Studies show that one-third of small business leave their banks before the relationship achieves profitability.
This is a problem for most major banks, but it also presents an opportunity. If a bank can decrease customer turnover through more effective efforts to retain customers, overall profitability will improve clearly and dramatically.
Many banks have found that customer retention is a direct way to increase profitability. For example, the average acquisition cost of a small-business lending relationship is estimated at $2,500 or more.
Assuming that a bank has 20,000 such relationships, and that 2,000 of those customers leave the bank annually, it would cost $5 million a year to replace the departed customers.
Thus, reducing turnover by 50% would improve profits by $2.5 million.
Commercial banks can improve customer retention by:
* Targeting single-service customers for cross-selling. Studies show a direct correlation between the number of services used by a small-business customer and the longevity of his or her bank relationship. By effectively cross-selling to increase the number of services used, the bank increases its probability of retaining a customer relationship.
* Understanding the complete small-business customer relationship. Traditional consumerbased householding systems enabled banks to capture only 60% to 70% of a small business' total business relationship. This was due to factors such as businesses with multiple locations or variations and abbreviations in business name and address.
Creating a Strong Foundation
Newly developed commercial householding systems now let banks capture more than 95% of a business relationship. These systems let a bank better understand the complete small-business relationship, which provides the foundation for effective cross-selling.
Building successful customer retention and cross-selling efforts without that foundation is like building on quicksand.
Improved retention, decreased turnover, and more effective cross-selling - which begin from knowing the customer - mean increased profits.