Customer retention now a primary focus

Deregulation. Increased competition. Market fragmentation. Changing consumer lifestyles. Declining customer loyalty.These are all reasons why Canadian financial service institutions are allocating an increasing share of their advertising budgets to direct marketing.As it becomes increasingly difficult to attract new customers, banks, investment...

Deregulation. Increased competition. Market fragmentation. Changing consumer lifestyles. Declining customer loyalty.

These are all reasons why Canadian financial service institutions are allocating an increasing share of their advertising budgets to direct marketing.

As it becomes increasingly difficult to attract new customers, banks, investment dealers, insurance and trust companies are realizing their current customers represent one of their most valuable assets.

That is why customer retention has become a primary marketing objective and we are seeing a shift from product-driven strategies to marketing strategies that emphasize the full relationship with the customer.

Much of the shift to relationship marketing can be explained by economics.

It is no secret that the best source of new business is current customers. Acquiring a new customer is five to 15 times more expensive than selling to an existing one.

New accounts

This is especially true in the banking industry, where two out of three new accounts are opened by current customers and customer retention increases dramatically with the number of accounts opened.

So, for financial service institutions, deepening existing customer relationships through upselling and cross-promotion of products has become the most viable method of attracting new sales and profits with a minimum of risk.

And, outside of personal selling, direct marketing is the most cost-efficient system for communicating with customers on a one-to-one basis.

More bang

In an era when lean marketing budgets have become the norm and executive management increasingly demands to see a return on investment, direct marketing campaigns are giving financial service marketers more bang for their buck.

Rapid advancement in computer technology is the second key force in the shift to direct marketing.

A relationship management strategy is dependent upon a customer database for both retail selling and direct marketing. And the financial service sector is well-positioned to take advantage of database technology for two reasons.

More information

First of all, financial institutions capture and store more information about customers than any other industry (outside of government.)

Secondly, they already have an electronic infrastructure in place as part of their operational and distribution systems.

The breakthrough has been the recognition that this information is a resource which can be used to gain a competitive advantage in marketing and selling.

And, with the plummeting cost of data storage, financial service institutions are increasingly investing in interactive marketing databases where vast amounts of data are stored and manipulated for the sole purpose of building and sustaining customer relationships.

Greatest predictor

The immense power of the database for financial services direct marketing lies in the fact that past transactional behavior is the greatest predictor of future behavior.

A customer’s product relationships, account history and responses to previous marketing campaigns are the most powerful selection tools for targetting and segmentation.

They are much more important than demographic, socioeconomic or psychographic variables in predicting future behavior.

(On the other hand, these variables, in combination with product and purchasing history, are the most powerful predictors of all.)

Profile segments

Sophisticated database software now exists that can statistically analyze and profile customer segments, then build predictive models that score the propensity of a customer to behave a certain way.

These database marketing techniques will increasingly allow financial service marketers to do a number of things: discover who their best customers are; offer them products and services they want and need; find and attract new business by searching for prospects who share a profile similar to the best customers; and deliver targetted messages that emulate one-on-one selling.

Most Canadian financial institutions – including the major banks and trust companies – have already made a major commitment to direct marketing.

Special departments

Many now have departments that specialize in direct marketing and run their own centralized direct mail and telemarketing campaigns.

Investment dealers and insurance companies have been slower to embrace centralized programs, primarily because of their reliance on brokers and agents who may be using direct marketing on an individual basis.

This, however, is quickly changing, as deregulation and mergers and acquisitions change the competitive landscape.

Here is a brief look at just some of what is in store for financial direct marketing:

- A merger of data collection and management functions among non-competing companies, creating pooled proprietary databases;

- Interactive pc services will provide access to financial information and transactions. Further growth is expected as pc use expands;

- Telebanking will expand and be a springboard for video banking. Banks are expected to be early proponents of interactive media;

- Multimedia campaigns will become more common. For products with broad appeal, adding Direct Response TV (drtv) to direct mail can double the mail response while producing a separate stream of leads from the tv advertising;

- 24-hour telephone access to financial information and transactions is growing in popularity as more people look for ‘off-hour’ service to fit their personal schedules;

- More non-bank companies will offer credit cards, following the leads of at&t and Ford in the u.s., and gm in Canada.

These cards will be just one component of a total customer relationship. Lower margins on card operation will be traded off against higher margins on other products.

This will post tough competition for traditional card marketers;

- Insurance companies will provide major business clients with touch-screen monitors and interactive kiosks that communicate benefit information to employees.

Next will be a pc hookup so companies can submit claim forms electronically.

In a market in which everyone from banks to investment dealers will soon be selling the same products, the battle to retain customers and market share is becoming ever more fierce.

Call it what you will – direct, database or relationship marketing – it is already an integral part of the financial services landscape.

Susan Hipp is vice-president and general manager of Toronto-based Kobs & Draft Advertising.