Measure Action Over Intention

October 2015: Vol 38 No 10
by Ron Shevlin

The 'Referral Performance Score' provides new perspective on member loyalty.

measuring excellenceDo you have the logo of one of your favorite brands tattooed somewhere on your body? If you don’t, you’re not alone. Few consumers say that visually displaying their favorite brands—by having a tattoo or by wearing hats or shirts with the brands’ logos—is how they show their loyalty to the companies and products they like most.

A survey by Zendesk found that 15 percent of respondents said they show loyalty through social media likes and follows, but the most frequently mentioned ways respondents show their brand loyalty are by referring the brand to friends and family and by buying more of the product or brand.

The Zendek study applied to a range of industries, not just financial services, but is particularly important for credit unions because consumers don’t purchase, or apply for, financial products with the frequency with which they buy many other types of consumer products.

This means that looking at actual member referrals (not just intention to refer) is especially important. The Financial Brand conducted a survey that my former firm, Aite Group, analyzed. The data showed that only about half of CUs are tracking their members’ referral behavior. As a result, many don’t know what their members’ level of loyalty really is.

Why Referrals Matter

Referrals are important for more than one reason. It’s clear why referrals matter to CUs: They produce new business and new members. But referrals also are important to members because they benefit from referring their favorite brands. Doing so:

  • is a form of self-expression. Providing a referral—whether online or face to face—gives consumers an opportunity to say what they think.
  • establishes their credibility. Many consumers provide referrals as a way of demonstrating that they’re experts in a given field.
  • validates their decisions. A referral is a means of saying “I made a good decision” about a brand or company.
  • is a means of social involvement. Providing referrals is a mechanism for consumers to engage with friends, family, or other communities.

Providing mechanisms—such as online message boards, product application forms and referral programs—through which members can provide referrals isn’t just for the benefit of the credit union. Members also benefit from using them.

A New Loyalty Metric

CUs routinely rely on metrics like member satisfaction and Net Promoter Score to gauge member loyalty. But these metrics track attitudes or intentions, not behavior.

As a result, Cornerstone Advisors proposes that CUs track and use a new metric: the Referral Performance Score, calculated by multiplying the absolute percentage of members who provide a referral in a given period by the absolute percentage of members who add new products or accounts in that time period. Ideally, referrals used to calculate RPS would come through a formal, trackable referral program, something some CUs would need to put in place.

The RPS metric was first introduced a few years ago by Aite Group, which found that CUs, as a whole, had a higher Referral Performance Score than community, regional, or national banks. Based on a consumer survey, Aite Group found that 48 percent of CU members referred their CU in the 12 months preceding the survey, and that 13 percent had expanded their relationship with their credit union by adding new types of accounts, for an RPS of 649.

In contrast, among consumers who consider a national bank their primary financial institution, 16 percent added new accounts. But just 37 percent referred their bank, producing a RPS of 574. Regional and community banks saw lower levels of both referral behavior and relationship growth.

How Good Is RPS?

In “Four Things You Need to Know About Your Customer Metrics”, Bob Hayes, chief research officer at AnalyticsWeek, lists four attributes of an effective performance metric: 1) clear definition of measurement; 2) clear method of calculation; 3) reliability and validity evidence; and 4) ability to drive internal change.

Because different FIs define products and accounts differently, there is currently not a clear definition of measurement for Referral Performance Score. But it does have a clear method of calculation, and the validity evidence for RPS is strong.

Based on data from the 2015 Financial Brand survey of CU and bank marketers, FIs were segmented by their loan and deposit growth rates. High growth FIs saw an average loan growth rate of 20 percent and an increase of 16 percent in deposits from 2013 to 2014. Moderate growth FIs grew loans by an average of 10 percent and deposits by 7 percent. Low growth FIs increased loans by 2 percent, but saw deposits drop by 3 percent.

RPS tracked with growth. High growth FIs had an average RPS of 1025, based on 41 percent of customers referring them, and 25 percent adding new accounts. Moderate growth FIs had an average RPS score of 800, resulting from 32 percent of customers referring, and 25 percent of customers growing the relationship. Low growth FIs lagged with an RPS of 234, based on 18 percent of customers referring and 13 percent of customers adding new accounts.

Underscoring the importance of driving—and tracking—member referrals, the difference between high growth and moderate growth was in the percentage of customers referring, not the percentage of customers adding accounts.

The validity of the Referral Performance Score can be further supported by applying the score to various consumer segments.

Putting RPS to Use

As a measure of member loyalty, Referral Performance Score is superior to measuring satisfaction and Net Promoter Score because RPS is based on behaviors, and because it can be applied to all members, not just the subset that can be surveyed.

Applying the referral performance score to specific product lines or member segments can help credit unions identify which are driving growth, especially growth in the behaviors that are the most important demonstrations of member loyalty.

With more sophisticated measurement over time, credit unions will be able to fine-tune this score to account for members who provide multiple referrals and for members who add high profit accounts vs. those who add lower profit products and services.

Having a referral tracking mechanism in place would facilitate counting how many referrals any particular member made, so the RPS analysis wouldn’t have to be binary (i.e., made a referral/didn’t provide a referral).

In addition, a credit union could assign points to particular products (based on average profitability levels) and give members higher points for providing referrals that result in the sale of high-profit products vs. lower-profit products.

Many credit unions deploy referral programs as short-term campaigns in an effort to generate leads. To make the Referral Performance Score a strategic metric requires that the referral program becomes a persistent effort, integrated into product applications, onboarding efforts, and the credit union’s digital communications.

In addition, credit unions should integrate the referral data into their member information files to enable them to identify their top referrers, and to spot changes in members’ referral activity.

Ron Shevlin is director of research for Cornerstone Advisors Inc., a CUES Supplier member and strategic provider based in Scottsdale, Ariz.