customer retention & revenue maximization for the modern banking corporation
DESCRIPTION
Forrester’s customer experience index places “Enjoyable” on the top of the pyramid, with “Easy” and “Meet Needs” below them. Huge banks and local banks have a difference of at least 15% in the number of customers that state that banking with them is an enjoyable experience. While this is a large number, it is not entirely insurmountable if the right systems are in place. It isn’t possible for a human or a core banking transaction system to compute the customer value, product classification, or best next product offering but a real time scalable intelligent system has the capability to provide this via multiple sales channelsTRANSCRIPT
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Customer Retention & Revenue Maximization for the Modern Banking
Corporation Using Technology as a Lever for Revenue Growth
CustomerXPs
www.customerxps.com | [email protected] | +91-80-3221-8309
In the banking industry, success and consolidation
go hand in hand. Size matters. In some markets
and segments, consolidation may be desirable to
be the number one. In others, it may be essential
for merely being able to survive.1
In either case, size brings in its own problems.
They are lightly called problems of plenty, that
cannot be solved merely by additional staffing,
customer service training or via a gunshot
approach.
Customer support issues are so endemic that we
now have treatises that actually advise customers
on how to tackle customer support teams.2
All this matters, because studies indicate that it is
more worthwhile to retain an existing customer
than to acquire a new one. The additional cost of
acquiring a new customer over retaining an
existing one can be anywhere between 5 times to
30 times3.
1 http://www.thisdaylive.com/articles/mid-sized-
banks-in-survival-moves-as-big-banks-consolidate-positions/144854/
2
http://biz.yahoo.com/special/customerservice05_article1.html
3 http://www.camfoundation.com/PDF/Cost-of-
customer-acquisition-vs-customer-retention.pdf
However, how does one know that the cost
incurred to retain a specific customer was actually
money well spent? How does one quantify the
number of customers that a particular loyalty
campaign prevented from switching?
These questions become all the more difficult to
answer as the number of customers and branches
serviced increase owing to consolidation.
Lastly, it only makes sense to spend effort in
retaining the kind of customer that would
translate into higher revenue if they stay loyal. So
it is essential to have a targeted campaign that is
metrics driven.
This document discusses how technology can be
leveraged to drive customer retention programs.
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Customer Lifetime Value (CLTV) Customer lifetime value is defined as the dollar
value of a customer relationship, based on the
present value of the projected future cash flows
from the customer relationship.4
Thus, one of the ways to calculate CLV, where
period is a year, is as follows:
where is yearly gross contribution per
customer, is the (relevant) retention costs per
customer per year (this formula assumes the
retention activities are paid for each mid-year and
they only affect those who were retained in the
previous year), is the horizon (in years), is the
yearly retention rate, is the yearly discount
rate.
While this may appear complicated, a simplified
way to understand this is as follows:
(Average annual revenue from the customer X
Gross margin for the customer) / (Annual churn
rate)
Without going into mathematical formula, it
appears logical to focus on retention efforts of the
customers which:
● offer higher annual revenue
● involve products that incur higher
margins for the bank
● span over multiple years
4
http://en.wikipedia.org/wiki/Customer_lifetime_value
Product and Customer Classification
The bank needs to have product classification
based on the following criteria:
● Product unit price (per year if it is spread
across multiple years, E.g. Home loans)
● Annual margin on the product
A similar classification needs to exist for
customers, based on the criteria below:
Current age / expected number of
years the bank will have the
opportunity to serve the customer
Probability of the customer buying
products per classification
Best Next Product (BNP) Offerings
Based on the CLTV, product classifications and
customer classifications, technology can then
assist the bank in deciding the best next product
(BNP) offerings for each customer. These offerings
can be rule based; auto generated by a heuristic
engine, and can be offered to the customer via
various channels, which are:
● Branch banking
● Internet banking
● Phone banking
● Mobile banking
It is more important or rather crucial to focus on customer
retention. The bank needs to have product and customer
classification in place to derive on the best offers that are
contextual to their customers.
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Rather than offering everything to everyone, the
BNP offering, being dependent on the CLTV,
product and customer type is much more
targeted.
Moreover, after the initial rollout, the BNP can be
tweaked or fine-tuned based on the response to
the current offerings. A product that was in the
top 5 but not in the top 3 could move up to top 3
if it is selling better than the other products for a
particular customer segment. Again this can be
automated or be an assisted decision based on
the MIS reports generated by the
recommendation engine.
Negative Lists
Customers detest upselling and cross selling if
they have been offered the product before, and
they have already expressed their disinterest in
the same. This detest can also lead to irritation
and a desire to not interact with the banking
entity, or as less as possible. Such customers then
become candidates for competitors to grab.
An automated solution to ensure this is minimized
is via storing or capturing the products or product
types that the customer is not interested in. Thus
the BNP offerings can filter out negative items
before the same are proposed to the customer.
Individual Customer Feedback
Customer feedback received from any sales
channel is a loyalty fostering element. This is
where smaller and community banks have an
edge, people enjoy banking with smaller banks for
this reason alone.
Can this work for a bigger bank too? To a large
extent, the same experience can be created for
the customer via the recommendation and
feedback engine. The other advantage being, that
the likes and dislikes can be fed to the
recommendation engine and can be used by the
entire organization. For example, phone banking
operator would have access to the same
information that the home branch teller has about
the customer.
Even though this information is perpetuated in
the system electronically, the customer recognizes
that despite being a huge organization, it took the
effort to remember her likes and dislikes.
The loyalty elements or yearly revenue per
customer can be measured against the number of
likes and dislikes stored for that customer. This is
used to assess the dollar value of the effort spent
in this direction
www.customerxps.com | [email protected] | +91-80-3221-8309
Conclusion
Meet Needs: Easy: Enjoyable
In conclusion, Forrester’s customer experience index places “Enjoyable” on the top of the pyramid, with “Easy” and “Meet
Needs” below them. Huge banks and local banks have a difference of at least 15% in the number of customers that state that
banking with them is an enjoyable experience.
While this is a large number, it is not entirely insurmountable if the right systems are in place. It isn’t possible for a human or a
core banking transaction system to compute the customer value, product classification, or best next product offering but a real
time scalable intelligent system has the capability to provide this via multiple sales channels.
www.customerxps.com | [email protected] | +91-80-3221-8309
About Us
CustomerXPs, a Red Herring Asia Top 100 winner, is a Software
product Company that creates real-time, intelligent products that
empower Banking, Retail and Telecom Enterprises with instant
insights enabling influenced outcomes of deeper customer
engagement and fraud-free transactions. With a vision to provide
ammunition to its clients to delight their customers even before
they could articulate their needs/wants, CustomerXPs software
identifies and solves, in real-time, complex problems in the areas of
customer experience management, contextual right-sell, fraud
monitoring, compliance, accurately predicting risk and automating
targeted treatments.
Alok Kumar is the Product Line Engineering Manager at CustomerXPs. He can be
reached at [email protected]. For more information on Customer
Experience Management, please write to us at [email protected] or visit
us at www.customerxps.com
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