Measuring the ROI of Your CRM Investment

13 November, 2012 (22:42) | Blog | By: admin

By Alan Buhler

It does not matter if you call it Client Retention Management, Client Relationship Marketing, Client Relationship Management, or Catch-all Repository for Marketing; every year financial institutions spend millions of dollars implementing CRM solutions. It is an amount that is expected to consistently grow in the coming years. While there seems to be no evidence of a slowdown in CRM spending, many community financial institutions continue to struggle to measure the return on their CRM investment.

The difficulty many financial institutions have in measuring the value of CRM may be due to an unclear understanding of where the institution started and what the measure for CRM performance was before the investment was made. Without this baseline, many financial institutions tend to adopt simple measures of performance that are often only built on basic referral and cross-selling activities. While this is a good measurement, it fails to acknowledge the interdependency of CRM strategies and the alignment of business processes across the enterprise.

It has been said that the “business” of business is to generate shareholder value. While this definition clearly can be applied to credit unions and community banks, it also should be a measure of your CRM value as well. With that said, traditional business education has taught us that shareholder value is derived from selling more of the company’s products and services. Based on this learning, financial institutions typically target their CRM programs on recommending more of their products to potential and existing clients while reducing their overall customer service costs. One reason is because cost/benefit projections can be reasonably precise. They are typically based on experience, usually have a clear origin, and a proven “cause and effect.”

When such a simplistic view of a CRM application is employed, one very important, yet overlooked, element is how client behaviors contribute to shareholder value. In other words, clients determine both revenue and cost to your institution by their choices, their behaviors, and how those behaviors consume resources. From this perspective you can see how shareholder value is determined almost entirely by the types of clients your financial institution attracts.

When you think about it, it is easy to see how your clients’ behaviors, their product choices, and the services they consume determine your financial institution’s shareholder value. It also becomes apparent that the objective of your CRM strategy should be to influence your clients’ behaviors to maximize customer satisfaction while increasing your institution’s profitability. In addition, because all your clients are not equally profitable, your shareholder value is determined almost entirely by the types of clients your institution attracts. Too few of a financial institution’s clients exhibit the behaviors that contribute to long-term value. Not all clients are created equally, nor will each client provide an equal return for the same investment. CRM thus becomes an investment in targeting the right types of clients, getting those clients to adopt a specific set of beliefs and consequent behaviors, and retaining those clients throughout the lifetime of their potential profitability to the institution. Equally important, institutions must measure the shifts in their clients’ behaviors over time, so as to determine the efficacy of the strategy, decision-making, and supporting investments.

What is the cost of not knowing and not liberating your client information within and throughout the entire organization? See the graph below:

Source: DataMentors, Inc.

Source: DataMentors, Inc.

As you can see approximately 150% of your profit comes from the top 20% of your clients, and about 30% of your clients are responsible for reducing your profit by more than 50%.  Keeping that in mind, consider the following simple and straightforward concept that can help prove the value of implementing the right plan and the right tools for CRM to pay for itself. The following example is based on a typical $100MM financial institution; however the calculations prove themselves out for any size institution:

  • A financial institution’s top five percent of clients average $2,000 annually in profit contribution.
  • Assume the institution has 20,000 household relationships; the 1000 (5%) most profitable households will generate $2,000,000 annually in profit.
  • On average, institutions attrite/lose 15-20% of their clients every year.  This percentage of attrition would hold true for the top five percent of clients as well.
  • Retaining just 2% of the top 5% of your clients per year earns the institution $40,000 (20 households x $2,000 = $40,000).
  • If your institution is like most, you are losing more than 10% of your key customers every year.

Another factor to consider is activity-based costing.  Activity-based costing provides the best foundation for calculating client profitability. Activity-based costing calculates resource usage based on the type of transactions your clients make. For example, client activities that include Internet banking will typically be more profitable than clients who only use traditional checking.  Tracking your clients’ activities is an important process.  This is because specific transactions consume a determined, fixed amount of resource and, therefore, can be used to distinguish between different patterns of usage from one client to another. As such, activity-based costing can identify shifts in behaviors by watching patterns in the resources consumed. With this knowledge, you can use CRM to encourage your clients towards more profitable behaviors such as internet banking.

People, in general, are slow to accept change, and it may take considerable effort to get clients to behave differently. An effective CRM measure would take this into account and factor in a client’s value over time.  Client lifetime value (LTV) builds on activity-based costing by extending the net profit of a client into the future for as long as the client is expected to remain a client.  Therefore, shareholder value can be calculated as the sum of the lifetime values of all your institution’s clients. This too can provide a basis for measuring the return on your CRM investment.

If you can project the lifetime value of your clients, you can then determine the maximum amount to invest to develop each of the relationships. Understanding the LTV of your clients can open windows of opportunity that are inherent in the life cycle of your clients.  In addition, you will be able to predict the most likely path a client will follow while banking with you—the strategic value of each of your clients. Knowing the points in time in which your clients are faced with the decision to remain with your financial institution or go elsewhere (i.e. every four to six years for an auto loan, but once a year for car insurance), you can compare the strategic value of the client at any point in the relationship to the amount necessary to keep the relationship. This is where CRM pays its biggest dividends.

Many financial institutions are still trying to understand what CRM truly is about, let alone what constitutes client profitability and how to measure it at any given point in time. In fact, there are three separate, yet equally important components that make up a successful, comprehensive, profitable CRM:

Analytical/Strategic CRM

Institution Leadership

Strategic Planning and Direction

Consultants/Industry Experts


Data Cleansing and Householding

Data Integration


Reporting and Analysis

Knowledge Management

Knowledge Deployment

Operational CRM

Core DP Systems

Branch Ops Systems

Loan Applications Systems


Internet Banking Systems

Human Resources

Internal Communications
Systems like: Intranet/Internal E-Mail Systems

Touch-Point CRM

The points and channels throughout the institution in which your staff delivers information to clients, as well as touch/interact with them.

Sales Force Automation and Contact Management Systems

Teller & Loan Systems


Internet Banking Portals

Direct Marketing (Direct Mail, Internet Messages, Officer Calls, Email)

All too often financial institutions mistakenly view CRM implementation as primarily a technology project. From this point of view, they completely overlook the impact of the new technology upon the organizational infrastructure. Actually, CRM is a business strategy that seeks to identify customers uniquely and develops the sales and service strategies that should be consistently executed across all delivery channels.

More importantly, CRM is about shaping your client’s behaviors, as well as improving customer service and reducing costs. When a financial institution really understands its client base, who they are, and how they behave, the institution can begin to segment clients into groupings that reflect profitability. Using activity-based costing and LTV, an institution can quantify shifts in behavior through patterns of resource usage and extrapolate this over time. This will form a basis from which to target clients, develop custom programs and content, and measure the contribution of your CRM efforts—the “cause and effect” that is so important for the ongoing tuning of a CRM program. In addition to gaining valuable ROI measurements, the process and dialogue associated with developing it provides additional important business benefits—making CRM a worthy investment for all financial institutions.

Alan Buhler is Executive Vice President of CoreTrac, Inc. He can be reached at or (512) 236-9120 ext. 272.

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