How Customer-Centric Strategies Pay Off Financially

Committing to customer centricity will almost certainly require a financial institution to invest up-front to support the strategy – an investment that will pay off over several years. Prior to making the decision to begin a customer-centric transformation, it is important that CEOs have a clear view of how the strategy will result in a stronger financial position for the firm. 

Unlike transactional-based product strategies (you buy from me – I make money and you get immediate value), customer-centric strategies create firm value over time through an increase in customer commitment and trust that should result in higher and more consistent revenue streams (we build a strong relationship and over time that will be more valuable to both of us).

Building deeper relationships can require investments in the brand, increased staff time from more consultative sales, employee recruitment and training, and increased service levels. Customer-centric strategies also often require significant customer-facing technology improvements. Compounding financial pressures, firms moving to customer-centric models may have temporary revenue dips as high-pressure sales tactics are dropped in favor of more consultative, needs-based approaches. The strategic bet placed by organizations moving to customer-centric strategies is that by making these substantial investments, they will create higher and more sustainable firm financial value over time.

Customer Value Identification

While much has been said about measuring loyalty and engagement, the actual work of identifying how stronger customer commitment actually ends up putting more money in the bank is often where firms fall flat in their planning. Many FI’s intuitively believe that customer-centric models will be more sustainably profitable, yet CEO’s fail to push management to identify exactly where the profit will come from.

Over the last 20 years, we at RedPort have been working on customer-centric transformations around the world and in our experience, the value financial institutions reap from customer-centric strategies is realized in the following ways:

  • Trusting relationships reduce product acquisition costs – Building deep and trusting relationships with the right customers pays-off over time as trusting customers are much less expensive to market and sell to. Compared to the cost of selling to a new or lightly committed customer, convincing somebody who already deeply trusts you to buy the next product is much cheaper and easier.
  • Strong relationships decrease consumer price sensitivity – Loyal customers don’t shop as much – and even if they do, they will buy your products at a slightly higher price as the built-up trust adds value beyond the product price.
  • Customer-centric companies enjoy higher average relationship balances – Happy customers bring more wallet share resulting in higher balances.
  • Customer-centric strategies may result in lower loan or claims losses – Customers that are emotionally committed to their financial institution may be more inclined to pay off loans first or to think twice about a marginal claim that may impact their relationship.
  • Loyal customers tell their friends about the FI – Customers who trust their financial institution can be counted on to refer their family and friends (especially when you ask them to!) – creating new valuable customers who require little or no marketing spend to acquire.
  • Customer-centric companies experience less attrition – Deeply devoted customers are both emotionally and physically tied to the firm and will be much less likely to take their business elsewhere – maintaining an annuity stream throughout the customers’ extended lifecycle.
  • Customer-centric FI’s deep understanding of changing customer needs reduces competitive pressures – Customer-centric companies that truly understand, and that have the capacity to act on their customers changing needs, can reduce or even negate competitive pressure. By anticipating customer needs and being there at the right moment, a deal may be done before competitors even have a chance to pitch.
  • Customer-centric strategies can often build on their reservoir of trust to extend the scope of their business to new products and services – Once trust is gained, existing customers will often be much more open to trying additional products and services.
  • The annuity streams from customer-centric companies can be more valuable at exit – Financial institutions with deep, lasting relationships become strong annuity streams that are often valued higher than transactional companies with similar revenues.

To illustrate these sources of value, we at RedPort often use a visual model that we call the “Customer Value Pool”. This model allows clients to visually picture how all of these value-creating activities work together.

Screen Shot 2017-06-01 at 8.17.31 AM

To understand our model, envision the “flow” of customers through your organization. New customers come in, buy products, cost money to serve, and eventually leave – moving the level of the “value pool” up and down. During their tenure, customer-centric financial institutions have the opportunity to manage customer value at all stages and decide which levels to pull to maximize the pool.

Putting Numbers to Paper

After identifying the potential sources of value, firms that are serious about moving to customer centricity should conduct an assumption based modeling exercise to understand exactly which of these levers will create the most value in their particular situation.

The following simple example shows a firm with 50,000 target segment relationships that each have a yearly value of $1000. By thoughtfully developing realistic assumptions, firms can model the expected return from moving to a customer-centric business model.

Example: Midsized Bank

Assumptions Product Strategy Customer Strategy
Total Number of Target Customers                    50,000                       50,000
Average Customer Relationship Value $1,000 $1,000
Customer Centricity Benefits
Reduced Acquisition Costs 20% reduction $36
Decreased Price Sensitivity 2% better pricing $20
Referrals 1% referral rate $10
Higher average balances $250 at 4% spread $10
Less Attrition 3% less attrition $30
Reduced Competition 3% more sales $30
New Products 5% cross sell of $300 product $15
Decreases Losses 10bps lower loan losses $10
Per Customer Increase in Value from Shift to Customer Centricity $161
Total Customer Value “Pool” Prior to Customer Centric Strategy $50,000,000
Total Customer Value “Pool” AFTER  Customer Centric Strategy $58,050,000
Increase in Pool w/ Customer Centricity $8,050,000
Total Annualized Customer Centricity Investments $2,500,000
Annualized Increased Value From Shift To Customer Centricity $5,550,000

In this very simple example, our bank expects to create $161 in average customer value or $5.5 million in incremental annual “money in the bank” for their $2.5M investment in customer-centric capabilities.

Deciding to invest

We at RedPort strongly believe that for many financial institutions, a properly executed customer-centric strategy will provide them with the highest sustainable returns over time. However, any strategy shift is risky and the decision to move to customer-centricity is a firm-wide (and probably board level) commitment. Before making this commitment, it is imperative that financial institutions have a clear understanding of exactly how they will add to the bottom line.

Steve Hodgson is Managing Partner and President of RedPort International, LLC

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