Today’s mortgage leaders are faced with a sobering reality in 2014. The current average profit per loan is $150. This average is down from $2,256 in the fourth quarter of 2012. These are staggering statistics! Industry experts cite increased compliance costs and increased competition as the driving forces behind this dramatic decrease in profitability. If the down-trend in profitability continues, those mortgage companies who have a clear vision for navigating the formidable challenges ahead will be the ones who thrive.
A major component to your business and one that addresses both compliance and competition is your marketing strategy. Consider the following:
►It costs six to seven times more to acquire a new customer than to retain an existing customer.—Bain & Company
►A two percent increase in customer retention has the same effect as decreasing costs by 10 percent.—Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
►The probability of selling to an existing customer is 60 to 70 percent. The probability of selling to a new prospect is five to 20 percent.—Marketing Metrics
A complex challenge faced by leadership in the mortgage industry today is identifying the most effective marketing techniques. Marketing concept, combined with the use of formulas for determining CLV (Customer Lifetime Value) and CAC (Customer Acquisition Cost) can take a generalized concept such as “relationship marketing” and provide data that clearly points to those customers who result in the greatest return, thus making it possible to spend your marketing budget in the most targeted, effective way.
What’s your marketing vision? You’ve probably heard the popular Marcus Lemonis mantra, “People, Process and Product,” as the three fundamental basics to success. A fully engaged visionary has the ability to break down these three vital areas in a holistic way and will not be afraid to make a strategic investment in any area. When margins shrink and profits tank, the conventional wisdom is to cut costs. A visionary leader has a well-rounded, educated understanding of the objective and balances both creative thinking and the ability to strategize through the available factual data. He won’t throw the baby out with the bathwater. He will do his due diligence through to a clear path—proof of concept, and will put his marketing dollars where he is confident there will be a return.
Mortgage companies often have great people in place, a great product to promote, but due to the overwhelming nature of managing numerous loan officer databases, pictures, contact information, disclaimer text, NMLS numbers, e-mail vendors, print vendors, gift vendors, designers and writers have not fully exploited their existing database in their marketing efforts.
A company with 50 loan officers likely has 15,000 referral and repeat customers that could become its greatest asset. Yes, it will take some work to have a well-designed marketing solution to stay in regular contact with those clients but if just three percent of those clients do a loan or refer someone, that’s almost 500 more loans in a year. How much time and money would you invest to get 500 more loans on the books this year?
By now, it’s obvious that customer retention is a good thing, but what is a customer’s real worth? An important component to the marriage of vision and fact is monetarily quantifying the value of your clients. How should a marketing budget be split between retaining established customers and marketing to new customers? Discovering this answer in terms of dollars and cents goes a long way towards developing a pointed marketing strategy.
The good news is that it is possible to use a relatively simple mathematical formula to assess the potential value of a client over their typical life-span. It’s called Customer Lifetime Value (CLV). CLV is a forecast of the net profit attributed to the future relationship with a customer. CLV might also be defined as the monetary value of each customer relationship as based on the present value of projected future cash flow from that relationship. CLV is an important concept in that it encourages marketers to shift their focus from immediate profits to the long-term health of their customer relationships.
There are numerous ways to calculate the CLV and we‘ll show you a simple way to do it in just a minute. However, no matter how you arrive at the total, producing a solid dollar figure gives you a tangible place from which to design client retention strategies and promotional campaigns. Of course, the following example does not determine profit, but it does give a better sense of the overall client value.
The average sales price in your area is $200,000 and your loan officers generally earn 100bps. If your loan officer closes a new transaction and that customer refers him just one new client per year, he will earn about $16,000 from that one customer over a five year period. That’s just one customer referring one new client per year. Use the same logic spread over 100 past clients; that’s $1.6 million in commission over the next five years.
If you think these numbers are extraordinary, you’re right. Not because database marketing results are mixed, but because too often originators don’t invest in their most valuable asset; the contacts in their database.
A visionary leader not only understands the long term impact of these kinds of numbers on his business, he has the unique ability to inspire his entire team to adopt his vision. A visionary leader engenders a culture of success by personally practicing and preaching the principles of his marketing belief system. Furthermore, he facilitates his employee’s success by investing in adequate database management and relationship marketing systems.
CLV has an intuitive application as a marketing concept, because in theory it represents exactly how much each customer is worth in monetary terms, and therefore exactly how much a marketing department should be willing to spend to acquire or retain each customer when it comes to relationship marketing. You’ll likely treat customers with high CLV differently from those with low CLV. You’ll spend more to retain them because they’re obviously worth more. You might discover that some customers have a low or even negative CLV. So, why spend a lot of money trying to retain them?
In addition to using the CLV formula, using the Customer Acquisition Cost (CAC) formula can be of tremendous value. CAC is the cost associated with convincing a new customer to buy a product or service. This cost is incurred by a business attempting to convince a potential customer. It includes all costs involved—research, marketing, etc. This is an important business metric as it plays a huge role in calculating the value of the customer to the company as well as the resulting return on the investment in a customer.
CAC refers to the resources that your business must allocate (financial or otherwise) in order to acquire new customers. CAC will typically increase as business matures, but it is also typical to see a diminishing return on CAC as a business grows in size. At some point, a given CAC strategy will no longer be beneficial, since the financial rate of return that generally accompanies new customers is surpassed by the cost of acquiring those customers in the first place.
Consider how much time your loan officers spend looking to acquire new customers through relationships with real estate agents. They’ve probably spent hours chasing an agent who promised to send them referrals, only to be presented with two or three or more “leads” for potential clients who really are more in need of a bankruptcy lawyer or credit counselor. We’re not at all suggesting a loan officer doesn’t have to work through these scenarios to gain the trust of their referral partners. Referral partners, such as real estate agents and financial planners, are a tremendous source of business when you find the right ones. What we are suggesting is that, as a leader, you promote the idea that your loan officers treat their client databases as one great big referral partner.
The logic is really so simple … Say you have one loan officer with a database of 300 past clients, friends and family. If just 10 percent of them refer him one client this year, that’s 30 additional loans. Does your loan officer have any real estate agent partners that will send him 30 referrals this year? If you do, we’re betting you spend a whole lot of time and energy promoting your loan officer’s relationship with him.
The leaders who have invested in a proven relationship marketing system and have committed to providing the infrastructure and tools necessary to execute, have a significant advantage. This advantage can be seen not only from a sales and marketing standpoint, but also from a recruiting perspective. The up and coming, motivated originators are more likely to make a move to your company if they can see that your vision includes a commitment to making them successful with clearly defined, accessible marketing systems.
The mortgage industry is an ever-evolving challenge. The mercurial nature of the regulatory system and rapidly progressive technology demand creative and nimble leadership. These aspects of the current mortgage lending climate have greater impact on our marketing strategies than ever before. Leaders who face these challenges with the ability to quickly adapt and without losing sight of their ultimate goal are inspiring to all of us. We see these visionaries rising to the top and we salute them!
Brent Emler is director of sales and marketing at Velma.com, a customizable marketing software provider exclusive to the mortgage industry. He may be reached by e-mail at email@example.com.
This article originally appeared in the April 2014 print edition of National Mortgage Professional Magazine.