The Cross-Sell Cross-Up

A popular retail marketing strategy might actually do more harm than good.

In certain precincts of the retail banking business, the benefits of cross selling customers are so obvious that they aren’t even debated anymore. And in theory, at least, the cross-selling strategy makes all kinds of sense: If you sell a given customer two products rather than just one, how can he not make your bank more money?

The strategy makes sense, that is, until you actually sit down and look at some real-world numbers. That’s what I had a chance to do recently, courtesy of a leading banking consultant. And what I found out makes me think that not only are cross-selling strategies doomed to be ineffective, such poorly conceived strategies might even be counterproductive to a bank’s profitability!

It sounds crazy, but it’s true. The data in question comes from Ralph Haberfeld, CEO of Haberfeld Associates, perhaps the industry’s leading expert on checking accounts. Earlier this year, a member of Haberfeld’s team picked a branch of one of his clients at random and tallied the revenues generated by each of its 100,000 retail customers. Every potential source of revenue was included, from fees to imputed interest income on deposits. Then Haberfeld ranked that list of customers in order of revenues generated.

So, you are thinking, the most lucrative customers in the branch must be the ones who’ve been cross-sold within an inch of their lives. The poor folks own everything from VIP checking accounts, to multiple CDs, to Christmas Club accounts, right?

Wrong. If anything, the reverse is true. The revenue champ at this particular branch owned just one of its products: a checking account. And that customer’s balance at the time of the survey was … minus $69! Furthermore, of the branch’s 10 most lucrative customers, six owned just one product. And only one of those 10 had a combined balance of more than $100,000, while two had negative combined balances.

In all, these customers represent a cross seller’s bad dream. Yet as noted, they are the branch’s top 10 accountsu00e2u20ac”out of 100,000!

The results of Haberfeld’s survey say a lot about where retail banking profits really come fromu00e2u20ac”as opposed to where many executives think they do. It’s not as if the customers of this branch didn’t own their share of multiple banking products, after all. According to Haberfeld, the average customer at the branch owns 1.74 deposit products, not far off the national average. Rather, the moral of the story is that those cross-sold, multiproduct customers don’t seem to be any more profitable than single product customers are.

To understand how customer profitability really happens, take the revenue leader at this branch, Mr. Minus $69 Balance.

I don’t know this for a fact, but I’ll bet anything that the reason he (or she) is so profitable is that this person generates vast amounts of NSF fees, at $29 a pop. I’ll also bet, while I’m at it, that minus $69 balance or not, this isn’t a customer who’s living on the edge economically and is just one paycheck away from the flophouse. Rather, he’s more likely a young, single, affluent-but-overworked professionalu00e2u20ac”an attorney, perhaps, or an investment bankeru00e2u20ac”who’s just so darned busy and harried that he doesn’t pay quite enough attention to his personal finances, and who’ll gladly pay the bank $29 again and again for the convenience of having his overdrawn checks honored.

This is an ideal banking customer, in other words! Retail bankers should want more of them, not fewer. Yet at certain banks where customer segmentation is the reigning dogma, this customer (and the revenues he generates) might likely be drummed out of the bank for lack of a certain minimum checking balance. Or worse, he’d be cross sold a line of credit that would preempt all those juicy NSF fees.

That’s why cross-selling strategies might not just be ineffective; when executed in a poorly thought-out way, they may actually do more harm than good. That’s something to keep in mind the next time management starts to tout its new strategy of segmenting customers to extract greater profits and efficiency for your institution. If there ever was a false economy, this is it. |BD|

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