One of the biggest keys to profitability for community banks and credit unions is customer and member retention. The longer you hold on to your customers and members, the more products and services they are likely to use – which will generate more revenue and higher profits.

This isn’t rocket science. But given the obvious ties between retention, revenue and profitability, it’s surprising how many community banks and credit unions don’t measure the lifetime value, or LTV, of their customers or members.

A Critical Metric

Lifetime value is defined as the net profit attributed to your organization’s entire future relationship with each customer or member. The website calls LTV “the single most important metric for understanding your customers.” When you know each customer’s or member’s LTV, you can make better decisions about:

  • Sales — What specific types of customers or members should your sales efforts be focused on?
  • Marketing and Customer Support — How much money should be spent to acquire and serve each customer or member?
  • Product Development — How can you offer unique products and services tailored to meet the specific needs of your best customers or members?

An experience I had with a credit union a few years ago illustrates why LTV is so important for community banks and credit unions. When I decided to purchase a car, the dealership obtained a very attractive financing offer for me through a large bank. During the weeks after my purchase, the bank followed up to make sure I was pleased and tell me about their other services and benefits.

So where does my credit union fit into this story? It doesn’t! Because throughout this process, it never even occurred to me to talk to them about a car loan. They were completely off my radar because I felt no allegiance to them over any other financial institution.

But the credit union lost much more than just a potential car loan. I was so impressed with the products and service of the large bank that I moved all of my financial business to them and cancelled my credit union membership. And to my amazement, the credit union didn’t even try to win me back!

A Different Story

Now how might this story have been different if the credit union had measured my LTV? First, they would have known how much money I was worth to them as a member over the course of my lifetime. Based on this, they could have created sales, marketing, product and support systems designed to:

  1. Make product and service recommendations to me so they were top-of-mind when I was ready to make a big financial decision like buying a car and;
  2. Be proactive by making a counter-proposition to me as soon as my credit report was pulled by the large bank.

If my credit union had done these things, there’s a good chance I’d still be a member today and they would be earning revenue and profits from me for the rest of my life. Instead, these revenue and profits are going to a large bank.

How Not as Important as Why

There are several different formulas and methods for calculating LTV. Each of them takes into account such factors as a customer’s or member’s age, income, credit score, family situation, products currently being used, and number of potential relationships with your institution.

The National Association of Federal Credit Unions (NAFCU) offers a few LTV guidelines for credit unions here.

But the details surrounding the how’s of calculating LTV aren’t as important as why calculating LTV is so critical for community banks and credit unions. If you aren’t measuring LTV, then you’re operating at a serious competitive disadvantage.

3 Takeaways

  1. Lifetime value (LTV) is the single most important metric for understanding your customers or members.
  2. Measuring LTV will help you make better decisions about sales, marketing, customer support and product development.
  3. With LTV knowledge in hand, you can make product and service recommendations that keep your institution top of mind when customers or members are ready to make big financial decisions.