One of the best lessons that we have learned when it comes to bank marketing is not every potential customer should be a customer. Of course, what that means is that at some point you have to tell a profitable customer that we are not the bank for them and make the introduction to a competitor. This is hard to admit, particularly when you see a customer with strong deposit balances and a healthy appetite for loans that really want to do business with you. Before you judge us as crazy for turning away a profitable customer, we have a couple points to bring up as our problem might be your bank’s problem as well.
As a community bank, we all have limited resources to market and limited resources to bring on new products. Because of this fact, we are not equipped to meet the needs of every customer. Sometimes it is best for that customer to go to a bank that is designed to meet their needs. Hospitality, for example, is killing it. It is one of the best risk-adjusted loan segments, cash flow is near record highs, fees from these accounts are strong and good operators are expanding. The average hospitality customer now produces over a 24% return on equity. Yet, our bank does not have the credit mentality, or the products to serve many of these customers. That said, we do know a variety of other customer types where we can add value and maintain a high level of relevance.
Marketing to a customer that should not be our customer would take our focus, drive our costs up and potentially frustrate the customer. Not banking that customer allows us to better deploy our resources. In other words, we want to focus on customer type and industry that offers both parties a strategic advantage in our partnership.
Propensity For Business
There is also the propensity dimension to the equation. Some customers we want, we can be relevant to, but are not ready to move to us for one reason or another. Without a source of pain, it will be an uphill battle to get that customer to move. A customer that grows top line revenue by 14% and their workforce by 10% annually is 30% more likely to need a new banking relationship than a customer that is stagnate. Far better to screen for these attributes and target our customers with a laser focus than to spread our marketing and sales resources amongst the whole community. Small businesses that bank at a competing community bank that lands their first overseas contract may be the perfect business to utilize our international expertise. This business could be profitable, engaged and likely to move their relationship over to us. The combination of the three dimensions produce a target subset graphically displayed as follows:
Increase Profitability By Lowering Acquisition Costs
The intersection of these three customer dimensions also has a profound effect on the lifetime value profitability profile. By choosing the right customers that we appeal to and picking customers that are more likely to expand their business with us, we end up lowering our acquisition costs. This shifts the whole profitability equation in our favor. The result is faster breakeven, higher annual profitability and better retention similar to the diagram below.
Quality Engagement Over Quantity of Engagement
Turning away customers never feels good and requires strong discipline. This is especially true for many community banks that pride themselves on service. After all, isn’t the hallmark of quality service going above and beyond the standard call of duty? It is, but we want to make sure that when we do go above and beyond it is for a strategic reason. Choosing quality of the relationship over quantity allows us to better focus both our marketing and relationship management resources. Spending time solving customers that have repeated problems, that are not aligned with our culture or that require us to expend resources away from our strategic direction often end up hurting us more than helping us.
This is another reason to thoroughly understand the customer you want and your bank’s value proposition in addition to your capabilities so that everyone can be crystal clear on what customers and potential customers to focus on. If above average accounts are managed in an above average manner, it should result in above average performance.
Submitted by Chris Nichols on October 28, 2015