Bankers who market their services to small businesses are well behind retail bankers in learning how to segment their markets, according to experts in the field.

During the past decade, bankers worked furiously to market more effectively to the different needs of individuals and to get handle on the cost of serving different types of customers.

"But banks have not yet caught on to segmenting the small-business market," said Lee Gunderson, a managing director at the Secura Group based in Washington.

There are, of course, exceptions -- which consultants say should be shining lights to others in the industry.

Narrow Focus, Good Profits

Village Bank in Port Chester, N.Y., has carved a narrow but profitable niche within the small-business commercial real estate market by imposing segmentation upon segmentation, according to David V. Winstead, the bank's chairman.

The $860 million-asset bank, which has about $130 million of commercial real estate loans, steers its way through the shoals of real estate lending by imposing tight parameters.

Its major segmentation requirement is geographic. "The property or building should be within 75 miles of the bank so [an officer] can leave the bank in the morning, call on the customer, and return to the bank by lunchtime," said Mr. Winstead.

Anything farther away, he added, is too difficult to monitor and too expensive to service.

Village Bank limits its loan amounts to between $400,000 and $2.25 million. It supplements this with strict credits rules and interest-rate protection guidelines. The bank will not make a loan unless a borrower guarantees the loan with personal assets. And the bank offers only fixed-rate loans.

Mr. Winstead, consultants, said, is a big exception in the small-business arena.

Needs Differ

"Most bankers tend to lump all small-business customers together," said Lorraine S. Rojek, president of Marketing Vision Inc., a Canton, Ohio-based company.

Ms. Rojek, who delivered the segmentation message this week at a Consumers Bankers Association seminar in Virginia, cautioned against that tendency. "A small retailer may have big cash-management needs while a small manufacturer may require help with equipment leasing," she said in an interview.

Segmentation also gives banks a better grip on their costs, since profit margins vary according to types of customers.

"Segmenting is not just a marketing tool but a way to determine which small business customers are profitable and which ones are not," said Scott A. Williams, a banking consultant in the Atlanta office of McKinsey & Co. "Some bankers view small business customers as unprofitable, while others see the market as a tremendous profit opportunity."

Neither view is correct because "the cost of serving different customers varies" according to the products and services they need, he said.

In addition to segmentation by geography and size, Mr. Williams also suggested, the age of a small-business owner should be considered.

Three Basic Categories

David L. Birch, president of Cognetics Inc. in Cambridge, Mass., suggests segmenting small-business borrowers into three broad groups: one-person operations, volatile but fast-growing firms, and small but stable companies.

Each clearly requires different marketing approaches. The home-based, sole proprietorship business can be served just like a retail customer. "Direct marketing is the most effective" approach, said Mr. Birch.

Mr. Birch dubs the second group -- volatile but fast-growing firms -- "gazelles," and cautions that they are tricky to serve. "One day they have a surplus of funds and the next day they have none."

Mr. Birch advises banks not to bother with these companies unless they are referred by reliable professionals, such as lawyers and accountants. Another approach tried by some banks is to offer the group loans guaranteed by the Small Business Administration.

The third customer category -- small, stable companies -- are "the mainstay of smaller banks," said Mr. Birch.

Ms. Rojek and Mr. Williams advise even further segmentation of this third group. Banks traditionally categorize such business by revenues but Ms. Rojek and Mr. Williams suggest further divisions -- namely, by assets and number of employees.

"A retailer with $1 million in annual revenues probably is a very different animal from a manufacturer with $1 million in revenues," Mr. Williams said.

Loans to New Doctors

NationsBank in Texas is a large bank that successfully demonstrates the value of narrow segmentation. One of the bank's specialties is loans to newly minted doctors anxious to establish their own practices.

"The loan covers start-up costs for the business and living costs for the doctor," explains Deborah M. Cannon, an executive vice president. With such a narrow focus, NationsBank claims better control over the quality of its loans.

"If an OB/Gyn wants to establish a practice we will look at whether the market can sustain another doctor in this specialty," Ms. Cannon said.

The result has been a good loan-loss record and an intensely loyal customer base. As the young doctors age, she pointed out, NationsBank provides them other products and services, such as credit cards and trust department advice.

Effect on Advertising

One final benefit of narrow segmentation, according to Marketing Vision's Ms. Rojek, is more effective advertising.

"A bank can narrowly target its message in trade publications to reach just those customers its wants," she said.

Such narrow messaging also provides a more powerful message than broad-based advertising to the small-business customer. "The danger of less focused advertising is that a bank creates an image of a generic product that every other bank has for small business." Ms. Rojek said. Ms. Adkins is a freelance business reporter based in Chicago.

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