08 Nov 3 Signs Your Profitability Analysis Strategy Needs An Overhaul
Consumer banking has been a source of relief for corporate financial institutions in recent years. The industry has rebounded quite nicely since the Great Recession of 2008, and consumer confidence in their banking partners continues to climb year after year. JPMorgan & Chase, for example, saw its Q3 2017 profits increase 7 percent over the previous year, thanks in large part to its consumer banking business.
It’s not all good news, however. The retail banking sector is as crowded as ever, with big-name institutions, local credit unions and international banks all jostling for position. Consumer options are no longer relegated to whatever branches are located nearby. With the proliferation of web portals and mobile apps, customers can do their banking from any place and with any institution of their choosing.
Staying competitive in this environment requires services that can meet consumer needs while also providing the best profit margins possible. That’s where profitability analysis can help. If you’re not sure whether you need to revisit your own profitability analysis strategy, consider these three tell-tale signs that a change is in order:
1. Your cost per customer is too high
Banks go to great lengths to bring in new customers, but they don’t always make the most of those relationships to optimize profitability. If the cost of bringing in new customers outweighs the revenue from those accounts, that should set off some red flags. There could be missed opportunities to sign up existing customers for additional services, or banks could be pushing particular offerings that don’t match up with the needs of their clientele.
Revamp your profitability analysis strategy.
Whatever the underlying issue is, banks need to achieve a more thorough understanding of how much money they spend on each customer and balance that against the amount of revenue those accounts bring in. A great way to start is to calculate your customer acquisition cost, which will provide insight into the investment needed to get consumers to open a new account or sign up for an additional service.
The next step is to revamp your profitability analysis strategy to get a better idea of how much revenue your existing services bring in and identify where any gaps may lie.
2. Your bottom line isn’t where you want it to be
There are few things more frustrating than seeing an uptick in sales and revenue only to have your bottom line stay flat. If your net profit figures aren’t measuring up to expectations, you may have a profitability analysis problem on your hands. There could be any number of culprits for why a bank’s bottom line suffers even when sales opportunities increase. It could be as simple as the costs of your services outweighing the potential revenue they present. Processing fees could be widely divergent across the entire spectrum of an institution’s accounts. There’s also the possibility that discount programs are overly generous, ultimately making them unprofitable over the long term.
In these circumstances, identifying specifically what issues are negatively impacting a bank’s bottom line requires a change in direction with the profitability analysis strategy, as the current approach is clearly overlooking a key detail.
A better approach to profitability analysis can help bring issues to light.
3. Low customer interest in new services
Ideally, every new banking service will be met with approval from your customer base. However, sometimes offerings fail to make the grade, resulting in low adoption rates. The cost of launching a failed service is steep on its own, but continuing to support a doomed program will only prolong the misery. If customers just aren’t gravitating to specific offerings despite heavy pushes in marketing and awareness, there may have been a critical miscalculation in the development and rollout of those services.
A better approach to profitability analysis can help bring these issues to light, allowing banks to avoid costly missteps and support only the very best services possible.
To get an idea of what best-in-class profitability analysis can do for a financial institution, consider the massive turnaround CommunityAmerica Credit Union experienced after implementing Acorn Software. The organization identified a major disconnect between its auto loan practices and the amount of revenue each transaction provided. By working with Acorn, CACU was able to maintain loan volumes while increasing the program’s overall profitability.
That’s just scratching the surface of what robust profitability analysis can do for your business. High profits are available if you know where to find them. Contact our cost management experts today to find out more.