Credit unions need to overhaul their capacity for measuring member profitability, according to one expert analyst. But the goal shouldn't be to punish the majority of members who drag on the bottom line.
Instead, said Joe Prunty, president of CoreProfit Solutions, the strategy must be to use good profitability data to move members incrementally toward profitability.
Speaking to CUES' Marketing, Operations and Technology Conference here on "Seven Steps to Successfully Measuring Member Profitability," Prunty told credit union executives that transaction-level data is the key to making decisions.
"The use of that data about member interactions allows the marriage of member-related revenues with the costs of generating those revenues, enhanced by channel specificity," he told his audience.
One mistake credit unions make in arriving at profitability figures is to take total expenses and divide that number by the number of members to arrive at a cost figure, according to Prunty. As an example, he cited a branch-centric member compared to an Internet-centric member, both of whom have the same balance but use different transactions.
"Which member is more profitable? I can't tell you, because you don't have all the data you need. What appears to be inexpensive has the tendency to create other behaviors that are more expensive." Case in point: the Internet-centric member who makes frequent calls to the call center.
As food for thought, Prunty asked, "Should it be acceptable business practice to allow members to set and control resource within your institution and over-utilize every channel and resource to the point they might never be profitable?" While some marketers may disagree, the answer is no, Prunty told a CUES conference, regardless of what the competition might be doing.
Every credit union, said Prunty, should be able to name those members who are providing significant net contribution to the operation. At a minimum, he said, every CU needs to know who's at the opposite ends of the profitability spectrum.
According to Prunty, credit unions should be attempting to increase profits per member while also increasing the number of profitable members. "What we want to do is go find members who exhibit behaviors that are profitable to us," said Prunty. "You want to stabilize members who are unprofitable. The goal here is not to get rid of members. And it's not about decreasing the marketing budget, but about getting rid of that 'spray-and-pray' approach to better targeted marketing."
What It Costs To Acquire A Member
Prunty told credit unions it is seven to nine times more expensive to acquire a highly-profitable member than it is to retain one. "So why wouldn't you just figure that out right now, rather than try to corral new folks who may or may not contribute," he asked. "Behavior-based member profitability can provide significant ROI-based acquisitions."
Getting to a number about every member's value to the credit union is important, said Prunty, but more important is knowing what that number means. Simply stated, said Prunty, if a credit union took all its members and broke them into quintiles, it would find that on average 145% of profits are generated by 20% of members.
"It behooves you to know who those members are and why they are profitable. It also behooves you to know the other 80% and where they fit in." Typically, in member bases divided into quintiles, only two represent profitable members.
According to Prunty, the seven steps to measuring member profitability are:
1) Identify a project sponsor(s), develop a complete and manageable budget and identify potential, yet tangible, ROI assumptions.
"You need a complete budget, not just a budget for hardware or software," said Prunty. "If part of your thinking is to go out and buy a profitability system, it shouldn't be done."
2) Identify and document all relevant costs (member, product, channel, organizations) and ensure that these costs have been thoroughly syndicated. "This is not activity-based costing," stressed Prunty. "This is not a run to benchmarks or anything like that. It must be representative of how your organization builds cost structures. It shouldn't take you more than 12 weeks to do."
By syndicated, Prunty said he means management must sign off completely on the numbers being used, otherwise reports will be dismissed by some in management after they are created.
Reliable Data Sources
3) Identify and procure transaction-level data from reliable data sources. If possible, start this process early and build historical files. "The two major roadblocks are numbers two and three on this list," said Prunty. "You've got to get access to transaction-level data."
4) Develop specific reporting requirements, i.e. frequency, type, distributions lists and platforms, security, etc. Ensure through syndication.
"The key things here are how many times are you going to run the system and distribute the information. We would advise that you do it at a minimum on a monthly basis, but would caution it can be like drinking from a fire hose," he said, referring to the volume of information that is produced. He recommended credit unions circulate sample reports ahead of time, even if absent data, to let management get a feel for them.
5) Develop specific algorithms, calculations and policies that apply to your credit union. Ensure that these are syndicated early and often.
"The key word here is policies. What are we going to do with corporate overhead, shared services, and competing business lines," he said. "This is data that can't be applied cleanly. You need to have an understanding on the front end of what those are."
6) Diligently select an application and vendor to provide either an in-house or an outsourced application or to provide in-house development assistance.
7) Periodically process your member profitability information (at a minimum on a quarterly basis) and be prepared to syndicate, refine, test and build new ROI models and then syndicate, refine, test and build new ROI models, then...
The Starting Point
"Really, this is the starting point," said Prunty. "It never stops, and you never want it to stop. You want to produce member profitability numbers and then do something with that data. We want them to see what happens. It's a process of constantly refining."
In examining cost data, Prunty pointed to 12 different categories, including cost of maintaining an account, processing a cash withdrawal, processing a branch deposit, opening an account online, closing an account, etc.
"This should show you opportunity," continued Prunty. "You should look at this mix and ask, 'What can I do with good members who don't use ATMs for deposits to get them to use ATMs for deposits. You could say to those members, 'We'll buy you dinner if you do this, as changing your behavior is good for the institution.' "