Pacific Coast Banking School Update
The Key to Superior Profitability:
Customer Acquisition vs. Customer Retention

By Rex Bennett

During recent years, banks have increasingly focused on customer acquisition through sales and business development efforts. Banks have hired sales specialists and engaged in extensive sales training programs for their current employees-all with the goal of bringing new business into the bank. This strategy is based on the unquestioned assumption that new customer acquisition is the keystone to increased market share and profitability. Unfortunately, this unquestioned, fundamental assumption is DEAD WRONG. The key to superior profitability lies not in new customer acquisition but in current customer retention.

One key question is, 'How should you view customers?' The answer seems obvious, but what is your answer? Take a moment and define how your bank views customers. Tom Peters often says in his lectures and books, 'The customer is not the enemy! The customer is not the enemy.' The reason he says this is that businesses, including banks, often view customers as entities that demand exceptional performance and satisfaction and, thus, interfere with their 'real' work-thus, becoming the enemy. That sayings is Peter's, this one is mine, 'The customer is not your friend either.' If you ask most people to define what a friend is, loyal is the word used most often. Friends stick with you regardless of your behavior. But customers are not your friends. They will not stick with your bank if they perceive they can get more 'value-added' at one of your competitors. The whole concept of a sales culture in banking is based on the fact that customers are not loyal and that with the right sales effort customers can be taken away from competitors and become customers of your bank. Unfortunately, while your bank development officers are focusing their efforts on the customers on competitor banks, their business development officers are focusing on YOUR CUSTOMERS. Your bank gets some of their customers, their bank gets some of your customers and market shares and total revenues remain about the same. It's the banking version of musical chairs- customers just go round and round and stop at various banks for a while. Unfortunately, while this game is going on, net bank revenues may actually decline. Why?

First a question: 'What is your bad debt ratio?' Most of you could answer that question to the third decimal place. But here's a more important question, 'What is your customer loss ratio?' What percentage of your customer base do you lose each year? What percentage of your revenues do you lose because customers move to another financial institution? You can detail the amount of new accounts and dollars of new business your bank has acquired in a year but how many accounts, customers, and revenue did your bank lose? The typical US bank has an annual customer loss ratio of 15 percent. 15 percent! Thus, the average bank also loses 15 percent of its revenue base per year. As a result, the typical bank must generate 15 percent of its customer base in new customers simply to avoid losing market share and revenues. The fact is that most customer acquisition and business development efforts do not result in net gains in revenues or profitability but simply replace customers that have left. This often results in negative returns-the same revenues but with increased acquisition costs.

The following information comes from a variety of sources and studies including universities, the banking industry, and the Technical Assistance Research Project (TARP) in Washington which is a non-profit organization that studies the effectiveness of competitive strategies.

· At any one time, one-fourth of a banks customers are dissatisfied enough to leave if they perceive there is a reasonable alternative. One-fourth of your bank's revenue is at risk at any one time.
· The typical bank loses 15 percent of its customer base and revenues each year. The result is that the vast majority of business development efforts do not result in net growth but simply replace lost revenues.
· The average bank spends 8-10 times more in customer acquisition efforts than in customer retention efforts. Customer acquisition costs include not just advertising and marketing costs, but the salaries and overhead of all persons involved in new business acquisition. For example, if you expect your officers to spend 50 percent of their time in new business acquisition, multiply their total salaries and benefits, their support staff salaries and benefits, and their overhead costs by 50 percent. That amount should be allocated to new business acquisition costs.
· The average return on investment for customer retention programs in banks is 170 percent-170 percent. That is, each dollar spent on customer retention returns $2.70 in revenue.

Obviously, customer loss ratios cannot be cut to zero-some customers move, some customers go out of business, some customers die, some customers simply are not worth keeping. But the ratio can be reduced and even small reductions have significant impacts on profitability.

· If your bank can reduce the customer loss ratio from 15 percent per year to only 13.5 percent per year, the net present value (NPV) of these saved revenues is about 10 to 15 percent of current revenues. In other words, if your bank can reduce its customer loss ratio by only 10 percent of the total loss ratio (i.e., from 15 percent total to 13.5 percent), your bank revenues would increase 10-15 percent. Effective customer satisfaction, recovery, and retention programs can certainly achieve this goal.
· Revenue increases are 2.5 to 3 times greater than the cost of customer retention programs.
· A Harvard University study showed that a reduction of 5 percent in the customer loss ratio results in a 25 to 85 percent increase in company profitability (depending on the industry).

'How should you view customers?' The answer is to view customers not as enemies, not as friends, but as 'Revenue Streams Over Time.' Protecting and enhancing these revenue streams should be the number one goal of every bank because protecting current revenue streams contributes significantly more to profitability than generating new revenue streams. Thus, customer satisfaction, recovery, and retention programs are essential to achieving and sustaining bank competitive advantage and superior profitability.

Rex Bennett, Ph.D. is a professor at the University of San Francisco and is president of Achieving Unlimited, specializing in customer retention and satisfaction programs for banks. In addition, he has been a faculty member of Pacific Coast Banking School for more than 10 years, as well as a variety of other banking schools throughout the country. He can be reached at (415) 721-7743 or rexobennet@aol.com.