Should you pay cash to get new customers?
By Mark Gibson
B.Before the pandemic broke out, it seemed like at least one bank in almost every market was offering cash incentives of $ 100 or more to attract new customers. Now that branches have been opened and marketing departments have returned to a new normal, purchasing new households is once again the top priority for many institutions, and with it the decision as to which value proposition or offer should be used. A key question for many CMOs and marketing directors is, “Should we be offering a monetary incentive to attract new customers?”
Put monetary incentives in context
Many industries – such as consumer goods, supermarkets, and furniture – have geared their sales strategy around seasonal discounts, so this concept is very familiar to consumers. Furthermore, pricing is not a new concept in banking: CD rates, mortgage rates, and zero percent balance transfers have been around for many years. In addition, banks have been offering free gifts to new customers for decades.
What is new is that customers are paid a substantial cash payment in return for their business. And over the past decade, we’ve seen these cash payments go from $ 100 to $ 500, or in some cases even to $ 1,000. Why is this practice so widespread?
Price advertising is always easier than motivating and appealing advertising without a price. And monetary incentives work! They are easy to understand for the customer (unless there are too many complicated conditions for the receipt of payment). They don’t require a lot of training for the sales force.
In addition, bank managers are analytical and the concept of customer acquisition and lifetime value influences how much an institution is willing to pay to acquire new customers. While this “cost-per-acquisition” should also include other marketing costs such as post-production or media, cash incentives often dominate the discussion between CMOs and their financial counterparts.
Finally, in view of the increasing importance of new household purchases for increasing the income of a bank, investments in marketing and cash payments in particular are contrasted with other growth alternatives such as the construction of new branches or the expansion of direct sales. Especially in this time of social distancing, growing sales through marketing often win.
What are the alternatives?
While price-based advertising is common in most industries, including banking, there are other approaches that add short- and long-term value to the business.
First and foremost, a strong trustworthy brand is able to attract consumers and business owners by highlighting attributes like quality, a high level of service, wide choice and technological expertise or extreme convenience (think Apple, Starbucks and Amazon). While it costs money to develop and promote these differentiating attributes, the benefits of charging full price with no discount and getting word of mouth from satisfied customers more than outweigh the investment. The net result is usually a more loyal customer and higher profitability for the company.
A second method of attracting more than your fair share of new customers is to offer a product or value proposition that excellently meets customer needs. Instead of offering discounts, a company is often able to charge a premium for that type of product or service.
A landmark Harvard Business Review article by Scott Cook, the founder of Quicken, entitled “Marketing Mistakes: Cause and Cure” stressed that far too many products are either copying their competitors or adding a feature or benefit that isn’t really important to customers. Rather, a marketer should study the targeted customers and the “jobs” they want, and then develop products and tools that will help the consumer do that job much better.
One of the best examples of this concept is the Dyson vacuum cleaner. James Dyson was an inventor who was frustrated with the performance of his vacuum cleaner. He took it apart and found that the clogs in the bag were reducing the suction power of the vacuum cleaner. He spent five years perfecting the world’s first bagless vacuum cleaner that had outstanding suction and never clogs.
In his own words, “We are, like everyone else, frustrated with products that don’t work properly. As designers, we are doing something about it. “
There are many examples of this type of innovation in banking. Bank of America’s Keep the Change or PNC’s Virtual Wallet are two well-known examples, but there are many more, such as Liberty Bank’s Quarter Back Checking or Huntington Bank’s 24-hour grace period to avoid overdrafts.
One advantage of premium branding or superior products over cash incentives is that the cost per acquisition is lower because you avoid the cost of the incentive. A hidden additional benefit is just as important. Businesses tend to keep customers the way they attract them. In other words, when you use cash to motivate a customer to switch, it means that the customer did not choose your company for more intrinsic reasons. The risk is that the customer will move on if another provider offers a better offer or a higher incentive. As a result, customers drawn through cash incentives may be less loyal and have a lower lifetime value.
Should You Use Cash Incentives?
Cash incentives work. Otherwise, smart banks like Chase and Santander would no longer use them. Unless you have a stronger value proposition, product, or brand, you may be forced to take advantage of cash incentives, at least in the short term. But what if most of the institutions in your market offer cash incentives? At that point two things will happen. First, the dollar amount of cash incentive increases to the level of lifetime value, essentially costing you as much to get the customer as you are going to make with them. Second, the appeal and differentiation of a cash incentive disappears because everyone has it, and you’re back at the beginning of where your basic brand and value proposition must stand on its own.
So the lesson is, even if you opt for cash incentives in the short term, you’d better work on building your brand, understanding your target customers, and building a “better mousetrap” to meet their needs. Otherwise you will be in a “race to the bottom” and will not have a sustainable growth strategy.
Mark Gibson is a Senior Consultant at Capital performance group, a strategic consulting firm that provides consulting, planning, analysis and project management services for the financial services industry. He can also be reached at LinkedIn.