06/03/2011

Achieving Profitable Revenue Growth


Today, every major financial services provider in the country is working on the new sales technologyu00e2u20ac”investing tens if not hundreds of millions of dollars for the coming competitive battles. The focus is on profitable consumer and commercial business … often with special emphasis on small business opportunities.

In this race to achieve profitable revenue growth, the long-term winners will be those financial institutions that implement totally integrated sales solutions. In our experience, the major challenge for our clients is effectively bringing together information, sales and loyalty management. The solution is to capitalize on both the latest information technology and sophisticated sales, training. Implementing just part of the integrated solutionu00e2u20ac”for example, doing sales training without the benefit of effective information management, or vice versau00e2u20ac”just won’t achieve the desired results.

Customer retention is priority one

In a survey of more than 2,000 bank CEOs, we asked them to tell us their bank’s number one priority. Seventy percent said customer retention. Furthermore, based on my recent conversations with leading high performance bankers across the country, it is clear that their number one priority is retaining profitable customers. That is no surprise when one considers that those same high performance bankers say what is starting to really keep them up at night is howu00e2u20ac”and whereu00e2u20ac”they are going to find future revenue growth.

Increasing profitable revenues is clearly and unequivocally the greatest challenge facing banks today. The toughest task will be building long-term growth, not flash in the pan, nonrecurring quick fixes. Some bankers believe one of the solutions is to get into the investment banking business. Others just as strongly believe that investment banking is inherently highly cyclical and that its current prosperity is simply a reflection of an overvalued stock market. Of interest, the high performance bankers believe that most of their profitable growth will ultimately come from their existing customers, not new business endeavors.

The new competitive environment

Today, the convergence of commercial banking, investment banking, insurance, and brokerage is creating even more powerful competitors for future business. Faced with these increasingly more effective competitors and more sophisticated financial services customers, high performance banks of the future will be distinguished both by operational excellence and, most important, totally integrated sales solutions.

The three key questions

To win in this new environment, every banker needs to answer three questions.

Which customers do you want to keep?

The consolidation of the banking industry is displacing thousands of bank customersu00e2u20ac”some good customers, others not. The banking environment is awash with excellent opportunities to take away or, at the very least, establish the beginnings of meaningful relationships with the profitable bank customers who are uncertain about what will happen to them in their recently sold bank. But don’t count on the uncertainty to last forever; this is truly a window of opportunity that normally remains open only two or three years after the acquisition is announced.

Keep in mind, too, that the major banks know precisely which customers are profitable or likely to become so, and therefore, are desirable to keep on their books. The loss of unprofitable accounts is not only acceptable, it’s a desired end result when coupled with easily achieved expense reduction that will more than offset the revenue from those accounts. Overall, the least profitable accounts in the bank place a tremendous drain on the bank’s earnings. The bottom line is that, no doubt, there are good customers who can be cherry picked from the competition; just take care to distinguish between the profitable and unprofitable ones.

Current profitable customersu00e2u20ac”The best possible source of revenue growth for most banks is not new customers; rather it comes from growing share of wallet from your current profitable customers. We like to call them “most valuable customers.” These are the same customers whose business ultimately determines the value of the bank. Exactly who they are is fast becoming common knowledge to a host of competitors. Using sophisticated information technology, your competitors can easily access everything from their names, addresses, phone numbers, and economic profiles, to their likely financial services needs and which sales approaches they will respond to most favorably.

We know that it costs about six times more to acquire a new customer than it does to expand the wallet share of a customer already on the books. At the start of the relationship, a new customer brings only base profitu00e2u20ac”a figure that remains static from year to year. The value of retaining profitable customers lies in the add-on revenue that builds over time: profit from additional purchases, price premiums, reduced operating costs, and referrals.

