Contemporary Analysis

Data Science

Grant Stanley

Predictive Analytics improves M&A Activity

There have always been two major ways to expand your business:  Grow it, or Buy it.  This brings up some interesting questions about which is more beneficial.  The correct answer is usually based on cost of customer acquisition and customer lifetime value.  Right now, with the cost of client acquisition being so high, companies are turning to buying distressed businesses.  One, it eliminates competition, and two, the customers can be acquired "on sale".  While mergers and acquisitions are common across all industries, there seems to be a significant propensity for growth by buying in the banking industry.

The unique problem that is causing an increase in the " buy them" thought process is that in banking their revenue generating power has dwindled with the decline of interest rates.   Not only that but as clients leave for competitors by natural attrition, there is a dire need for new customers.  Buying seems to solve both of these.

While it may solve the issue of new customers at a reduced cost, how to transfer the old customer base to the new bank has always been a major problem.  First, you have a bevy of new customers who have not gone through your buying process.  You have no idea who they are and why they are in the product they are in.  Secondly, you can fix problem number one by keeping the staff from the bought bank, but they're not sure if the customers are in the correct products anymore either because they don't know what products they have to sell.

Grant Stanley

8 isn't enough. Why you need a better sales system.

How many products can the average salesperson keep in their head while they are making reccomendations to customers? You will be shocked to find on average it is only 8.  What if 8 isn't enough?  What if you have more than 8?  What if you have twice that?  Ten times that?

If you have more than 8 products, when a member of your sales team calls on a current client, they only recommend the products that they are most familiar with.  You have provided them an entire playbook, and they use only a tiny fraction.  Unless, those 8 products just happen to be the correct product for a customer, your sales staff just put a client into the wrong product.  They assumed that everyone was like them.

Think about that for a second.  The whole point of cross-sell is to keep your clients happy and purchasing from you. Matching the wrong product with the wrong person means reduced satisfaction, frustration, and loss of loyalty.  On the balance sheet, you are losing income, not maximizing profitability, and your salespeople are misusing their time.  How do you improve this?

Grant Stanley

How to Increase Customer Lifetime Value

While many business make substantial investments to improve customer acquisition, they often fail to invest in improving their customer lifetime value.  Customer lifetime value is the average monthly net profit per customer divided by the monthly churn rate.  Learn how to calculate customer lifetime value here.  Companies can increase customer lifetime value by making investments to improve customer loyalty, crossing selling, and up-selling.

Improving customer loyalty, reducing customer churn, allows you to increase net new sales.  Net new sales = # of New Customers - Customer Churn.  Your sales and marketing teams work hard to bring in new customers, and customer churn erodes their efforts.  Fortunately, improving customer loyalty and reducing customer churn, increases the return on investment from customer acquisition, improving your customer lifetime value.

To reduce customer churn, you need to know each of your customers.  You need to know who is most likely to leave and why.  Knowing who is most likely to leave allows you to contact them before they leave.  Knowing why people leave, allows you to fix your systems.  The who is a short-term fix, the why is a long-term fix.  For small companies, knowing the who and why might be obvious.  However, for companies with thousands or millions of customers this becomes very difficult.  

Let's look at the impact of increasing customer loyalty on revenue.  

Grant Stanley

How to Calculate Customer Lifetime Value and Cost of Customer Acquisition

While it is important to focus on new client acquisition, it is equally and perhaps more important to focus on improving your relationships with your current customers. This will help you improve your customer lifetime value. Customer lifetime value is the amount of net profit you receive from each customer. As a general rule, the average customer lifetime value needs to be 3 to 5 times the average cost to acquire a customer.

Improving customer lifetime value will help you have a sustainable and profitable business. To stay in business, the net profit from each customer has to be more than the cost to acquire each customer.

Customer Lifetime Value is the average net profit that can be attributed to a company's entire relationship with a customer.

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