If there is a homogenous product in banking, it is the checking account. For example, most every bank out there charges a monthly fee for their retail and commercial business accounts. Ask banks why they charge a monthly fee instead of an annual fee and most bankers will tell you a combination of “that is how the industry works” and “customers won’t pay an annual fee.” While it is true that a monthly account fee is a banking tradition, it is not in other industries, and consumers and business have proven themselves more than willing to pay upfront annual fees. To get to the bottom of this, we convened a series of focus groups to test the notion plus provide our analysis of both structures.
Why Annual Subscriptions?
The biggest reason to charge a monthly fee is that the price appears lower and that lower amount reduces the friction for a potential bank customer to choose a bank product. While we will take a look at both those assumptions, charging an annual fee accomplishes two important things:
Return on Acquisition Cost: A customer costs a couple of hundred dollars to acquire on the retail side and over $10k on the commercial side. Locking the customer in for at least a year allows your bank to break even on the lifetime value of the customer. While it is true that an annual fee presents more friction, that friction serves to ensure a more profitable customer. Before a customer pays for a product or service all at once, they are sure they are going to use the bank. The result is a more committed, loyal and engaged customer.
An annual cost structure also serves to give your bank more runway to prove your value proposition and forces the customer to think about that value proposition only once per year versus 12 times per year.
What Customers Choose
In a recent focus group of over 220 potential customers (a representative sample of our customer base), we put a single premium checking account package in front of them and gave them two options. One option was our standard charge of $14.95 per month. The second option was a one-time, annual payment of $177 per year which equates to a mere 1% discount. The outcome of choices is graphically below:
Interestingly, 60% picked a monthly structure while 40% wanted to pay annually. We then had a thesis that within our survey, more affluent participants would have the means and desire to choose annually. We were only just slightly correct as there was only a minor correlation between wealth and the account structure choice. For households making above $100k per year, the probability of those participants to choose annual pay rose from 40% in our test group to just 42%. This is within our statistical error rate of 2%, so we deemed this relationship inconclusive.
We wanted to see if there was any variation between regions within the U.S. and found that most areas of the country exhibited a similar split as to the above. The notable exceptions were the New England region that sharply favored a monthly structure, while the Pacific regions favored an annual pay structure.
We also tested if the preference for monthly or annual was correlated with age and found that most all age groups fell around a 50% / 50% preference. The lone differences were Millennials that proved once again that they are a different cohort. Contrary to our thesis derived before testing, the Millennials heavily favored annual pay to the tune of a 58% preference.
The Power To Choose
While your region or customer base may have a strong preference so much so your bank may want to offer one structure over another, one strong takeaway here is to have the best of all worlds and create the power to choose. While this increases your transactional cost slightly, it pays off by not only having more customers pay annually but reduces the negative aspects by limiting decision friction. Banks should build a clear product page that not only allows users to toggle between viewing a monthly or annual cost options, but banks should consider showing more of a discount than the 1% that we showed. Doing so will likely move more customers into the annual bucket and increase satisfaction for both monthly and annual pay customers as well as the bank.
Banks easily have the capabilities to offer both a monthly and annual pay offering. If a bank could just transition 40% of their checking into an annual pay structure, profitability would increase. Further, banks looking to attract Millennials will have a more aligned structure.
If you are looking to take this concept to the next level, banks can package ID theft protection, cell phone insurance coverage, digital storage and technology support to create a truly differentiated, annual fee product that would set your bank apart from the competition.
The next time you decide to reimagine your pricing, consider adding an annual pay option and design an account that clearly sets your bank apart.
Submitted by Chris Nichols on April 17, 2017