How to Retain Credit Card Customers

Competition in credit cards today is intense. Almost every American, it seems, gets a new credit card offer in the mail almost every week. Credit cards are highly profitable, but only if the customer stays around for a while. It costs about $80 to acquire a new credit card customer who returns about $120 per year in profit, but only if she keeps the card. If she drops the card after a few weeks, or doesn’t use the card, the issuer will lose that $80, plus some more money spent trying to reactivate her. It is a tough business.

Credit cards are suffering from the same disease that ails long distance and cellular phone service: lowball price offers. No matter how low you get, some rival can always undercut you. You teach your customers to think of your card as a commodity, and to shop only for price. If you offer 3.9% APR (for the first six months), you train customers to think only of the interest rate and time. After the six months is up, they will be receptive to the next lowball offer that comes along. You will lose the customer, and the money you spent to acquire her. You can’t win if you play the game this way.

Despite this competition, some companies have been able to prosper: keeping most of their customers, and maintaining their profits. What is the secret of success in this dog-eat-dog business? The answer is customer loyalty. Issuers who succeed have found a way to build and maintain customer loyalty. Those who fail have turned their cards into a cheap commodity, disposed of as easily as yesterday’s newspaper. Long term loyal customers:

• Spend more per year
• Have higher retention rates
• Will tolerate higher fees and interest rates
• Are less costly to serve

How do you get loyal customers? There are really only two principles that determine whether you will achieve customer loyalty. You must:

• Manage customers so as to earn and keep their loyalty
• Recruit loyal customers to begin with

Fredrich Reichheld’s book The Loyalty Effect (Harvard, 1996) is certainly one of the most important books on loyalty in this decade. He points out that there are loyal customers and disloyal customers. Sixty percent of AT&T customers never switched to Sprint or MCI. Some people only buy American built cars. They are loyal by nature. People have a loyalty coefficient, which you can discover, and use to your advantage.

MBNA has made a fortune by targeting affinity groups and designing a card just for them: dentists, doctors, lawyers, engineers. MBNA works through the managers of trade associations. Association members are loyal to their group. That loyalty can be extended to the group’s card.

Loyalty applies to airlines. I travel a lot speaking on Database Marketing. A few years ago, I realized that I should concentrate on one airline so as to achieve Gold status. I picked American, which required me to fly 25,000 miles in one year. January 1, the clock starts all over again, and you lose the Gold qualifying points you had built up the previous year. On Christmas day, I called American to see how many miles I had accumulated.

“Mr. Hughes, you have 24,600 miles.”

“You are going to give it to me, aren’t you?”

“No, Mr. Hughes. You need 25,000 miles.”

“But it is Christmas! The year is over. Can I pay you for the 400 miles?”

“No, Mr. Hughes. You have to fly them.”

So, the day after Christmas, for $44, I bought a round trip to Raleigh-Durham. I flew down at 7:00 am, back at 9:00 am and was in my office by 11:00 am, safely Gold. I have been Gold ever since. Last year I made Platinum Executive, having traveled 100,000 miles on American in 1999. I am loyal. Of course, I sought out cards that give me American miles. My wife and I, between us, have five Citibank American Advantage cards. I now have well over a million miles on American, a big percentage of which is due to the credit cards.

How can you find people who will be loyal to your credit cards? There are three steps:

• Create a vision of what your card stands for. Is it a group? An airline? A lifestyle? A sport? You must stand for something other than low price.
• Design your acquisition strategy and your retention strategy to emphasize your vision.
• Sell the customers a second product. Banks have learned that it is very hard to maintain loyalty to a card alone. If they can get customers to have a checking or savings account as well, the retention rate goes up by a significant percentage.

Don’t talk price. Talk the vision. You will get less customers that way, but the ones you get are much more likely to be profitable. After all, profits, not body counts, is what makes for success in any business, especially credit cards.

There are really only two types of customers: transaction buyers and relationship buyers. Transaction buyers are only interested in price. They have absolutely no loyalty. “Never mind what you did for me yesterday, what are you going to do for me today?” You cannot make money by issuing cards to transaction buyers.

Relationship buyers, on the other hand, are looking for a service that they can trust, that treats them well, and that relates to their life in some way. If you treat them right, relationship buyers will stick with you for a lifetime. They won’t mind if your fees or interest rates go up, as long as you maintain the relationship.

A good way to see whether you are attracting transaction buyers or relationship buyers is to conduct defection analysis. Call 5,000 people who have dropped your card in the past year, and find out why they left. Get the real reasons.

• Relate their defection to the pitch that acquired them. Was it relationship or price?
• See if defection is related to their lifestyle, age, income, family, home ownership, occupation.
• Come up with a picture of the kind of customer that you don’t want, and design programs to be sure you don’t acquire these disloyal customers.

  
  

  

Once you have a credit card customer, there is one sure way to keep her. Sell her a second product. Sell her a checking account, a savings account, a mutual fund, an auto or personal loan, or a home equity loan. Banks who have built a customer database have discovered that loyalty is a function of the number of products owned.

The problem is that banks are not organized to take advantage of this situation. There is a VP for Credit Cards, a VP for Retail, a VP for Home Mortgages, etc. The VP for Credit Cards does not get a bonus if his customers sign up for a checking account. Often these VPs don’t even share the names. But the fact is, the number one best way to keep a credit card customer is to sign the customer up for a checking account. She will begin to identify with the bank’s branch and its personnel. She will be embarrassed to have them know that she has dropped the bank’s credit card. So she won’t.

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