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Wednesday’s post looked at profit margins in relation to the key area of Operational Process for Digital Transformation, and we picked at some numbers the MBA had thrown out a little while back on the cost of originating a loan. Today, we’re going to take that topic in a slightly different, but still-related direction.
While looking at the cost to produce a loan, as well as total revenue overall, there's a hidden metric that many forget: the cost to acquire a new customer versus the cost of keeping one.
We’ve seen several representations of multiples on this, the most common being “Companies focus on acquisition more than customer retention, even though it can cost 7x more to acquire new customers.” And while those statistics are alarming, we very quickly shake them off as not being reality, right? Let’s look at some hard numbers in a small cross-section across a few industries. An article on Entrepreneur.com states the following:
Here are some typical industry standard cost of customer acquisition values, the amount of money each company spends on average on marketing and advertising to acquire just one new customer:
· Travel: Priceline.com: $7
· Telecom: Sprint PCS: $315
· Retail: Barnesandnoble.com: $10
· Financial: TD Waterhouse: $175
Think about that for a second and then answer this question: Do you know what it fully costs you to acquire a customer? In case you’re stumped on that question, the same article provides a good high-level exercise in calculating that cost.
Let’s dive outside of loan origination for minute. Even mortgage’s sister industry of title production struggles with this concept. For example, we offer a solution on the Pavaso platform called Title Check™ — where title companies can stay in front of existing customers by offering them an annually recurring service to check their title and ensure it’s clean. This is an entirely new line of revenue to leverage all of those customers that they’ve acquired and closed, instead of purely focusing on bringing in the next closing. Even after presenting this efficient, cost-effective solution, many don't see the value in offsetting their most labor-intensive process with simplified repeat offerings that result in higher profit margins.
We’ve offset this challenge for lenders, Realtors and title companies with some pretty cool functionality. In addition to our Digital Close solution, the Pavaso platform provides “team” functionality that keeps the professionals like you in front of the consumer so you are available to them after the closing. This allows you to foster relationships with those customers and present them with other offerings that promote and achieve customer loyalty, instead of having them disappear once they’ve got the keys to their home.
Finally, when TILA-RESPA hits, the cost of doing business is going to change again. If you don’t know what it costs your business TODAY to acquire vs. retain customers, figure this out fast so you can also have an understanding of what that metric will be when Aug. 1, 2015 rolls around.
For other references to things we've discussed on this blog, be sure to register for a free account at the TILA-RESPA Knowledge Center, where you can browse a knowledge base of articles and documents, or join conversations in the forums.
All information and views expressed or implied are provided without warranty and are only opinion. Each participant should seek legal representation for legal interpretation of the ruling and the CFPB directly for final instruction and interpretation. The final rule can be found here.