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April 2000 Volume 1.09
Trends In Bank Profitability
by Rodger Gallagher
Do different levels of satisifaction change bank
profitability?
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In the previous articles, we saw how the work done by James DiConstanzo,
a senior vice president at the PNC Bank in Pittsburgh, had found
that highly satisfied bank customers have higher account balances,
and that bank branches with highly satisfied customers are more
profitable. But often the strongest links between the value customers
perceive they get and business profitability comes when trend data
is studied. The PNC Bank checked this out by undertaking two waves
of customer research spaced 15 months apart. The same customers
participated in each wave of research. The account balances for
each customer were attached to the sample when the initial wave
of research was undertaken in 1996 and the updated balances were
added to the data when the second wave of research was undertaken
15 months later in 1997. So the result was two sets of customer
satisfaction data with associated account balances, but covering
identical customers. This provided the base data so that trends
in financial performance and links to customer perception could
be studied.
Highly satisfied customers are the most profitable
The researchers found that customers who were highly satisfied
in the first wave of research and remained highly satisfied in the
second wave had substantially increased their balances. On average
their balances had increased by $US 4,800. Clearly, highly satisfied
customers who remain highly satisfied reward a bank with more business.
When the researchers looked at customers in the second wave who
had only been satisfied in the first wave, they found that their
balances had gone up by $4500. On the other hand when customers
ceased being highly satisfied they dropped their level of business
by $1000. If they had stayed highly satisfied they would have increased
their business by $4,800, so the total loss of business when a customer
slips from being Highly Satisfied is $4,800 + $1,000 = $5,800.
So there are degrees of customer satisfaction. Customers are not
merely satisfied or dissatisfied. It is only when they become highly
satisfied and remain so that they reward businesses with substantial
increases of their business. And as the following graph shows when
customers slip from being Highly Satisfied, banks bear the brunt
of their wrath as customer bank account balances fall as funds move
elsewhere.
The slippery slope
When a bank customer slips from Highly Satisfied to Satisfied,
there is a huge loss of business.
And what about the customers what started off as satisfied but
ended up being less than satisfied? The research found that where
this occurred customers reduced their business on average by $1,400.
So while it is best for optimum business results to keep customers
highly satisfied, where it is difficult to do this then at least
they should be kept satisfied. A major conclusion taken from this
research by PNC Bank is that changes in the degree of customer satisfaction
are a really good predictor of changes in the level of business
for customers.
But, as raised in the previous article, the causal relationship
may also flow in the reverse direction. Many banks have identified
their most valuable customers and decided to supply superior service
to this group of customers. The opposite side of this is that they
frequently end up providing inferior service to their low value
customers. What banks frequently fail to evaluate in these exercises
is the potential value of these customers. A customer may move business
from one bank to another because of a better rate or product offering.
Because the first bank now treats the person as a non-valued customer
then it is likely that the customer's satisfaction will decline
because of the decreased service. And of course this decline in
customer service, coupled with the superior rates and better products
at the second bank, will ensure that the customers keep most of
their business with the second bank. So the causal relationship
may be a little more complex than it first appears.
It is important to capture the views of people who might one day
be a valued customer as well as the views of people who are currently
valued customers. Businesses often find it strange when we do Customer
Value and include some of their least profitable customers in the
study. The reason we include these customers is that their total
expenditure with all suppliers is large.
The PNC Bank study covered in this article and the two previous
articles proves once again that there is no such thing as a satisfied
customer. There are degrees of satisfaction, and business gains
flow when customers regard the products and services they receive
from a supplier as excellent. This is especially important in banking
where there is often no price differential in terms of interest
rates paid and fees charged.
SPIRALS AND OTHER THINGS
Old steel electric power pylons, Belgian cast iron, swamp kauri,
and Tasmanian Blackwood timber seem a strange combination. Where
would you find them all coming together? I first came across a Belgian
wrought iron lace spiral staircase in the old automatic telephone
exchange in Wellesley Street, Auckland. A few years later I came
across an identical one in the old Hamilton telephone exchange.
These beautiful staircases were installed early in the 20th century
as part of the first automatic telephone exchanges imported from
the Western Electric plant in Belgium. Imagine my surprise to encounter
one of these staircases in The Narrows Landing Restaurant just south
of Hamilton. The owner, Brian Hermann, has installed the staircase
in the middle of the restaurant as a feature linking the ground
and first floors. Patterns made from the castings on the staircase
have allowed the cast iron lace theme to be incorporated in handrails
throughout the building.
The old steel from the power pylons has been used for the structural
frame of the building as well as for the door and window frames.
The steel is complemented by stained glass windows and doors together
with various types of timber recovered from old buildings. It all
comes together rather well and provides a perfect setting for relaxed
dining. First I tried the steamed mussels with tomatoes, chillies,
and olives, which were delicious. For the Main I had the Piedmontese
Heart Foundation approved eye fillet with field mushrooms, which
although good was a little cool by the time it made the table. And
downstairs in the cellar a massive slab cut from a swamp kauri log
provides the right ambience to taste selected bottles from the wine
collection.
Phone The Narrows Landing to book a wedding, a conference, a hotel
room, or a meal on 0800 526 346 or see them on the Web at http://www.thenarrowslanding.co.nz/
Regards,
Rodger Gallagher
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