Michael Hinshaw for BAI
In a world where bank customers are more likely to switch and to show less loyalty than ever, customer experience is a double-edged sword.
Delivering the right customer experience at the right time means understanding the wants, needs, and expectations of your customers and designing an experience that meets those needs. While it may seem intuitive that an improved customer experience equals happier and more loyal customers, managers want quantitative proof. Fortunately, such proof is available in metrics such as increased loyalty, decreased cost, lifecycle progression, and increased customer lifetime value (CLV).
If executed poorly (or not planned at all), your customer experience will almost certainly push current and potential customers away. But for those banks that “get it” and take the time to plan, design, and implement customer-centric experience initiatives, it’s a proven way to more effectively compete while simultaneously boosting profit, brand perception, and retention.
When deciding how much to invest in an improved customer experience, the question that needs to be asked first is, “What is the customer worth to us?” Not just current value, but future value. Potential value. A lack of knowledge around the current and potential value of individual customers means that you may unintentionally dissatisfy all your customers. Not just those who may have little value, but those whose value to your bank is significant.
"How significant?” you might ask. For example, 2014 research by Bain & Company estimates the lifetime value of a loyal promoter is worth 2 to 2.5 times that of a detractor. That figure comes from promoters’ tendency to purchase more products from their bank, combined with their staying longer and recommending the institution to friends and colleagues.
The fact is, not all customers are created equally, and the cost of delivering the “ideal experience” to all is simply too great. At the same time, the cost of not delivering the ideal experience – to the right customers at the right time – is also significant. After all, J.D. Power’s 2010 U.S. Retail Bank Study notes that 37% of customers who switched their primary bank said they did so because of bad experiences.
A regional bank client of ours found that boosting retail customer retention by 5% would yield an additional $354,000 in annual net profits. How would your bank profit by reducing the number of customers you lose due to bad experiences?
Building the Business Case
Implementing a customer experience strategy has been proven to differentiate, drive positive market perception, and boost customer loyalty. In fact in 2015, 77% of companies with above average CX maturity levels reported that their 2014 financial results were better than their competitors, compared with only 55% of those with below average customer experience maturity.
For banks specifically, a recent study by Forrester Research indicates that the average large bank can increase revenues by about $210 million a year by delivering a better customer experience. This topline revenue growth is quantified in three areas, with over half driven by reductions in churn, followed by increased share-of-wallet and word-of-mouth driven acquisition.
Yet long before the late 1990s, when the concept of “customer experience” was introduced, there was widespread recognition that how someone feels about an organization is driven in large part by how they are treated. This hasn’t changed. In fact, the way customers are treated is more important to them today than ever.
Customer experiences occur over the duration of the relationship customers have with your bank at the points where your bank interacts with or touches your customers. These “touchpoints” include every contact point, such as ads and branch signage, tellers, your call center, your ATM network, website and more.
When these interactions meet or exceed customer expectations, good experiences result, bringing customers closer. When expectations aren’t met, these poor experiences drive customers away. As a result, future revenue is affected – either positively or negatively – at every single touchpoint between your bank and your customers.
More recently, the idea of a conceptual framework for improving experience – customer experience management – has gained significant traction as study after study continues to prove the connections between experience and profits. At its core, the concept of return on customer experience investments is broadly linked to two key areas: first, driving additional top-line revenue by increasing customer value and, second, by reducing expenses through a focus on the interactions that drive the greatest value.
These four lenses into customer experience ROI will help you start building hypotheses for your customer experience business case:
Increased Loyalty: What are the fiscal impacts of keeping more of your most valuable customers longer? Bain found that “banks that are loyalty leaders enjoy a growth rate that is 10 percent higher and a cost of funds that is 80 basis points lower than banks that are price leaders.” Areas in which ROI can be measured include: reduction in churn, driven by increased reluctance to switch; increased share of wallet, driven by willingness to purchase; acquisition driven by positive word-of-mouth.
Decreased Costs: Most banks overinvest in customer-facing initiatives which have little or no positive effect on customer experience. One MCorp Consulting client, a mid-size regional bank, saved nearly $300,000 a year on community investments without negatively affecting perceptions or attitude. Areas in which ROI can be measured include: eliminating redundant or ineffective touchpoints; reducing the cost of touchpoints you may be over-delivering on; simplifying processes and systems.
Lifecycle Progression: Identify where and how an improved experience can influence the speed of movement through your lifecycle. Across industries, Aberdeen Group research notes that best-in-class customer experience organizations have 300% more leads in their sales pipeline that result in closed business than the average company. Areas in which ROI can be measured include: improved brand awareness through positive word-of-mouth; a greater percentage of “pipeline” business resulting in new accounts; elimination of dissatisfiers to more quickly boost satisfaction.
Increased Customer Lifetime Value: Combining insights from the three areas above drives CLV models. For example, one bank was able to see how lifetime value for a typical credit card customer rose from less than $30 in the first year to over $200 in the third year. While there are many CLV metrics, one set is the “RFM” model which includes:
- Recency: When the latest purchase was made and for what amount
- Frequency: How many purchases were made in a specific period
- Monetary Value: The total amount spent on purchases during a specific period
The process of significantly improving customer experience takes organizational resources and commitment. That’s why assessment is so critical and why the business case for customer experience improvement should be made with a clear understanding of which measurable monetary and value levers can be moved—and how.
By combining a clear understanding of which customers are most valuable with a quantified understanding of customer wants and needs, your bank can prioritize investments in customer experience. As a result, you’ll boost value by focusing your efforts, while minimizing the risk of over-investing in delivering ideal experiences to customers you’ll never make money on.
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