Is Every Customer Worth Having?

Wholesale lenders should assess the value of individual mortgage brokers, according to an industry report, because more is not always better. As rates rise and originations are anticipated to decline industrywide, lenders will direct efforts to attracting or retaining brokers. But, in order to get the bigger bang for the buck it is essential that companies focus on evaluating which brokers provide the greatest overall returns. The recent report by Inforte, a customer strategy and solutions consultancy, indicates that evaluating the value customers represent for the organization, which it refers to as customer value-based management, is a key role in an organization’s success. The report, of which one of the key goals is to improve the profitability of wholesale relationships, according to Inforte spokeswoman Marcy Blount, outlined steps companies can take to operate on a customer value basis and make the most of their money to accelerate growth and probability.

“Understanding and acting on customer value insight will help determine everything a company does, from what programs to invest in, to attracting and retaining the right customer, to predicting ROI from marketing and sales investments,” Inforte said in the report.Most financial services firms involved in business-to-business environment face the same customer conundrum — many customers are marginally profitable or not profitable at all, Inforte said. For many, the 80/20 rule holds true, where 20% of its customer base contributes 80% of the a company’s profits. With value distribution being so lopsided, it is vital that lenders gauge the overall value contribution brokers make to their organization.

“Enterprises are discovering…that the shortest path to increased profitability and organic growth is to extract more from loyal, high value customers, and to find lower-costs ways of serving others,” Inforte said.

The goal of developing a customer value model should be to determine one overall customer “score” that represents a broker’s relative importance. The ladder to obtaining that score involves identifying the highest value brokers and the loyalty on behalf of brokers. As not all loyal parties are profitable, the lender should then create customer retention programs for those brokers it prefers to keep loyal.

In developing the customer value-based model, the managers must first create the most accurate portrait of the brokers regardless of data availability and also determine which variables provide and detract value. Then, they must take an inventory of the data currently available to determine if its is sufficient to create a viable customer-value based model and whether it captures a sufficiently broad view of a customer’s interaction with the organization. Finally, the variables must be weighted appropriately. Starting with a ‘perfect world’ scenario allows the lender to perform a gap analysis between the information currently available from their present data sources and determine the need and priority of tracking additional information, Inforte said.

It is also important to determine what time period is necessary to fairly evaluate brokers. The model should be tailored to the average amount of transactions a customer performs in a specified time period. For example, if a broker only averages 10 to 15 transactions a month, a snapshot containing data for three months will do, and a more frequent time interval would be appropriate for brokers that complete several daily transactions.

Regardless of the model’s design, it should be crafted with its audience in mind to answer what perspective of a firm’s brokers will be most compelling to Sales, Marketing and Operations, and what metrics impact their day-to-day activities.

“We have observed customer value serving as the ‘unifying bridge’ across an enterprise’s departments, giving Marketing, Sales and Operations a common denominator to prioritize budgets and foster cross-departmental interaction as they work together toward a common goal — firm profitability,” the report read.

For example, the customer-value based model can help the marketing department recognize high-value brokers and those on the decline, which can then trigger account executives to have face-to-face meetings with declining brokers or personally deliver promotional items, and in turn allows the sales team to provide corporate with product and pricing feedback based on ‘casual’ conversations with high-value customers.

Marketing managers intending to developing customer value management capabilities must first address some core questions: “What value does a particular customer provide our organization?; How does their value compare with our other customers?; What level of service is required in order to attain this value?; How has their value changed over time?; and How have we impacted this value?;” the consulting firm reported.

The lender’s strategic priorities must also be considered. For example, managers must know what metrics are important to the organization, if they can influence these metrics through efforts such as targeted marketing or pricing, or if they are out of their control, with, for example, new state regulations making it cost-prohibitive for the company’s business model to remain profitable.

Introducing an actionable framework for customer value management also requires that technical criteria be determined, such as over what time interval brokers will be evaluated on, or what geographically based differences in broker performance will be accounted for.

It is essential that lenders understand the relative value of a particular broker when compared to all of the firm’s brokers in order to understand the broker’s relative profitability, their performance and value-migration over time. “A relative and time-based customer value framework allows the organization to monitor the relative impact of product and service preferences, and in determining the level of interaction required to maintain the relationship,” Inforte said.