Why Credit Unions Need to Focus on Member LTV
Lifetime Value (LTV) has been discussed as an important metric in financial services marketing for many years. If you aren’t familiar with the term, it is basically defined as the projected revenue a given member will generate over the course of their relationship with the credit union. However, I would submit that it is often overlooked when making decisions about the aggressiveness, or lack thereof, of a specific marketing initiative.
Let me give an example. A few years ago, many credit unions were offering very dramatic interest rates on checking accounts. We had one client who ran a checking promotion based on paying 4.01% APY. Although there were many requirements involved including a high average daily balance, monthly transactional minimums and the like, this offer was extremely compelling in a market environment when even large CDs were yielding only a fraction of this interest. Suffice it to say, this promotion generated a great deal of attention and many people signed up.
This promotion was clearly designed to build market share and in that regard it was very successful. Of course, it was not sustainable over the long haul and eventually the high interest rates were reined in. I’m OK with all of that. As I understood the intention, the promotion was never viewed as a short-term strategy. The client recognized that, if it managed these new members properly, a reasonable percentage of them would remain long after the initial promotion.
That’s where LTV comes in. If your credit union has a good handle on the average value of its members, marketing decisions can be made based on long-term benefits, not quick fix tactics. There are various formulas for calculating LTV and I won’t endeavor to go through all the variables here. Typically these calculations factor in average balances of loans and savings per member, average interest rate margins, average per member income/revenue and cost of providing services. The Kissmetrics Blog offers a helpful infographic that outlines the steps in calculating LTV. The equation given is for retail service companies, but it can be a helpful starting point for you if you’re unsure of where to begin.
This gets back to a discussion we have many times with clients – that of strategy vs. tactics. It’s very easy to think tactically and move from one marketing initiative to another. What’s more difficult, but ultimately more valuable, is to have a full strategy in mind that drives your marketing initiatives. Using LTV can help you build out your strategy, because you’ll have the long game in mind.
LTV also highlights the importance of another common metric – member satisfaction. As you well know, as you increase member satisfaction, you can increase member loyalty and, eventually, margins.
Another example of using LTV metrics for planning marketing promotions would be a refer-a-friend promotion. On the surface, it may seem a little hard to justify paying out $50 or more to motivate an existing member to help recruit a new one, but it may make abundant sense for long-term revenue generation. Even with the financial incentive involved, most people are not likely to offer the name of a friend or family member unless they are satisfied with their credit union relationship. So, in essence, you have one brand loyalist advocating on your behalf to recruit another member with the potential to be equally loyal to your institution. Again, properly managed, it should be a good investment all the way around.
You know which products are most profitable for your credit union. Taking that information and combining it with LTV data can help you decide where you need to focus your marketing dollars. However, do keep in mind that the marketing climate today may not be the marketing climate of the future. The infographic I linked to earlier in this post can walk you through how to account for those discrepancies.
As you survey your current marketing initiatives, consider the lifetime value of your members. Having long-term goals in mind can help you optimize your marketing efforts today.
Thom Villing is president/CEO for Villing & Company. He can be reached at 574-277-0215 or firstname.lastname@example.org.