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Profit
Impact of a Retained Customer - an Example
A community bank has decided to evaluate its
checking account pricing policy. Until now, the bank has charged
its checking account customers a $10-a-month fee, and observed
a 10 percent customer acquisition rate along with a 15 percent
attrition rate. Having read about the benefits of customer retention,
Steve, a bank employee, suggests that the bank lower its monthly
fee to a more competitive rate of $7 per month. Based on his
readings about customer management, Steve estimates the bank's
customer attrition rate will decrease to around 10 percent,
and its customer acquisition rate will increase to 15 percent,
if the bank lowers its fees. Having studied the purchase behavior
of other long-term customers, Steve also claims that once a
customer has been with the bank for one year, there is a moderately
high probability that he or she will purchase a 3-month certificate
of deposit (CD) and become even more likely to remain with the
bank. Steve argues that, given a pool of 100 prospects and these
estimated customer acquisition and retention rates, the bank
can increase profits nearly 10 percent in one year's time by
implementing his proposed strategy. Steve's claims are based
on the customer retention profit analysis found in Table
Retention-5.
Steve's analysis reveals that the bank
could benefit from charging a lower and more competitive price
instead of price skimming. It could attract more customers and
retain them for longer periods of time. In the short term, the
bank would suffer losses by lowering its price. But in the long
term, increased sales (i.e., add-on selling) to its retained
customers would help to moderate these losses. This long-term
profit potential makes retaining more customers an attractive
strategy.
Steve uses information about customer
behavior and profit potential over time to justify his recommended
strategy.
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