It didn't take Steve Hickman long to realize that trying to please every small company in Florida would end in frustration.

As director of small-business banking at Barnett Banks Inc., he had the task of determining what segments of the market with $5 million in revenues or less could be served effectively and profitably.

"We spent a lot of time looking at product profitability," he said. "We had to figure out a way of serving this community in a cost-effective and risk-effective manner."

Finding out what kinds of companies are in a market is the first and often the most difficult job facing bankers targeting small companies. It is also the first step in determining how to develop appropriate products and services.

The best place to start is in your own backyard, according to Mike Greer, a Cleveland-based consultant and former banker. A bank's existing customer base often holds clues to what clients like about the bank, and what kind of companies are the most valuable to the bank.

"It is not so much what the value of each customer is that matters, it's that you are now constantly looking at them that counts," Mr. Greer said.

The first step in determining value is getting to know how much it costs for the bank to deliver products and services.

Knowing which products and services are the most profitable, the bank can determine which relationships are the most worthwhile.

This knowledge opens other doors as well, Mr. Greer said. Salespeople will know which existing customers they need to keep satisfied. And they'll know which customers to target in their prospecting calls.

First Interstate Bank in Los Angeles used this kind of target marketing in a recent direct mailing. The narrowly focused pilot program targeted only existing customers and only those that met certain balance requirements.

Betty Behrens, product manager for commercial services with the bank, said customers that made this cut were then tested against information provided by a data base vendor to weed out those with poor credit ratings at other lenders.

The result: a 15% response rate from the mailing, generating $12.7 million in new loans. The only problem loan of the entire bunch came about because the business owner suffered a heart attack. His wife has since resumed payments.

The mailing served other benefits as well.

"The only issue was that some people wanted more money or a revolving line," she said. "We were so excited about it that we're coming out with another preapproved mailing for a revolving line of credit."

While First Interstate's success was in part due to the use of an internally generated data base that was compared to one from a third party, others haven't fared so well. Bank One Texas found that a data base developed from internal and external sources contained incomplete addresses, leading to a large number of letters stamped "return to sender."

Still, Robin Wantland, head of small business banking, said the bank's two-year history with direct marketing has been successful. And the bank is now refining its data base even further through the use of artificial intelligence.

"For me, it makes sense to really validate the sources you've got before you go out and do a bunch of mailings," he said. "You start by trial and error, and we've really seen it narrow down and become better at getting us to the right opportunities."

For Barnett, segmenting efforts have produced 19 different products and services targeting certain kinds of small companies. For instance, the bank developed a payroll processing service for retailers with fewer than 10 employees. The bank also developed a long-term mortgage product for entrepreneurs looking to buy their own facilities.

But Mr. Hickman says the bank does its homework on its product innovations, and those that don't deliver are shelved before they reach the market.

"We've thought of a lot of products and services that we've backed away from simply because either the profitability or market potential weren't there," he said.

And part of making a product profitable is ensuring effective distribution, Mr. Greer stressed. This means getting the bank's frontline sales force involved by sharing segmentation and product development information with them.

"Unless you can make this information available to the people on the line, don't even bother doing it because that's where it is turned into dollars," he said.

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