The Relationship Pricing Conundrum

Rich Jones
April 4, 2008 | COMMENTS

Credit unions are innovating incentives and relationship packages to create more member loyalty. Member loyalty is tied directly to:

• Engagement
• Brand image
• Convenience and physical proximity
• Price

Let's dissect each of these.

Engagement

Engagement is measured by the number of products members have with the credit union and the balances they carry with those products. The more products with higher balances, the more loyal the member tends to be.

Why? Member perception. Generally members believe that the more products they have, the more difficult it is to switch to another financial institution.

Brand Image

Brand image is how members feel and think about the credit union while transacting their business and while seeking new products.

If members believe the credit union is honest, trustworthy, safe, secure, priced right, and friendly; cares about them more than other local options; and is sophisticated enough for their needs, the credit union earns loyalty because of its brand image.

Convenience and Physical Proximity

Convenience/physical proximity is a key driver to loyalty and trumps all other loyalty measures. If the credit union is inconvenient, loyalty is lost.

The No. 1 reason members leave is because they're moving away from branch convenience. E-service adoption hasn't significantly changed this consumer decision when choosing and being loyal to a financial institution.

Most consumers still want to be close to their money. Convenience is a combination of access and physical location, but also includes operational ease in transactions, processes, and procedures.

Consumers choose and retain products because of ease and simplicity of doing business. If the credit union makes things hard for the member, loyalty is lost. Consumer apathy and inertia go only so far in retention and adoption.

Price

Price receives way too much credit and attention as a loyalty ingredient, but it still has a place in creating relationships and loyalty. All prices are elastic, and the elasticity of price is related directly to engagement, positive brand image, and convenience and proximity.

We all have "cherry pickers" who'll switch financial institutions over one basis point, but most members will accept less than the best rates (to a point) because of their loyalty—and some members don't pay attention to price at all.

We hear from the cherry pickers because they have to contact us to close their accounts. But we rarely hear from the significant majority about our prices or fees.

Our challenge is to keep appropriate perspective on the real impact of price and fees when we're seeking ways to earn and maintain member loyalty.

When credit unions develop relationship packages, they typically use price incentives on deposits and discounts on loans. This may get the engagement the credit union seeks, but it has a significant impact on margin and profit.

The Conundrum

Here's the conundrum. Credit unions want to give incentives to their best, most profitable members to "earn" their business and loyalty. They do this by:

• Designing their pricing around balances regardless of the profitability of the member or household
• Designing them as "tools to cross sell" for the benefit of the credit union, not necessarily to meet the member's needs
• Using a complicated, hard to administer, and difficult to communicate matrix of points, prices, or balances

The consequence of applying these tactics? Profitable members become even less profitable. This may garner more loyalty, but the bottom-line cost is great and in most cases unacceptable.

The Alternative

What's the alternative? Build member relationships and loyalty using member profitability criteria instead of balances or product adoption criteria. Relationship pricing must:

• Reward member profitability
• Meet members' needs
• Include a "penalty" for unprofitable members that will be used to fund the rewards/incentives given to profitable members; this will have the added bonus of helping unprofitable members improve their profitability
• Be easy to understand and administer

There are times when the competitive environment requires credit unions to offer rates that aren't profitable. There also are times when we're willing to compromise profit to attain member growth or product adoption goals.

But these decisions are driven by a temporary environmental or business need, not as a permanent strategy to deepen relationships or buy loyalty. Buying business through discounts isn't sustainable unless there's a way to create additional revenue to fund these discounts and incentives.

In most credit unions, only 20% to 30% of members are profitable. These profitable members make it possible to serve all members. All relationship pricing programs should focus on rewarding members that allow the credit union to be a financially strong business.

Rich Jones is vice president of marketing for Elevations Credit Union in Boulder, Colorado, and a member of the CUNA Marketing & Business Development Council Executive Committee. Contact him at 720-565-6046.