Small-Business Market Needs a Big Effort

The hugeness and diversity of the small-business market makes it difficult to serve efficiently.

Whether it is the new frontier of retail banking or the last frontier of commercial banking, one thing is certain: The small-business market offers tremendous profit potential - but only for financial institutions capable of dealing with its complexities and meeting its challenges.

Consolidation has brought tremendous pressure on banks to maximize the value of their franchises. Increasingly, they are recognizing that a significant portion of that value revolves around the owner/operators of small businesses.

It is a hybrid market, sharing many characteristics of the consumer and commercial markets. Since entrepreneurs are in business to create wealth, their business and personal financial decisions are so interwoven that they are nearly inseparable.

Unlocking the Potential

With the ability to sell a wide variety of services, small business offers tremendous potential for profitability. Unlocking that potential and building a high-performance small-business program requires management to meet several challenges.

The challenges of organization, market management, and differentiation go to the heart of productivity and profitability.

Meeting the organizational challenge has proven to be the most difficult. According to the 1991 Consumer Bankers Association survey on small-business banking, 86% of the respondents defined small-business customers by gross annual receipts, and 63% defined them by average loan size. (Respondents were allowed to check more than one category, so the responses totaled more than 100%.)

Asked to define who had organizational responsibility, 52% named the commercial division, and 41% named the retail division. The remaining 7% indicated that small business banking reports to both.

Why All the Confusion?

Being a hybrid market, it does not fit neatly into the traditional retail/corporate organizational framework. As a result, many small business programs are hybrids themselves, often existing without the full sponsorship of either the retail or corporate sides of the bank.

While senior management may have made a commitment to the market segment, overall organizational support falls short. The support training is somewhat different.

Not having heard a clear and convincing mandate from either the retail or commercial sides of the bank, support areas have not developed specific action plans to meet these needs. This leaves many programs struggling to achieve both an internal identity and a market identity.

This struggle hurts performance and adds fuel to the debate over the proper organizational report point. Bankers serving the small business market soon begin to focus more on internal organizational issues and career-path implications than on building a high performance program.

What Kind of Customers?

This question of whether customers are retail or commercial is a major obstacle, keeping many banks from achieving their potential.

Perhaps it would be more beneficial for the institution to view the small-business customer simply as a customer with varying degrees of financial needs, both business and personal. This approach allows greater flexibility in designing a program around the needs of the entrepreneur.

Company life-cycle stages and financial-product usage patterns suggest that each point, branch, small business, or commercial banking, has a vital and somewhat specific role in the business-development process.

The key is to clarify these roles and, in the process, get the customer to the appropriate service point. This makes it easier for the customer to do business with a financial institution and improves its productivity. It will also energize business-development activities and promotes teamwork within the organization.

Road Map to Effectiveness

Meeting the organization challenge requires:

* A clear understanding of the market.

* Developing a written "blueprint" or strategic business plan for the market segment. Identify the issues critical to success and how they are to be dealt with. Use this as a communication tool and a road map for your entire organization.

* Adding value by organizing around the customer with business development responsibilities that are specific, ensuring that quality service is provided at each point.

This is not to suggest abandonment of the existing commercial/retail structure.

However, senior management should look carefully at how business is done with businesses across the whole spectrum - small to large.

The key to efficiency and profitability is to get an organization to do the right thing, providing the right skill set, and the right products at the right time. Those that meet this challenge will start to create a true competitive advantage.

Market Management

With so many prospects, it is too time-consuming, inefficient, and costly to call on companies at random.

It is imperative to use market-segmentation and target-marketing techniques.

The principle that 80% of business comes from 20% of the customer base is as true in banking as in other industries. So a prospect list can be developed that is a mirror image of the top 20%.

This should be done for all levels of a distribution system, branch, small business, and/or commercial banking.

A market segmentation and target marketing approach has the following benefits:

* Increases productivity of calling forces.

* Increases sales, as officers understand the product needs of each subsegment.

* Controls costs by limiting direct calls to prospects that fit targeted profiles.

Companies not fitting the profile may be good customers or prospects, but may need to be approached in a more cost-effective manner, such as telemarketing or direct mail.

A highly focused target-marketing program can outmaneuver the competition while working smarter - not harder.

Due to the vast size of this market, most banks mistakenly employ only a mass-market strategy. However, target marketing sets an institution apart from its competition, while maintaining a focus on productivity and profitability.

Winning in the small business market requires management to meet several challenges. Primary among them is to organize so that business-development responsibilities are specific and quality service is provided at each point.

This is the key management challenge for all banks that wish to be successful in this market.

A bank that is able to meet this challenge will be on its way to generating a key competitive difference.

Mr. Greer is founder and president of Greer Growth Systems Inc., Cleveland, a specialist in setting profitability objectives for financial institutions in the small-business market.

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