Protect Your Customer Base – It’s The Nucleus Of Your Value

Customers are expensive for FS firms:

• They are expensive to acquire – consider the total cost of marketing activities, incentives to join or switch and the costs associated with onboarding.
• They are expensive to lose – the loss of CLV (however you measure that) and their replacement cost.

For these reasons alone, businesses need to protect and strengthen their customer base. The economics of this argument are irrefutable.

If you reduce customer attrition, you make more profit. The converse is also true and the negative impact is significantly worse. For example, if you’re only winning new clients at the same rate as you’re losing them, the business is standing still. In reality, it’s actually going backward. How so?

• The cost of acquiring a new client is much higher than the cost of retaining them. The accepted ratio is 5 to 1; that means you spend 5 times as much on the new client acquisition.
• In financial services, particularly those where the client relationship is the primary driver for value, you don’t just lose the client. You lose reputation, as dissatisfied clients often share their dissatisfaction with others. Plus you lose that client’s loyalty and their willingness to act as an advocate for your brand. In the late 1980s, First Direct had established such a strong fan base, they grew their business by 30,000 new accounts per month on referrals alone. This customer advocacy still exists today.
• Trust is hard to acquire and easy to lose. Where a firm breaks its trust with a customer, they won’t return.

Protecting your base is just good business. If done well, it also makes millions. Research conducted by Bain, across hundreds of their clients spanning multiple sectors, found that a 5% drop in customer churn led to an uplift in net profits of between 25% and 125%. This was documented in “The Loyalty Effect” by author Frederick Reichheld.

In consumer financial services, another compelling reason to take good care of customers has been approaching steadily from a distance – the Consumer Duty.

Compliance with Consumer Duty mandates an investment in time and money. Of course, the more effectively the firm has been managed (a combination of a healthy culture, strong leadership, engaged and motivated employees, streamlined operations, the effective use of technology, excellence in customer experience and general good governance) the lower the investment and the less painful the path to compliance.

For some executives, the whole exercise is seen as an annoying distraction from business as usual, a change project guaranteed to suppress profits for the time it takes to implement the necessary changes (and beyond).

But the upside benefits are worth it. The alternative doesn’t bear thinking about.

A final thought: as you undertake your compliance project, a critical activity is assessing where you stand with your customers today. Understanding their expectations of your business is the first step. Measuring how well you are delivering against those expectations is the second. Knowing how to deploy those insights to inform effective action is the third. There are no shortcuts in this process. Trust, loyalty and advocacy are the positive outcomes of meeting your customers’ expectations. Therein lies the pathway to growth and profitability.

This plays strongly to the “Consumer Understanding” outcome of the Consumer Duty.

The last few years have thoroughly shaken up the markets and customer expectations have changed – in some cases, dramatically. You must know what they are and how well you’re currently delivering against them. Otherwise, you risk moving forward without all the key facts and insights at your fingertips. Not a good idea.

If you’re not sure how to go about that, a conversation with us at Promising Outcomes might prove illuminating.

First published here.