How do you retain your best customers? Most likely your competitors are trying to take them from you. Your only defense is to devise and implement a retention strategy using a carrot-and-stick approach: Reward customers for staying and make it a tough choice for those who want to leave.
Follow these steps to increase retention:
Recognize who is leaving and why. Are they customers who were purchased as part of a group of loans or through a specific marketing program? Do the loans have common pricing, geography, origination or maturity dates? Did the customer move, get offered a better rate or need more money?
Qualify the reasons for leaving by talking to loan officers and customer service reps. When a customer calls in for a payout amount, they should be queried for the reason and have it noted in their file. Conduct a telephone survey of recent ex-customers to understand why they left and whether you could have done anything to keep them.
Calculate future customer value. Future profitability among customers can vary widely. A customer who has never activated his home equity line over the past three years is less likely to be as profitable as a customer with a fixed-term home equity loan. Because of this you would not expend the same effort in trying to retain each customer.
It is also important to understand the components of future profitability. A customer with a $5,000 loan balance and 12 percent APR might have the same projected profitability as a customer with a $10,000 balance and 6 percent APR. Reducing the APR on the first customer would have less effect on profitability than the same reduction on the second customer.
How likely is the customer to pay you back? Future profitability needs to be adjusted for risk.
Target controllable and desirable retention. Not all customers can be retained, nor should all customers be retained. Some will leave regardless of what you do, while others who are unprofitable should be allowed to leave.
A home equity loan customer who is consistently late on payments is a credit risk and should be allowed to pay off his loan (hopefully with a loan from your favorite competitor), regardless of the interest rate and fees charged. Similarly, a home equity line customer who has never activated her account should be saved only if doing so would motivate use.
According to the U.S. Census Bureau (Current Population Survey March 2000), 9.1 percent, or 17 million, of owner-occupied households moved within the past year. More than half of these moves were in the same county. Though home equity loans that are paid off because the borrower moved is uncontrollable, retaining the customer is not. The key is three-pronged:
o Find them when they plan to move.
o Write a loan on the new property.
o Give an incentive upfront to keep doing business with you.
Remove barriers to save (and not save) accounts. When a customer moves out of a branch’s territory, an incentive should be given to the loan officer to help book a new loan in the customer’s new area. Even if this means double-paying part of the commissions (to the new and existing loan officers), it will retain the loan within the company, most likely increase the size of the loan and cost less than acquiring a new customer.
For unprofitable accounts that should not be saved, the incentives to keep the account should be removed so that time and money are not spent trying to retain poor-performing customers.
Predict who will leave. The most obvious sign of attrition, besides the actual closing of the account, is when a customer calls for a payout amount. However, at this point it is harder to save the customer since he already decided to leave. With predictive modeling and triggers you can improve your ability to predict who is likely to leave. Two sources of data for this, in addition to internal data such as payment history and customer service contacts, are credit bureau triggers and pre-mover files.
Develop retention strategy. Once you have a better understanding of who is leaving and why, develop a retention strategy that can be tested and tracked. Specific, realistic goals should be set and incentives put in place to motivate behavior that maximizes the sales rep’s income and the company’s profitability.
Test, test, test. It is crucial to keep testing new ideas and refine them to maximize results. Some ideas to test are:
o Make it easy for people to pay their loans, such as direct debit of checking account.
o Eliminate some of the fees for rewriting loans, making it more expensive to go elsewhere.
o Remind the customer of the advantages of keeping the loan with you if he moves. This can be done through any direct marketing channel including messaging on the payment book.
o Cross-sell other products to expand the relationship.
Send a select group of customers a “thank you” check each year to extend the life of the loan. Figure the cost in upfront so your pricing covers the expense. It might be a little harder for a customer to transfer a loan from a company that actually pays them back.
Track results. Results need to be tracked to determine what is working and what needs to be fixed. Though anecdotal evidence is helpful, it should not replace hard-core data tied to specific tests and strategies. If the number of customers tested is too small, test over a longer period to obtain a statistically valid sample size. Report results not only to top management, but also those in the field to help them buy into the process.
Now, do it all again. Like all endeavors, things change over time. What works amid high interest rates may not work when interest rates fall through the floor. Though your strategy may be effective now, changes in your competitors’ strategies could negate that. Retention strategies need to be modified and refined over time. So once everything is working like a well-oiled machine, go back to the first step.
