The ONS recently reported that the average duration of marriage in the UK was 12 years. While average customer durations can fluctuate across financial products, a study in the banking sector a few years back found that nearly 40% of those surveyed had been with their banks for over 20 years, while another 20% had been with their provider for over 10 years.
But this doesn’t have to mean that romance is dead. The process of selecting financial partners is very different to selecting romantic ones. Recent Brandwatch research found that ‘convenience’ was the most common reason for why customers stay loyal to their banks – something that wouldn’t bode well if they were describing why they stay loyal to their spouses. The customer need for convenience – or rather the inconvenience of having to switch accounts – has helped the sector secure high retention through the years. But convenience works both ways. As open banking, challengers and emerging technology continue to disrupt the sector, it will become increasingly convenient for customers to switch products if the services you are offering them become sub-optimal.
This throws risk at financial businesses that require customer loyalty and retention to deliver profitable returns. This risk can be understood best through a lifetime value metric – a measurement of the value that current and future customers will provide during the entire lifespan with your business. The nature of lifetime value is such that it only takes a small decline in retention or average customer duration to drastically diminish the promise of ROI. So, what steps must financial services marketing teams take to ensure they remain the ultimate partner of convenience to their customers?
1. First, understand what your customer lifetime value is
The profitability of a retail financial product is based on the behaviors of customers after purchasing a product, rather than margins that are already baked into the product at the point of sale. This makes customer lifetime value the ‘one metric that matters’ across the sector. There can be no ROI without the guarantee of long-term customer relationships. This is due to, among other things, the high cost of customer acquisition, which can vastly outweigh any revenue over the first couple of years. You must understand how much on average you can expect to earn from a new customer across their lifecycle, and set customer retention targets to ensure those figures are being met.
2. Segment your customers
Another way that the financial sector is unique is that it is one of the few sectors that you can simultaneously grow in customer numbers and shrink in profitability. In fact, the rapid growth of customer numbers can be entirely unsustainable if it is coming from risk-based products, such as insurance or lending, where unprofitable customer segments can add significant risk of loss.
Therefore, it is essential that you implement an effective segmentation strategy to target the customers who will deliver the highest returns over their lifetime. Collaboration with product teams, data scientists and underwriters will ensure that you are targeting customers that are within the risk appetite and fit your target market.
3. Drive down cost per acquisition (CPA)
Once you have a clear idea of who you want to target, you need to focus on bringing them in for the cheapest cost per acquisition. Ultimately, the lower the CPA, the lower the customer risk and higher the potential lifetime returns. All financial products are primarily driven by a finite amount of organic demand that exists within the market at any given time. While some degree of demand creation activity is essential to ensuring those in-market for your products know that you sell them, you would be naïve to believe that you can manufacture demand where no demand exists. Or in other words, you wouldn’t try to sell car insurance to somebody that does not own a car.
Therefore, it is key to have a strategy to capture demand with in-market consumers to ensure you are hitting acquisition targets and maximizing marketing efficiencies. Select appropriate and cost-effective marketing channels for your audience and remember it is a considered purchase and not an impulsive one. Just as no child ever asked Father Christmas for a junior ISA, not many people have made impulsive financial decisions from TV or social media adverts. Therefore, use any above-the-line activity selectively and only when the higher costs of this activity will justify the extra sales it may deliver you further down the line.
4. Think next best product
In financial services, being ‘customer-first’ means putting the customer’s lifetime financial wellbeing and security at the center of your strategy. This means targeting the right customers at the right time with the right products. Far too often marketing functions sit in business unit silos, unaware of the huge cross-sell potential of customers sitting in other areas of the business.
Understanding the financial customer lifecycle is key to knowing what products to push to customers when. Successful financial services businesses must ensure their long-term profitability by providing products and services that cover the broad spectrum of customer needs across the lifecycle. This may even involve taking short-term risks, such as promotional offers on less profitable products such as current accounts, for the long-term benefits associated with more profitable products such as lending.
Figure 1: Example of an average financial lifecycle
5. Build your customer base
Much of the disruption in the financial services market has focused on acquiring younger customer demographics through better user experience (UX), digital and mobile servicing. However, because of their age and wealth gap, much of this disruption will not be realized until over the next two decades. In the UK for example, the average wealth of over-60s is over ten times higher than people aged 30-39.
This means that over the next few decades there will be two major shifts in generational wealth. Firstly, younger demographics will continue to grow their own wealth through the conventional means of work. Secondly, they will be inheriting a vast amount of intergenerational wealth. The financial services sector must be prepared to invest in this emerging demographic through generating long-term investment and commitment from the business. However, many of these customers may not become substantially profitable for several years in the future, which can be challenging for marketing teams pressurized into hitting short-term profitability targets.
It would appear that it is convenience rather than passion that may explain the reason why we appear to stay with our banks for longer than our spouses. Many financial businesses famously ‘bank’ on customer loyalty – with current accounts now offering over £150 to switch as a way of bribing customers to sacrifice the inconvenience of switching. In such an example, a bank is taking a risk that the customer’s future relationship with the bank will earn them more than that upfront cost of acquiring them – through retention, cross-selling and upsell. This ultimately puts financial institutions in a position very different to marriage. The investments you make today are for a honeymoon payday in 10-20 years. However, with significant disruption ongoing in the sector, it is more important than ever that incumbents do continue making the investments.
Christopher Price, financial services consultant at Frog UK, a part of Capgemini Invent.