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48% Of Your Bank’s Customers Are Eroding Your Profitability

By Michael Deely

48% Of Business Banking Patrons Are Likely To Switch Banks Soon, Eroding Your Customer ProfitabilityWhile attracting and retaining customers for your retail bank is certainly a difficult task, doing the same for B2B customers is an even more arduous challenge – especially when it comes to customer profitability.

In last week’s blog post, we covered the importance of a customer profitability analysis for retail banks, and next week, we’ll cover the calculation of customer lifetime value. Today, we’ll cover customer profitability analysis for business banking customers.

The Fickle SMB Market For Business Banking

Middle-market banks in search of growth consistently target small- and medium-sized businesses (SMBs). Indeed, the SMB segment offers tremendous profit and growth potential since it’s perfectly aligned with the regional nature of middle-market and community banks.

SMBs account for more than 90 percent of companies across the country and, after some contraction during the latest recession, they are growing once again. In the United States alone, there are 8 million small businesses (those with sales between $100,000 and $10 million) and 160,000 medium-sized businesses (those with sales between $10 million and $500 million).

However, as many banks have discovered, SMB customers are more difficult to attract, retain and serve. One particular challenge for many banks is to match the needs of small business customers while still ensuring customer profitability. But by far the most difficult challenge is customer retention.

B2B banking customers are often more fickle than retail consumers because they’re motivated primarily by price. In fact, according to Barlow Research, almost 20% of small business customers are at risk of switching banks in the next year, and even more concerning: 48% of small businesses (and 42% of medium-sized businesses) report that they will use another bank for their next banking product purchase.

With so much business at stake for your bank, you need a thorough customer profitability analysis to ensure you’re maximizing your bottom-line growth.

Profitability Analysis Best Practices

Much like the best practices for customer profitability in retail banking, B2B customer profitability analysis requires specific activities and alignment in your banking operations to ensure your bottom line stays healthy. Here are just a few of those important steps:

  • Collect the right data about your business banking customers, including interest income, fees, direct transaction expenses and allocated overhead.
  • Develop accurate, consistent and fair cost and revenue methodologies to calculate the profitability of each B2B customer.
  • Calculate customer profitability along with various dimensions including individual business, market segment, branch, region, product, pricing relationship and time period.
  • Use data analysis tools to model various scenarios and see how changes in product packaging or pricing increase customer profitability or experiment with how changes to interest rates or cost allocations affect business and product profitability.
  • Ensure that all necessary staff members understand your approach and their role in using customer profitability analysis, including front line staff, marketing and servicing.

Tailor Your Customer Interactions Accordingly

With your structures and analyses in place, you need to make it simple for any staff member or manager to use your customer profitability insights. In order to tailor interactions for specific customers, your staff needs your profitability analysis to be integrated into all of your sales, CRM and customer service tools.

When you integrate your profitability analysis into all of your interaction tools, staff members have a deeper understanding of what each customer brings to your bank – and they’ll be able to leverage that information appropriately to increase your SMB market share. Once those SMBs become customers, you’ll be able to leverage that same analysis to increase your customer retention over the long term.

Especially for your business banking customers, profitability analysis is a critical component of any serious growth strategy. Once you have a firm grip on which products, packages and services are the most profitable, your bank has no trouble growing its bottom line.

To keep your bank’s profitability healthy, your business banking operations need to function as efficiently as possible. Click below to download a free whitepaper from Big Sky Associates and discover how process improvement directly benefits your bottom line.

Download Your Free Report - 6 Bottom-line benefits of process improvement for your post-recession middle market bank