Spending $1.25 To Capture $1? Consultant Urges CUs Reexamine Approaches

"You should have a P&L on every one of your members."

-Joe Prunty

If nothing else, recommends Joe Prunty, president of CoreProfit Solutions, credit unions should learn the principles of behavior-based profitability.

It's knowledge that would make for much better decision-making in a variety of applications, he said, stressing several times during his remarks that spending $1.25 to capture $1 in revenue is a bad proposition.

Prunty defined behavior-based profitability as the use of detailed, transaction-level data about member interactions that allows a CU to measure member-related revenues against the costs of generating those revenues-and know specifically which channels generated the revenues.

Prunty said the components of overall profitability for a credit union are revenue, minus the cost of generating revenue, minus corporate overhead. However, he cautioned, when determining profitability a credit union must start at the member/account level and work up to the product and organization level. Measuring profitability in the opposite direction causes allocation problems, he asserted.

"When you measure member profitability, you get an accurate picture of what members and groups of members are contributing to the credit union's bottom line-and why," he said.

According to Prunty, there are two important things a CU can do to increase its profits, or retained earnings: increase the profit dollars per member, and increase the number of profitable members.

One key is retention. He cited a Gartner G2 study that said it costs more to acquire a new customer than to retain a customer.

"Since you can't retain everyone, make sure you retain the most profitable ones," he said, noting that without even reviewing the individual credit unions on hand for the conference he already knows that "Twenty to 30% of your members drive 150% of net income. That's frightening, because you don't know who the 20% to 30% are. On average, it will cost five to eight times more to acquire a highly profitable member than it will to retain one."

In short, a credit union needs to know who is contributing what.

If you study profitability, it is important to understand what other financial institutions will be targeting these members and their families.

A credit union should study the behavior of its members so it will know why they use the channels they use, he advised. In addition, a credit union should monitor the behavior of its management and the behavior of its products.

For instance, Prunty noted it is better to mail 2,000 letters to a targeted group selected on its likely response, than it is to "pray and spray" 10,000 letters to the entire membership. "Segmentation allows a credit union to focus on key current and historical factors that contribute to the profitability of its members."

Key factors of segmentation include the number and types of products owned, interest rates charged and/or paid, fees waived and frequency of waivers, channels used and preferred, balances maintained, number of accounts maintained, and types of "loss leader" products.

"Multiple share draft accounts, sitting unused, is a drain on profitability, as is selling good products to bad people," he said. "For example, selling Christmas Club accounts to everybody-some will use it the wrong way."

It is impossible to figure out SEG profitability without household value. Behavior of the member, analyzed in detail, can show the profitability or unprofitability of that member, and those who comprise the SEG."

Every credit union knows that branches and phone centers are the most expensive channels for members to use. But how does management get those members to change their behavior?

"You can get folks to do things differently," said Prunty. "So why not pay a member to change his or her behavior?"

Prunty's argument, and he drew on several examples, was that it pays to reward members for costing the credit union less.