NAFCU Services Blog

Originally published on CUinsight.com.

Unless you know who your best members are and why, it is impossible to develop a winning marketing and business strategy for your credit union.  I thought it might be helpful to provide a structural framework in light of the veritable explosion in membership since Bank Transfer Day.

We’re going to have to define some terms before we get started. By ‘best members’ I don’t mean the ones who spend the most time in your branch or lobby, the ones who show up at your annual business meeting, the ones who send thank you notes all the time, the ones who bring brownies and cookies at the holidays to your tellers, or even the ones who have been with the credit union since before you were born.

For purposes of this analysis we’re going to use profitability and value as the key metrics for defining ‘best member.’ Before we start segmenting your members, though, we need to change the way you think about member profitability.

It is relatively easy to assess profitability of an enterprise when you’re looking at products or services. Profit equals revenue minus costs, with some fudge factors that you can argue over with regard to overhead and other indirect costs. But once those are hashed out, you can look at auto loans, mortgages, refi’s, insurance, etc. and see whether you’re making money or losing money on a business line by business line basis.

That is a standard way of looking at your business and one which can yield great insight into what you should be focusing your energies on.  But the problem with this approach is that it is focused inward, not market-focused – at the end of the day you have a great picture of results and trends, but no real sense of the market. Growing the business is great, but do you really have insight into where those profits are coming from if all you’re doing is looking at aggregate numbers?

Another way to understand your business is by looking at members, and figuring out which of them are most profitable, and the value they get from you and the value you get from them.  This helps you identify the ‘best members’ because it allows you to see the marketing investment you’re making in each segment, and what the return is.  In essence, you’re looking at both the value provided by the credit union to members, and the value they provide to you in return. When you run the numbers you might be surprised at the results.

A Model for Segmentation

One of my favorite business books is ‘What Are Your Customers Really Worth,’ from Wharton Publishing by Sunil Gupta and Don Lehmann.  Gupta and Lehmann cite one study of U.S. banks which indicated that only 30% of their customers were profitable – looking at it from the other side, over 70% of the bank’s customers were destroying value.  That is hardly a recipe for long-term success, and the only way to know what your ratio is will be to take a hard look at your members. Gupta and Lehmann provide four categories that you can use for your member segmentation:

1. Star Members/Customers – Truly your best members. They get high value from the credit union, and provide high margins, strong loyalty and great retention rates. This represents a mutually beneficial relationship, and you want to cultivate more of this type of member. They are likely to have multiple lending relationships, and be consumers of numerous other ancillary revenue-generating solutions (well-worn credit and debit cards, insurance, ID theft, debt protection, etc).  Growing market share of this segment is the preferred option.
2. Lost Cause – On the other side of the coin, these members do not get much value from the credit union, and are considered marginal in terms of profitability. They may provide a benefit in terms of helping you achieve economies of scale (e.g. in justifying a call center, new branch or help desk).  But if you can’t see a path forward to evolving them to higher profitability, then you should consider ‘firing’ them.  I recall a discussion with a CEO of a large credit union that had a number of members with large deposits but no other activity, who were taking advantage of his credit union as a safe haven.  But in a low yield environment (compounded by the costs associated with the NCUA assessment) they were costing the credit union money (destroying value). This CEO decided to charge them a fee for the safe haven privilege – i.e., creating a negative return on their dollars – with two possible outcomes, either they leave the credit union or they become profitable.  In either case they overall profitability of the credit union increases. Growing ‘Lost Cause’ market share yields top line growth, but is destructive to the credit union unless done right.
3. Vulnerable Members/Customers – Partly valuable, these members provide meaningful value to the credit union but really don’t get much value in return. They can be newly acquired large members, maybe even small businesses, attracted by Bank Transfer Day. Or they can be long-standing members whose involvement with the credit union has gradually dwindled over time to a single loan, or who are members with just a modest share draft account largely because of the challenges involved in changing all of their linked bill-paying accounts.  These are members that may have been stars in the past or who truly have potential to become stars with the right focus and investment in solutions and better service. Don’t leave them feeling ignored and taken for granted - the strategy is focus, focus, focus, to ensure retention and to enhance returns.
4. Free Riders – These may be the hardest ones to deal with, because they are getting a superior value from the credit union but not providing a similar high value in return. Perhaps they responded to an extra-special rate promotion, with the unfulfilled expectation that they would move other accounts to the credit union once they had a mortgage there. The problem is like a supermarket that advertises loss leader specials, and how they deal with customers that come in and just buy the loss leaders and nothing else. This relationship is unbalanced, in the sense that the member is getting a much higher share of the value than the credit union. The solution is easy to visualize and hard to implement – raise prices or reduce service levels for free riders, to either convert them to profitable members or convince them to go elsewhere.

Reach For The Stars

Focusing on member profitability allows you to take a long-term view by visualizing members as assets who can provide long-term returns with the proper investment.  It also sharply defines the thesis that the value of members differs significantly, and if all you do is track profitability at the product or service level you’ll never see this.

Acquiring low-value members is not going to lead to sustainable, long-term and profitable growth. But understanding the composition of your members and where the value imbalances lie can, if you build that into your business model.

So what about all those members you’ve acquired as a consequence of Bank Transfer Day? How many of them just opened up a share draft account and have done nothing else? Have you considered which of them you might be able to convert into Stars, and how?

Post written by Dave Frankil, President, NAFCU Services Corp.

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