Targeting the most profitable small-business customers is a maxim among bankers, but a recent study said the tactic is only a short-term solution.

"It's not really a winning strategy," said Terri Austerberry, a McKinsey & Co. senior consultant who worked on the study with the Bank Administration Institute.

Failure rates are high among small businesses, so many of a bank's most profitable customers will not remain in operation, the study said.

Instead, banks should pursue strategies that deepen and broaden their relationships with all small-business customers, not just the cash cows, Ms. Austerberry said.

"It's important to understand who your profitable customers are, but putting all your eggs in that basket is dangerous," she said.

The reason is that not many survive. Only 20% of small-business start- ups last for more than 10 years, which means that banks must prospect for new customers rather than just trying to retain existing ones.

Many new small-business customers generate initial profits for banks because they maintain large balances in noninterest-bearing accounts, the study said. But these account balances decline as the proprietors become knowledgeable about financial options and seek cash management products that offer higher returns, it said.

In addition, the study said, increased competition on price is likely to drive down the revenue banks can generate by selling more products to their most profitable customers.

Bankers tend to compensate for high turnover in the small-business market by targeting more stable industries such as accounting, law firms, and health-care groups.

At the same time, bankers tend to shun stores, hotels, and restaurants, which typically are subject to consumer whim and have higher failure rates.

But that tactic won't work, said David Van L. Taylor, executive vice president of the Bank Administration Institute.

"The mortality rate among small businesses is so high that the real payoff involves developing products that can help bring existing customers up the profitability scale," Mr. Taylor said.

In addition, banks that tend to focus on products such as checking accounts and term loans have only a narrow share of the highly profitable small-business market.

Each small business provides an average of $13,000 a year in revenue to the financial services industry from leasing, insurance, payroll, investment, and traditional bank products.

The report outlined eight compatible strategies banks could use to build their presence in the small-business market. The strategies include:

Becoming a category killer. This is used by banks such as Wells Fargo & Co., which specializes in credit lines, and the Money Store, which specializes in Small Business Administration loans.

Building a relationship strategy. Merrill Lynch & Co., for example, uses a single financial consultant to handle entrepreneurs' business and personal finances.

Discounting. This would lead banks to charge lower fees for automated teller machine use or for electronic bill payment, which is cheaper for a bank to provide.

Acting as a distributor. A bank could function as the "One Source for Business" by offering sophisticated financial products, such as estate planning or insurance, to businesses too small to merit a dedicated relationship manager.

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