that banks are blessed with. Oftentimes internal databases are perceived as weak stepsisters to the aforementioned proprietary software packages. This perception undervalues the importance of market retention as an integral component of market growth.

In their zeal to capture new customers, banks often overlook the necessary objective of holding on to their existing customers. Accenture states that about a quarter of new customers defect during the first year. It costs five times more to get new customers than to retain the old.  Additionally, customer attrition on an annual basis is estimated to be 10%. This adds up to a lot of new and existing customers going out your back door.

Data rich and information poor is the resulting status. But being data rich is a marketing opportunity. Knowing your own customer base inside and out enables banks to establish deep relationships with customers beyond the “Have a nice day” scenario. It is a pathway for growing geographic and demographic markets, and fostering positive word of mouth, the most effective marketing tool for capturing new customers.

Building an internal database is tedious work. That may be the reason that banks skip it and move to the “sexy” goal of purchasing high-powered software. However, any community bank can construct an effective marketing engine using their customer data with these four steps.

  1. Identify inactive customers. Infrequent account usage is a warning sign. It signals potential defection to the competition. Proactively collecting utilization data helps to create strategies to avert departure.
  3. Describe active customers by key target segments. You need to develop different fields (or variables in data literacy jargon) on each and every one of these customers in your database.  And this is simpler than you might think.  Two demographics are priceless: town (and state) and age. Both are already in your database; they just need to be numerically coded and attached to your customer. These two variables allow you to do target segmentation by geography and by customer journey (or lifestyle stage).

With geography, you can monitor the number of customers who are both opening and using accounts, purchasing loan products and services or becoming inactive - by town or region.  Market growth and shrinkage can be accurately assessed as well as service utilization and product demand. With age, you can maximize your bank’s product reception during the customer journey or lifestyle stage. Checking account customers ages 25-35 are your potential first-time homebuyers, while home equity loans might appeal to your 55+ customers who want that dream vacation. Marketing dollars can be judiciously targeted for “hits” versus “misses”.

  1. Create a customer loyalty spectrum. Numerically code the products that customers have purchased over time (checking, savings, time deposits, mortgages, HELOCs, credit cards, debit cards etc.). A diversified portfolio of products and services translates into loyalty as a lifetime customer.  Loyalists should be rewarded and integrated into your marketing strategies. Look at them as your brand ambassadors.
  3. Continuously enhance your customer database. Customer-provided information can be proactively coded into your database with the expressed purpose of getting to know who does business with you. Knowing customers’ family composition, employment fields, and their outside interests enable your bank to cultivate an authentic customer experience for them.

This is the bottom line – you neglect your existing customers in the pursuit of new customers at your own risk. Focus on keeping them. Capturing new markets is certainly an essential business practice and the new data-driven products on the market have their place. But without making the most of a rich database of your own customers first, you may find your growth strategy is self-defeating.

Comments? You can contact me directly via my AdvisoryCloud profile.

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