# Time To Reexamine An Assumption About Profitability

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A few years back, one seemingly reputable industry consulting company stated that members with only one relationship (single service) have a 35% chance of leaving a financial institution, while those members with more than three relationships have an 85% chance of being loyal for three to five years.

Perhaps this was true for keeping members in general, but did anyone question if the members with all of those products were even profitable? It turns out that the most profitable members in the average credit union own three to four products, while the least profitable ones have four to five!

These two charts represent a typical credit union. The member household base is divided into 10 relatively equal groups called deciles. Decile nine and 10 are profitable while all the others are not. Therefore, you can see that all the credit union profit is obtained from 20% of the member households. When the member base is spread out into the same 10 deciles, we can then look at chart B to see that the most profitable member households (deciles nine and 10) have between three and four accounts, while the least profitable deciles (one and two) have the same number of accounts!

Begging The Question

So the data begs to ask, are more products better?

If your credit union was Amazon.com and you sold two books rather than one, the answer would be that more is always better. Therefore, most retailers like Amazon.com can use standard affinity models generated by commercial analytics tools to suggest what a customer is most likely to buy based on their own and other similar customer purchase patterns. The next best product analysis may even include a simple ranking of the products that are most profitable. But at a credit union, unfortunately, isn't that easy.

Exhibit C: Product and product combination profitability in a typical credit union:

Product Monthly Profit

Checking* -\$2.00

Auto Loan* \$18.17

Checking + Auto Loan \$44.58

Savings* -\$3.25

Checking + Savings \$3.92

CD* -\$13.83

Checking + CD -\$13.33

Checking + CD+ Savings \$10.50

* While most credit unions minimally require a share account for membership, the above chart does not recognize share accounts with balances less than \$200, thereby generating "single service accounts."

In Exhibit C, top, notice that the profit associated with a specific product combination cannot be intuitively deduced. The cumulative profit is dependent on many factors, including overall portfolio balance, type of product combination, member demographics, product pricing, etc. In banking, members often take money from one product to fund another, thus changing the dynamics of how profit can be anticipated. It isn't as simple as product profit No. 1 plus product profit No. 2 = total profit. Many factors, including behavioral ones, go into the equation.

To accurately predict the right product to cross sell to a specific member (aka the next best product), credit unions must take into consideration both the likelihood of buying another product together with the resulting profit obtained from the new combination of products. To do this, analytic tools that are specifically tuned for credit unions can help. With this information credit unions can determine:

* What to cross-sell a particular member that will be well received by the member AND represent positive profit to the credit union.

* For each product, which members should be offered that product in order to ensure a positive reception and additional profit.

* Which products offer the best cross sell opportunities to help prioritize campaigns and predict ROI.

* Product packaging information to help determine appropriate pricing and packaging. Some credit unions even offer different pricing and packaging to different members.

Ideally, credit unions not only need to determine profitable cross-sell recommendations, but they also need the ability to push the ranked recommendations out to the front line personnel who interact directly with the members. Together with the proper training, compensation incentives, access to member information, and referral tracking support, front line personnel can be instrumental in supporting the credit union's marketing campaigns and overall cross sell efforts. Having this kind of sales culture achievement is a key objective for many credit unions today.

What To Watch

Looking into the near future, there are two additional technology enhancements that will further contribute to the sales capabilities of credit unions. First, is complete channel integration with all the member touch points (tellers, phone, email, ATMs, online banking, the credit union's website, etc.). The second enhancement is the ability to do real-time analysis to generate cross-sell recommendations when triggered by a specific transaction or interaction at that very second.

While there is some technology already available, this is still new and few credit unions are able to embrace this real-time opportunity today.

However, with an eye on the real-time capabilities not too far away, credit unions will have even more ability to sell the right products to the right members at the right time.

Alysa Dver works for Sedona Corporation and can be reached at alyssad sedonacorp.com or 508-881-5664.