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Budgeting for Retention
By Jack Borland
April 24, 2006
I've been talking with a number of community bankers recently. Surprisingly, while community banks as a group differentiate themselves on their high-touch personal service, very few of them actually set aside money for customer service improvement or customer retention initiatives.
Many bankers expressed agreement that they know they have to compete on value rather than price, but most still focus on matching the best CD rate in the area, rather than stepping back and thinking strategically about how they can use superior service to improve their bottom line.
Part of this reluctance to rethink how the bank relates to customers comes from training. We've all been taught that you have to focus on acquiring new business, and on keeping a good balance sheet to be successful in business. A certain amount of effort has to be made to cross sell to existing customers in order to improve wallet share and household values. What's missing is some systematic thinking on the value of retaining existing customers - and why spending money to improve retention is more effective than investing in new sales campaigns.
Let's look at the facts:
- The cost to acquire a new customer ranges from 6 to 10 times the cost to service an existing customer.1
- For every $1 spent acquiring a new customer you'll spend $100 to re-acquire a lost customer.2
What does this mean for you? Suppose you own a bank - a multi-branch facility located in three suburban communities. Let's say you have about $750 million in deposits. You've got steady account growth of 12%, counterbalanced by an attrition rate of 10%3. If you can increase your retention rate from 90% to 91% you'll increase your net account growth by 50% (from net 2% to net 3%).
Stated another way, reducing defections by 1% can increase your net assets by approximately $7.5 million. At an average profit-to-asset ratio of 0.67%, that increase is worth about $50,000 in profit per year. That's worth spending a little money up-front to improve your retention rates, isn't it?
"Hold on" you say, "That's not me." Or "I'm not a bank." OK, plug in your own numbers and see what a dramatic effect improving your retention can have on your bottom line:
 |
Example | |
Your Situation | |
| Yearly Sales (or Asset base) | $750,000,000 | |||
| Yearly Profits | $5,000,000 | |||
| Profit/Sales(or Profit/Asset) | 0.6666% | |||
| Acquisition Rate (AR) | 12% | |||
| Defection Rate (DR) | 10% | |||
| Net Growth Rate (NGR = AR - DR) | 02% | |||
| Modified DR | 09% | |||
| Modified NGR | 03% | |||
| Effect on your profits | +50,000 |
This argument doesn't speak to the profitability of individual customers. In virtually all industries, you find that established customers are more profitable on a year over year basis than new customers. This makes sense when you think about the costs for customer acquisition. While acquisition costs are a one-time expense, servicing costs generally go down over time. Knowledgeable customers don't require as much handholding as new accounts because they've already learned the answers to basic questions about your relationship.
What's the net-net here? Simply put, you will make more money by focusing on not losing customers that you already have. I've said this before: ultimately, your best assets and the only assets that don't depreciate over time are people - your employees or your customers. By focusing on managing and retaining customers, you'll make a smart investment to grow your company.
How can you act on this? Give someone or some team overall responsibility for the customer experience. Have them develop strategic directives for managing all customer interactions - processes, channels, materials, everything! And have them drive culture change throughout the organization so that everyone, from the frontline employee to the back-office accountant, understands who the customer is and why their loyalty and retention is central to all the company's efforts.
For more on calculating customer retention, try our Customer Experience Calculators.
Jack Borland is a Customer Experience Consultant and Sales Manager at Vox, Inc., a customer experience consulting firm. Contact him through the feedback form on our Contact Us page. Copyright 2006 Vox, Inc. All rights reserved.
1 Source: General industry estimates
2 Source: MauroNewMedia studies
3 Note: Top rated banks such as Wachovia report retention rates of 87% - assuming a retention rate of 90% is extremely conservative
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