Clearly, understanding the financial needs and motivations of your most valuable customers and targeting cross-sell efforts accordingly are the keys to revenue growth. Remember, though, not all customers are created equal. Great cross-sell ratios and high retention rates among the wrong customersu00e2u20ac”the chronically unprofitable accountsu00e2u20ac”do nothing to build profits, especially if the products being sold are loss leaders themselves.

The 150/20 ruleu00e2u20ac”The traditional 80/20 rule, whereby 20% of your customers supply 80% of the profits, doesn’t apply to banking. Our research indicates that 20% of the customers often supply 150% to 175% of the bank’s profits. Here’s a trivia question: Which of your customers are being targeted by the competition with significantly lower loan rates and easier credit terms?

The major sales and marketing challenge for most banks over the next three to five years will be retaining their most profitable customers, growing their share of their business, and, to a lesser extent, adding new profitable customers. In many instances, the real competitive battles will be fought over the most profitable five percent of the customer base.

What are the priorities of your best customers?

Here is where I believe the banks that really know their customers and provide personalized service have a tremendous competitive advantage. Simply knowing the customer and providing personalized service is often the key to customer retention. No matter how much the industry changes, personal relationships still play a significant role in the banking customer’s buying decisions. Banks, however, need to make a greater effort to manage those customer relationships. Once you have identified your most profitable customers, the next step is to build solid relationships with each of them that cannot easily be taken away by price competitive offers. Because you understand and can anticipate their needs, the customer is more loyal and thus more inclined to give the bank a greater share of his or her business. It is as simple as that.

The process of building customer retention and loyaltyu00e2u20ac”and in turn, revenuesu00e2u20ac” requires a customer-focused approach. All the playersu00e2u20ac”employees, shareholders, and the boardu00e2u20ac”must be committed to building relationships with and creating value for the bank’s profitable customers. The real challenge facing many banks is to focus their finite resources more sharply on their most profitable customers. Longer term, simply providing average service to all customers, both profitable and unprofitable, will not be a winning strategy.

Research shows that most customers would prefer to keep all their financial accounts in one place. If your best customers’ financial needs are being met elsewhere, then what is the cost to the bank of those lost opportunities? The vast majority of bank marketing dollars are focused on new account acquisition, but the real competitive advantage lies in retaining and expanding relationships with your most valuable customers and insulating them from other competitive offers.

Who is competing for your best customers’ business?

Your toughest competition today is probably not who it was a few years ago. More than likely, the greatest competitive threat today is coming from brokerage firms, mutual fund groups, captive finance companies, and niche competitors. Merrill Lynch, American Express, G.E. Capital, Charles Schwab, and many others have their sales, marketing, and customer service acts together. And while many of the major regional bank holding companies are fumbling the execution of their selling and service-quality strategies right now, remember, we’re only a little way into the first quarter of the game.

Winning in the new environment

One bank president told me recently how, over the years, his bank has spent a small fortune on various marketing promotions and sporadic sales training. But when he walks into his branches, he sees little happening, and when he looks at his income statement, he sees even less. Some of the pieces are there, yet they are fragmented and are not achieving profitable revenue growth.

It comes down to this: Successfully growing revenue requires a totally integrated effort. Achieving profitable revenue growth will not necessarily occur as a result of purchasing a marketing customer information file, requiring attendance at a sales training course, or any other standalone effort.

The key to retaining and growing profitable customer relationships really comes down to integrating and managing three critical elements: information, sales, and loyalty. The chart above outlines the key components of each of the three elements that collectively build an integrated sales solution.

Profitable revenue growth is what it’s all about

The bottom line is that after all the low fruit of expense reduction has been picked through operational improvement and better use of technology, the real winners will be those banks that can create sustainable profitable revenue growth. Their focus will be on identifying their most profitable customers, retaining and expanding those relationships, and attracting new profitable customers, especially the refugees from recently acquired banks. In the new competitive environment, targeting your sales and marketing dollars on your best customers is fast becoming the non-negotiable imperative for increasing earnings.

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