"The Great Customer Courtship," an article in the Feb. 12, 2011 edition of the Wall Street Journal says it all: "For consumers, the latest round of wooing is presenting more opportunities to score competitive rates. It's a great time to be a banking customer, especially if you are willing to consolidate your business in a single bank."
For the most part a deposit-gathering article, it makes a case for the obvious-there are advantages to keeping all of one's money under one roof.
As credit union professionals, we devote innumerable hours breaking down and decoding member profitability, demographic, behavioral and attitudinal statistics to put together relationship products, service sets of rules, segmentation standards, and delivery approaches that have a go at placing our members directly at the heart of the whole lot of what we do.
Simply put-it's a buyer's market in financial services. Our duty is much greater than earning the opening piece of business-it's creating a lifetime of commerce with each member. One technique is to quantify and increase our member's lifetime value (MLV).
When our credit unions distinguish the actual worth of our members, we can make improved strategic and tactical decisions.
The simplest formula for determining MLV is: MLV = m (r over 1+i-r), where m = margin or profit per member; r = member retention rate; i = cost of capital.
At one mid-sized credit union, m = $171.82 and i = 2.13%. By testing various rates of member retention (r), this credit union was able to determine the estimated lifetime value from each member.
r = 85% produces MLV = $852.58.
r = 90% produces MLV = $1,274.84.
r = 95% produces MLV = $2,289.33.
These calculations, and other variations employed by the credit union, proved valuable in its strategic planning process. Available expansions of the formula above can help to estimate member lifetime value (MLV) with constant and growing margins, retention rates, and time horizons.
Five Strategies for MLV
Concisely, here are five central strategies for measuring and improving the MLV of our member bases, critical for enhancing our member-centric models in order to produce sustainable revenue and profitability.
1. Determine the past three to five years and present profitability of our entire member base. It can be as simple as "net income per member" or adapted to consider extraordinary items, profits from standard operations, or other financial measures to give us a valid representation of our average member's contribution to profit.
2. Determine the retention rate of our members. Members come and go, but what is our current rate of retention? Year-to-year? Three-year moving average? What percentages of our members stay with our institutions, giving us an opportunity to increase their contribution to sales and profits?
3. Increase our member retention rates with better skilled and more engaged frontline employees. Our frontline leaders see our members every day-face-to-face, on the telephone, or via our websites. Imagine if each of these leaders-with their can-do attitude-looked for opportunities to make each member interaction result in a more loyal relationship. They may increase revenue with a successful cross-sell or decrease account-related expenses by helping a member utilize electronic delivery. The solution is for each frontline leader to act, with license, and add value to each account at every transaction. The advantage is a member relationship that utilizes more products and services.
4. Increase profitability potential with effective member on-boarding processes and active outbound marketing. Some institutions endeavor for each account to make use of many related services at the onset. Some utilize the two-day, two-week, and two-month follow up approach for account penetration. It's clear that the earlier we help our members make use of our services, the better.
For existing accounts and relationships, mine data for opportunities to earn business that exists at other institutions. Sweeten the deal and make it worth our member's effort, if necessary. The upfront cost will be offset by the new revenue stream from the relationship. Plus, we will increase the member's lifetime value.
5. Grow the 20 who give us 80. We know the 20-80 Rule: 20% of our members generate 80% of our revenue. With some keenly tuned segmentation analytics, we can establish individual account analysis and profitability for individual members and groups, too. For those who are already loyal with high lifetime values, discover their next financial need that allows us to capitalize on a strong relationship. For members whose loyalty is growing, work to cement the relationship with targeted offerings. For members who do not contribute to profit, consider a pricing plan that generates fee revenue for services once considered basic.
As leaders for our financial institutions, we should make use of current profitability and lifetime profit potential data to produce more highly engineered sales and service strategies, product packaging, pricing combinations, and delivery systems. The more we understand the current and lifetime profitability of our members, the closer we get to elite levels of sales and service.
Jeff Rendel is president of Rising Above Enterprises. He can be reached at jeff.rendel@RisingAboveEnterprises.com or 866.340.3770.