By Mark Gibson
Before the pandemic hit, it seemed like at least one bank in nearly every market was offering cash incentives of $100 or more to attract new customers. Now that branches are beginning to open and marketing departments are returning to a new normal, new household acquisition has returned as a top priority at many institutions, and with it the decision of what value proposition or offer to use. A key question for many CMOs and marketing directors is: “Should we offer a cash incentive to attract new customers?”
Putting cash incentives in context
Many industries—such as consumer packaged goods, supermarkets and furniture—have structured their sales strategy around seasonal discounts, so this concept is very familiar to consumers. Additionally, price promotion is not a new concept to banking: CD rates, mortgage rates and zero percent balance transfers have been around for many years. In addition, banks have provided free gifts to new customers for decades.
What is new is paying customers a sizable cash payment in exchange for their business. And over the past decade, we have seen these cash payments inch up from $100 to $500 or even $1,000 in some cases. Why has this practice become so prevalent?
Why cash?
Price promotion is always easier than coming up with a motivating and engaging non-price promotion. And, cash incentives work! They are easy for customers to understand (as long as there aren’t too many complicated stipulations to receive the payment). They don’t require much training for the sales force.
Additionally, bank executives are analytical and the concept of customer profit and lifetime value influence how much an institution is willing to pay to attract new customers. While this “cost per acquisition” should include other marketing costs such as mail production or media, cash incentives often dominate the discussion between CMOs and their financial counterparts.
Finally, with new household acquisition becoming so critical to growing a bank’s income, investment in marketing and cash payments in particular are being weighed against other growth alternatives such as building new branches or expanding direct sales forces. Especially in this period of social distancing, growing revenue via marketing often wins out.
What are the alternatives?
While price-based promotion is common in most industries including banking, there are other approaches that build more short- and long-term value for the enterprise.
First and foremost, a strong trusted brand is able to attract consumers and business owners by emphasizing attributes including quality, a high level of service, deep selection and technological prowess or extreme convenience (think Apple, Starbucks and Amazon). While it costs money to develop those differentiating attributes and to advertise them, the benefits of being able to charge full price without discounting, as well as receiving word of mouth referrals from satisfied customers, more than outweighs the investment. The net result is usually a more loyal customer and higher profitability for the organization.
A second method for attracting more than your fair share of new customers is to offer a product or value proposition that meets customer needs in a superior way. Far from discounting, a company is often able to charge a premium for this type of product or service.
A seminal Harvard Business Review article by Scott Cook, the founder of Quicken, entitled “Marketing Malpractice: The Cause and the Cure,” made the point that far too many products are either copying their competitors or adding a feature or benefit that doesn’t really matter to customers. Rather, a marketer should study the targeted customers and what “jobs” they are trying to do, then create products and tools to help the consumer do that job in a materially better way.
One of the best examples of this concept is the Dyson vacuum cleaner. James Dyson was an inventor who became frustrated with his vacuum cleaner’s performance. He took it apart and found that the clogs in the bag were reducing the vacuum’s suction. He spent five years perfecting the world’s first bagless vacuum cleaner that has superior suction and never clogs.
In his own words: “Like everyone, we get frustrated by products that don’t work properly. As design engineers, we do something about it.”
There are plenty of examples of this kind 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 that premium branding or superior products have over cash incentives is that the cost per acquisition is lower because you are avoiding the cost of the incentive. An additional hidden benefit is just as important. Firms tends to keep customers the same way they attract them. In other words, if you use cash to motivate a customer to switch, that means that customer did not select your firm for more intrinsic reasons. The danger is that when another provider offers a better deal or a higher incentive, the customer will move on. As a result, customers acquired by cash incentives may be less loyal and have lower lifetime value.
Should you use cash incentives?
Cash incentives work. Otherwise, smart banks like Chase and Santander would not continue to use them. If you don’t have a stronger value proposition, product or brand, you may be forced to use cash incentives, at least in the short term. But what happens when most of institutions in your market offer cash incentives? At that point, two things will happen. First, the dollar amount of the cash incentive will rise to the level of lifetime value, where it essentially costs you as much to acquire the customer as you are going to earn from them. Second, the attraction and differentiation of a cash incentive disappears because everyone has it, and you are back to square one, where your fundamental brand and value proposition has to stand on its own.
So, the lesson is, even if you choose to use cash incentives in the short run, you had better be working on building your brand, understanding your target customers, and building a ‘better mousetrap’ to meet their needs. Otherwise, you will be caught in a “race to the bottom” and not have a sustainable growth strategy.
Mark Gibson is senior consultant at Capital Performance Group, a strategic consulting firm that provides advisory, planning, analytic and project management services to the financial services industry. He can also be reached on LinkedIn.
