Financial Marketers, Are You Listening: Stop Buying New Customers!

Using financial incentives may get people to switch banks, but this risky marketing strategy often does little more than undermine your profitability.

“You keep customers the same way you attracted them.”

I think back on this sage advice I received from a veteran of Proctor & Gamble as I watch what is happening in retail banking these days. It’s become common practice to offer new customers $100 in cash (or more!) to persuade them to open a checking account.

Is this a winning marketing concept that you should adopt? Or a dangerous precedent you need to avoid at all costs?

Parallels exist in other sectors, like consumer packaged goods. Back in 1887, Asa Candler, an Atlanta businessman, had an innovative idea to convince people to try Coca-Cola. When he decided to offer a financial incentive to prospective customers, the “discount coupon” was invented.

For decades, such coupons worked pretty well. But then nearly every soda brand on the market offered a similar discount. Who recalls seeing the “Coke and Pepsi wars” heat up years ago? What they ended up doing was training people to wait for a special then stock up.

The couponing craze spread to categories like food and cleaning supplies, where carefully built brands like Tide and Jif found themselves trapped in the vicious downward spiral of perpetual discounting. It’s like marketing crack — try it once and you may find you’re forever hooked.

Coupons have migrated online in the last decade or so, notably lead by sites like Groupon, but the same harsh realities haven’t changed. Coupons tend to attract price sensitive, deal oriented consumers. Are they profitable? Do they ultimately turn into repeat customers?

It’s true that most consumers love a deal. And 93% of consumers say they have used at least one coupon in the last year. Even affluent consumers use coupons, with one study finding that nine in ten have used a coupon in the past 12 months. However, it’s important to note that consumers fall into one of two broad groups:

  1. Consumers who religiously use coupons to lower their expenses, either because they need to or because they like the challenge
  2. Consumers who are motivated by more intrinsic elements of the product, like quality, taste, convenience or value

As the years have passed, many categories have trained consumers to “wait for the deal.” This is perhaps most visible in the department store category where the vast majority of consumers know to sit on the sidelines until the next sale rather than pay full price. Remember what happened when J.C. Penney tried to replace the sale mentality with an “everyday low price”? They soon realized that its customer base had been fully trained to visit the store only during sales — if J.C. Penny didn’t run a sale, no one came in. Postscript: That strategy and the CEO responsible for it only lasted one year.

It’s important to remember that, in each category, there are competitors who resist discounting and price promotions. These brands tend to have better reputations, perceived higher quality products/services, and fatter profit margins. These companies have staked their brand on other attributes besides price — e.g., quality, design, style, or convenience. Apple and Starbucks come to mind, but so does Bank of America, which recently got rid of its “almost free checking” and has (so far) resisted paying new clients to switch.

The financial services industry has typically only relied on one of the four Ps of marketing (product, price, place, promotion) in marketing. They pull the “price” lever — typically in the form of rate specials — to generate interest in their products and attract new retail customers.

Many banks and credit unions will periodically offer a special rate to stimulate demand. But over time, financial institutions have trained a price-sensitive segment of consumers (think: CD rate shoppers!) to “wait for the deal.”

Probably the best example of this promotional approach in financial services was the era of credit card “0% balance transfers,” which experienced a quiet death shortly after nearly every provider built their acquisition strategy around it; a sufficient number of consumers learned they could switch from one new provider to the next. The same thing happened with long-distance providers after the breakup of AT&T; they each kept upping the stakes, with cash offers increasing from $50 to $100 to $200 and more, until the amounts being offered didn’t even match the potential annual revenues.

More recently, the financial industry has seen new interpretations of the “free toaster” promotion, but the underlying concept is still the same: a “free gift” used to incentivize switching checking providers. Bank and credit union marketers will frequently blanket their market four or five times a year with direct mail pieces designed to “buy” as many new (mostly mass market) checking relationships as possible.

Today, there is at least one retail financial institution in every market offering $100 or more in cash to open a checking account, usually with a stipulation of direct deposit, debit card or bill pay usage to increase the chances the account is actually used.

Cash offers can often turn into a war between competitors — a “race to the bottom” in terms of profitability.

So why are cash incentives so prominent? The simple answer is that the cash incentive acquisition strategy is relatively easy to develop and administer, and appeals to a wide range of consumers who are motivated by cash. It doesn’t take a tremendous amount of imagination to come up with a promotion to pay new customers $100. The financial industry isn’t known for being terribly creative, and marketers realize that a sizable segment of the population will do almost anything for $100. Granted, from the financial institution’s perspective, not all accountholders qualify for the cash incentives due to stipulations, so the actual cost of acquisition will be lower than the stated amount.

Further explaining the trend, whenever financial marketers conduct A/B tests with “champion vs. challenger” direct mail campaigns, the version that gives the customer $100 always beats out the second version that doesn’t.

Reality Check: Offering $100 to buy a customer is a short term promotional tactic to boost sales, not an intrinsic reason to select your institution or create a loyal, lifetime relationship.

It’s important to remember that — similar to the Coke and Pepsi wars, long distance carriers, or the credit card “0% balance transfer” offers —when every competitor in a market offers the same incentive, the incentive loses all power and no longer increases demand; it simply makes the product/service less profitable.

Remember the insight from the Proctor & Gamble brand manager? “You keep customers the same way you attracted them.” That has three very important implications with respect to promotions built around financial incentives:

  1. The customer did not choose you for intrinsic reasons; i.e., your brand is more convenient, higher quality, or aspirational
  2. You “bought” the customer, which means that either you need to retain the customer with price, or a competitor will take them away with a richer offer
  3. Because of these two implications, a customer attracted by cash offers is less loyal than a customer attracted by more fundamental brand-based reasons, and therefore these customers tend to be less profitable over time.

The lesson here is that offering cold hard cash is no substitute for doing your homework to develop a strong brand and a compelling value proposition.

If you decide to buy customers, you had better understand what reasons other than price you have for consumers to select you, and clearly communicate that reason along with the $100 offer. Because when most competitors in your market offer cash, you will be right back where everyone started… with people choosing one provider or another based on reputation and what makes them different and better.

Mark Gibson is a Senior Consultant at Capital Performance Group, providing strategy, marketing, and analytical consulting services to the financial services industry.

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