Here’s a quiz to see if you need to read the rest of this article.
When your bank is short on its profit budget, where do they always look to slash the expense budget? If you did NOT answer “Marketing,” you can stop reading now. Have a nice day. For the other 99% of you, read on.
Marketing is always one of the first areas cut, because management really does not believe that marketing programs add income. They just add expense.
While sometimes this is correct, the truth is that marketing programs often do add to income, well in excess of the related expenses. Unfortunately, since we’re marketers and not bean counters, we figure that such truth must remain intuitive. Management just has to trust us, that our budgets are well spent. Hence the annual budgetary belt tightening.
At the risk of your eyes glazing over at this point, I’d like to suggest that you can demonstrate the value of marketing in a way that CEOs and CFOs can understand: your Efficiency Ratios (ER).
ER is something management looks at all the time. It’s often a basis for executive bonus plans, in that ERs of all banks are reported by regulatory agencies for all banks; grouped by size, location, and type of banking operation. The ER shows how well the bank is being managed.
Like good and bad cholesterol is good or bad for your health, some expenses help the ER, while others don’t. Expenses that hurt the ER are not welcome.
Simply put, the ER is a measurement of how much bang you get for your buck. A well spent dollar earns five or ten dollars. A poorly spent dollar only earns a buck or two; or worse, it earns nothing.
A well managed bank spends about 55¢ to earn a dollar. That’s an efficiency ratio of 55%. Such a bank with $1 million of revenue would have $550,000 of expenses, so it would earn NET income of $450,000.
That same bank would earn only $400,000 on the same revenue, if its efficiency ratio was 60% instead of 55%.
What’s that got to do with marketing? Well if marketing is just considered an expense, it’s pretty obvious. Lower expenses = lower ER = higher NET income.
Certainly there are many marketing activities that can not be justified by the income generated. Try convincing management that your bank’s name on the side of city buses generates a single home equity loan or checking account. How about a radio jingle everyday at noon during the local news? Or a letter in the mail with a fantastic offer printed on the envelope?
But not all marketing activities are just expenses. Many programs are directly related to generating hard income to the bottom line. When this happens, bank marketers need to quantify such success, and show management how the expenses IMPROVED the ER.
Example 1: Most bankers know exactly how much a checking account is worth. With net interest margin, check fees, and NSF fees, each account generates much more revenue than it costs to service them. If a checking account generates NET income of $100 per year, how much would the bank be willing to pay to get another one? Would you pay $25 in marketing dollars to generate $100 EVERY year in net income? Of course you would. That’s an ER of 25%. Here’s how you need to toot your own horn, albeit unasked for.
|
Checking acquisition program: |
|
3,000 |
New checking accounts |
|
$100 |
Annual net income per account |
|
$300,000 |
Total annual income |
|
$100,000 |
Artwork, printing, mailing, premiums, media, sales incentives |
|
$200,000 |
NET INCOME |
|
33.00% |
Efficiency ratio |
Example 2: You plan to spend $17,500 on a HELOC acquisition program. There’s some money that could be slashed from the budget to help the bottom line, a.k.a. ER. Not so fast CFO. Do you really want to give up $170,000 in net income at a terrific ER of less than 10%? That’s 10¢ spent to make a $1. Ask the CFO to show you another area of the bank where the ER is 10%; she can’t do it. Demonstrate to management how the Marketing Department can act as a profit center. It’s not a drain on profits. It creates profits.
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Home Equity Loan Acquisition Program: |
|
10,000 |
Mailing to home equity loan prospects |
|
$1.75 |
Per unit cost |
|
$17,760 |
Total Marketing cost |
|
3.00% |
Response rate |
|
300 |
New loans generated |
|
$25,000 |
Average balance |
|
$7,500,000 |
$ New loans generated |
|
3.00% |
Profit Margin |
|
$207,240 |
Annual INCOME |
|
$17,760 |
One time Expense |
|
9.33% |
Efficiency ratio |
At Financial Marketing Systems, Inc. all of our marketing solutions can be documented to earn much more than they cost. Check out our web site at www.bankmktg.com. We do the math for you regarding our BorrowingPower home equity program. Better yet, call Bob Singer at 815-398-2474.
Creston Harris, President
Financial Marketing Systems, Inc.
