If you can improve your level of customer retention by just 5%, and sustain that improvement over five years, you can improve operating earnings by as much as 100%.

This astounding leverage is possible because of the lower costs of loyal customers as opposed to new customers. Added to this equation is the fact that loyal customers are the richest source of new customers and own more accounts per household than new customers.

Employee loyalty also contributes to the 100% operating-profit improvement. Customers are induced to continue dealing with loyal employees, and vice versa. I call this entire dynamic "the customer-retention cycle."

Getting Started

Once a bank ventures into this cycle, the phenomenon becomes self-perpetuating. It is the single most profitable strategy lever a manager can pull.

Once the bank is positioned as one that keeps good customers, only the unprofitable customers are left for competitors. As long as the strong bank doesn't falter, the competition cannot counter its strategy.

This sounds easy enough, but how can your bank actually break into the cycle?

Start by making it the centerpiece of a marketing strategy. Customer retention becomes a way of life, not just the current season's most fashionable program.

Next, profile the loyal loan and deposit customers who will be the focus of the retention strategy. Regrettably, not all of your customers will be worth trying to retain -- not all have a capacity for loyalty.

You cannot retain customers who will switch banks over two basis points.

The best approach to identifying who is worth the effort is to take a look at the customer data base and see who has stayed with you for several years.

Next, measure the gap between the present level of customer retention and your objective for the next one to five years. Remember, this leverage is potent: Sustain it for five years and double your annual operating profits.

Once the loyal-customer profile is established, survey a number of loyal customers who have recently left your bank and ask why. Conversely, survey a number of continuing customers to determine what kept them loyal.

Inevitably, one reason for customer retention will be attachment to loyal employees, so talk with them to find out why they have stayed with you.

Discussions, Not Interviews

The most useful way to learn about both loyal and fickle customers and employees is to bring groups of each together for discussions. Unlike traditional focus groups, these should be focused on the task at hand, emphasizing that a retention-improvement team is listening.

The session moderator converses with the customers and employees instead of interviewing them, using a mixture of metaphorical and literal questions.

For example, if you ask customers to describe their relationship with your bank as a friendship, or to describe your competitors as animals in the wild, you will discover far richer insights than are obtainable from standard focus-group questions.

Immediately following the discovery phase of each exploratory session, you can debrief the retention team on what they have learned about customer loyalty. Then, in a first step to close the retention gap, hold a session to generate ideas and next steps for improvement.

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