A distribution of surplus in proportion to trade

The Co-operative Group in the UK announced recently that its interim dividend payment for the first 6 months of 2008 was to be £8.9m, this is £2m more than the interim payment for 2007 and comes on top of a full year dividend payment of £38.1m in June.

For those that don't know the Co-operative Dividend programme was re-launched in 2006 and essentially awards points to members based on their spend within the group of companies – these points are then assigned a value every 6 months as an interim and full year dividend, based on the profits of the group. In this way the programme pays out a true dividend or share of profits based on the contribution the customers make to the group as a whole. Since its re-launch the Dividend programme has recruited over 500k new members, taking the Co-operative membership to 3.1m.

Although the programme has recently been re-launched and replaced a previous "standard style" retail loyalty programme it is essentially nothing new. The founding members of the current Co-Operative movement, the Rochdale Pioneers Society were established in 1844 and within their original eight 'Rochdale rules' was the inclusion of a requirement for the "distribution of surplus in proportion to trade" which became known as 'the divi' - this was probably one of the first "loyalty" programmes in the UK.

The Co-Op aren't the only organisation to support loyalty through a share of profits. The Britannia Building society in the UK has been running a whole of bank style loyalty solution called Britannia Membership Rewards (BMR) for over 10 years. This scheme rewards customers with points based on their financial product holding and value within those products. On an annual basis the points are converted to a cash value based on a proportion of the society's profits and are then paid out to its members.

Although these businesses as co-operatives and mutual societies are built around ownership by their members and the return of excess profits as either a dividend or competitive pricing, there is probably a lesson here for all businesses.

The recent financial crisis highlighted the unhealthy focus some companies have on either their employees (and associated bonuses) or on shareholders and their requirement for ever increasing profits – sometimes at the expense of long term growth and stability. Badly sold mortgage products to customers who clearly had no ability to pay or would struggle to pay in the future were sold by financial institutions who were thinking more about short term gain than a long term relationship. The other banks and investors buying these badly sold mortgages up as packaged portfolios or Collateralised Debt Obligations (CDOs) weren't thinking of the customers either – they were all just looking at the profits to be made. You could argue that for these businesses the customers were almost an inconvenience, with the focus simply on making money for stakeholders rather than thinking about delivering benefits to their customers.

A sustainable business however is based on both acquiring and retaining profitable customers - this doesn't mean a business has to be owned by its customers but it does need to recognise that customers are the lifeblood of the business and it needs to acquire them with a view to retention - providing great products, customer service and recognition of their loyalty from day one. In their book "Return on Customer" Don and Martha suggest that "the only value your company will ever create is the value that comes from customers -- the ones you have now and the ones you will have in the future. Businesses succeed by getting, keeping, and growing customers."

They go on to put it succinctly saying "Without customers, you don't have a business. You have a hobby". You could probably spin this around a little and say "Without focusing on customers, you don't have a business. Period."

Whether the Co-Operative Groups recent renewed success is a result of the re-launched dividend programme, their group wide rebranding or their increased focus on ethical investments and fair-trade products is difficult to tell – what isn't hard to tell is that a business which is still growing after 160 years must be doing something right.

Without trust there is nothing

I was reading a new report this week from Forrester about how customers rate European banks. Across 7 different European countries, the UK stood out with the weakest scores to the question of whether customers felt their bank does what's best for them – with just 21% agreeing to this statement. Given the current credit crunch you could be forgiven for expecting this type of response as people lose faith in their banking institutions, however this is an annual survey and the results for 2008 are only marginally lower than for 2007. The report went on to discuss how customer advocacy improves a banks chances of winning new customers by word of mouth and that of those customers who think their main bank is a good customer advocate, the majority of these go on to be promoters.

Backing this research up, a recent study by Carlson Marketing of the financial services industry showed that customers with stronger relationships are 75% more likely to recommend to friends, 42% more likely to remain a customer and 57% more likely to buy additional products. As detailed within this study a key element of stronger relationships is trust which is defined as a belief that the company has the best interests of the customer at heart, and can be depended upon for respect, openness, tolerance and honesty.

Although many banks score badly in the area of trust, the UK based Nationwide Building Society has recognised this and actively looks to build trust with customers and potential customers. Its TV advertising highlights how other banks have preferential rates only for new customers – unlike Nationwide which has a fair pricing policy for all; it's ATMs highlight how there are no cash withdrawal fees and all its call centers are UK based. In 2001 the Nationwide launched an initiative to articulate the society's values to customers which included putting customers first, delivering best value and exceeding expectations. Since this time they have more than doubled their current account customers, tripled their credit card portfolio, significantly grown savings balances and doubled their annual profits. Not bad for a bank which is focusing on doing what's right for the customer, not just what's right for the bottom line.

The largest direct bank in the US, ING Direct announced recently that it will suspend foreclosure on all occupied family homes until March 2009 and suspend all evictions until January 15^th. Their CEO, Arkadi Kuhlmann is quoted as saying "We help customers buy homes with mortgages only if we believe they are suitable and affordable. Consequently, once we get customers into a home, we work hard to help them stay there. We hope this foreclosure suspension will provide some relief during the holidays to those experiencing financial hardships. I call on others in the mortgage industry to step up and help homeowners with foreclosure relief during these difficult times". Now obviously banks are not charities and if someone cannot pay for their home the bank will have to take steps at some point to recover their investment – however what ING shows is that this can be done whilst also recognizing that these are real people with real lives – this is sure to build trust as ING stands out from the crowd.

Spanish Bank Caja Navarra takes this one step further with its Civic Banking product. Unlike any other bank I've come across, Civic Banking tells you exactly how much money they make from you. Customers understand that banks are businesses and that business are there to make profits, however most customers don't actually understand how a bank makes money. Providing this clarity allows the customer to enter into an agreement with their eyes wide open, understanding what the bank is giving them and conversely what the bank is getting back. This isn't simply done however to provide transparency, the bank donates a percentage of the profits on the customers behalf to social projects. This allows the customer to see not only how much the bank is making, but also how much it is then giving away. The projects that the bank donates a percentage of profits to are not simply large charities but instead can be very small, localised projects, nominated by the customer and setup by the community. In one example a water saving project had requested £7,000 and this had been donated by just 113 people. Caja Navarra really do engender trust by providing true transparency and showing a genuine corporate social responsibility.

Given the importance of trust within relationships and the rewards that can come from this for financial institutions, there has been a noticeable hush from almost all banks since the credit crunch. For many this is probably due to still being in a precarious position and as the old adage goes, "when you have nothing to say - say nothing". However for many banks things have changed with government support stabilising them and so now is really the time to begin rebuilding trust.

LTSB in the UK are the noticeable exception to this with much of their recent outdoor activity focused around the message of a "bank you can bank on". While many of the larger banks in the UK have been focusing their advertising on savings messages - promoting great rates in the hope of attracting much needed savings balances - LTSB has been focusing their message on one of trust, reassuring customers and prospects that they are a bank you can bank on. If LTSB get it right all indications are that the savings balances will follow naturally.

Trust is a key component of customer advocacy, the visible expression of customer loyalty. Banks have historically scored low compared to other industries when it comes to trust and so now is the time to really put the customer first and start to rebuild that trust – the much needed profits will follow.