Customer Loyalty and the 80:20 rule

Author: Kevin Phillips

I have found myself recently listening to panels of industry experts debating the strategies banks should adopt to improve the loyalty of customers.  I wanted to make some sense of it in simple terms, so I decided to apply my favourite categorisation tool – the rule of eighty-twenty.  Looking at the leading UK providers today I have somewhat crudely split their approaches in two, based on observations of the reality, rather than rhetoric of the retail financial space.

The case for the 80%

“Customer loyalty is all about the big ticket product – get the punters in with a current account and credit card, and there is an 80% chance they’ll be in for life.  Just don’t rock the boat.”

This strategy for banking loyalty relies on two well-known laws of human nature: inertia and procrastination.  It lies in the successful practices from the previous century, when people left school and opened a current account with a red-brick bank, probably the one used by their parents.  With little choice on offer they institutionalised their banking relationship, and that was probably that… and it still works for the majority of customers.  Their bank keeps a low profile, do well out of the relationship and tries not to energise the customer into shopping around.

Using this rule financial service companies were relatively assured that they get around 80% of their potential customer portfolio, based on the demographics of the target market.  As technology moves forward they try following the in-crowd and provide a basic digital offering – see your balance online, view e-statements and transactions, and then a churn out a me-too mobile App.  Why change what works?

The case for the extra 20%

“Empower customers with self-service capabilities, cut traditional costs and spend a bit where customers want to go – to their digital devices.”

Beyond the 80% herd-instinct customer base lie the more sophisticated remainder, the upper 20%.  To capture this market, something more than basic-banking is required.  These customers are money conscious and upwardly mobile.  They feel good about getting a great deal, demand a higher standard of service, and are willing to try something new.  Despite their more exacting requirements they are not hard to target; it has never been easier with the dawn of the digital age.  Telephone banking, straight through internet services and mobile app channels create enough noise to attract these magpie-like customers.  To keep them, maintain a good standard and offer tip-bits of technology advancement every so often.  These punters enjoy crowing to their peers, so let them generate referrals and new business.

Further analysis

Having applied my rule I was left musing over the result, toying with the nagging doubt that something was missing.  If you’ve safely bagged the 80% of your potential customers, and offered carrots to the other 20%, what more is there to do?

The answer lies in the fact that there is a missing element not factored into my two-dimensional calculation, something more to do with laws of physics than maths – velocity.  The rate of change in the market space is accelerating, dramatically, driven by the phenomenal escalation in digital technology.  Sure, great deals on rates, loyalty points and cash-back still pull in the punters, but as these flatten out across stiff market competition lines it is other factors that provide the leading edge.  We’ve already moved from showing a balance via SMS to digital wallets in just five years, and soon we’ll be able to do as much more with our smart phone than we can with our desktops.  The needs of the clamorous next generation will not stop there either.

What is most important to realise, what is almost hiding in plain sight is that the 80% of yesterday will become the 20% of tomorrow.  If we let it, the change will be upon us in a few short years and it will be too late to react.  Marketing strategies focusing on the current lion share will find themselves feeding off the remains of an aging generation, while leaner, sharper, modern financial services will gobble up the widening self-serve orientated customers with their full on omni-digital age engagement.

Despite what I’ve heard, I believe we’ve only just taken the first step into the banking revolution, and it will be one far more fundamental than just the arrival of a new digital-channel.  The customer loyalty battleground will be won by organisations that reinvent themselves to focus on a holistic strategy.

The question that still remains is how are they going to achieve this in what little time they have left?

24 Jul 2013

Author: Kevin Phillips

I have found myself recently listening to panels of industry experts debating the strategies banks should adopt to improve the loyalty of customers.  I wanted to make some sense of it in simple terms, so I decided to apply my favourite categorisation tool – the rule of eighty-twenty.  Looking at the leading UK providers today I have somewhat crudely split their approaches in two, based on observations of the reality, rather than rhetoric of the retail financial space.

The case for the 80%

“Customer loyalty is all about the big ticket product – get the punters in with a current account and credit card, and there is an 80% chance they’ll be in for life.  Just don’t rock the boat.”

This strategy for banking loyalty relies on two well-known laws of human nature: inertia and procrastination.  It lies in the successful practices from the previous century, when people left school and opened a current account with a red-brick bank, probably the one used by their parents.  With little choice on offer they institutionalised their banking relationship, and that was probably that… and it still works for the majority of customers.  Their bank keeps a low profile, do well out of the relationship and tries not to energise the customer into shopping around.

Using this rule financial service companies were relatively assured that they get around 80% of their potential customer portfolio, based on the demographics of the target market.  As technology moves forward they try following the in-crowd and provide a basic digital offering – see your balance online, view e-statements and transactions, and then a churn out a me-too mobile App.  Why change what works?

The case for the extra 20%

“Empower customers with self-service capabilities, cut traditional costs and spend a bit where customers want to go – to their digital devices.”

Beyond the 80% herd-instinct customer base lie the more sophisticated remainder, the upper 20%.  To capture this market, something more than basic-banking is required.  These customers are money conscious and upwardly mobile.  They feel good about getting a great deal, demand a higher standard of service, and are willing to try something new.  Despite their more exacting requirements they are not hard to target; it has never been easier with the dawn of the digital age.  Telephone banking, straight through internet services and mobile app channels create enough noise to attract these magpie-like customers.  To keep them, maintain a good standard and offer tip-bits of technology advancement every so often.  These punters enjoy crowing to their peers, so let them generate referrals and new business.

Further analysis

Having applied my rule I was left musing over the result, toying with the nagging doubt that something was missing.  If you’ve safely bagged the 80% of your potential customers, and offered carrots to the other 20%, what more is there to do?

The answer lies in the fact that there is a missing element not factored into my two-dimensional calculation, something more to do with laws of physics than maths – velocity.  The rate of change in the market space is accelerating, dramatically, driven by the phenomenal escalation in digital technology.  Sure, great deals on rates, loyalty points and cash-back still pull in the punters, but as these flatten out across stiff market competition lines it is other factors that provide the leading edge.  We’ve already moved from showing a balance via SMS to digital wallets in just five years, and soon we’ll be able to do as much more with our smart phone than we can with our desktops.  The needs of the clamorous next generation will not stop there either.

What is most important to realise, what is almost hiding in plain sight is that the 80% of yesterday will become the 20% of tomorrow.  If we let it, the change will be upon us in a few short years and it will be too late to react.  Marketing strategies focusing on the current lion share will find themselves feeding off the remains of an aging generation, while leaner, sharper, modern financial services will gobble up the widening self-serve orientated customers with their full on omni-digital age engagement.

Despite what I’ve heard, I believe we’ve only just taken the first step into the banking revolution, and it will be one far more fundamental than just the arrival of a new digital-channel.  The customer loyalty battleground will be won by organisations that reinvent themselves to focus on a holistic strategy.

The question that still remains is how are they going to achieve this in what little time they have left?