Creating a feedback loop.

• Author: Neckopulos, Jim

A KEY FACTOR TO SUCCESS in today's ever-competitive small banking marketplace is finding subtle differences to gain a competitive edge. Banks that understand this reality will be able to take advantage of sometimes significant and measurable differences in their customers and markets to implement more effective and profitable segmentation.

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In a previous article (ABA Bank Marketing, November 2010), we discussed one effective way to segment small-business customers: through understanding the lifecycle needs of the business owner and the business. In this article we will explore the two other techniques: Creating a segmenting scheme that focuses on the sophistication of these businesses and their needs; and, developing a dynamic needs assessment feedback loop that enhances awareness of both lifecycle needs and the sophistication of the business.

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Let's start with understanding the level of sophistication that the business has. Here are some suggested steps:

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1. Build business profiles of your small-business customers.

   For example:

   * Service businesses need to manage their cash flow carefully as they often experience delays between when services are performed and payment is received.

   * Seasonal businesses, including agricultural businesses, have investment and borrowing needs that vary during the year.

   * Retail businesses often need to purchase inventory to gel ready for the holiday season when they make the majority of their sales.

   While there is an element of revenue generation in consideration of these businesses, a significant amount of their banking needs are tied to the nature and key characteristics of the business as well as the industry in which they operate.

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   Use of a needs-assessment guide that recognizes the lifecycle of customer needs is imperative. (For example: Where is the customer or potential customer with respect to his or her lifecycle needs? Does he or she need assistance in developing a roadmap to meet these needs?)

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2. Assess the areas of greatest need for your business customers. A business with significant and ongoing cash flow activity is likely to benefit from well-developed cash management products to ensure idle balances are invested, invoices are paid on a timely basis, and discounts for early payment of supplier invoices can be assessed or evaluated. Smaller business (in terms of revenues) may in fact see this as a key need and therefore a key "buyer value" when either choosing a new bank or staying with a bank. Unfortunately, most banks often only provide minimal cash management capabilities to these "smaller businesses" or platforms with minimal functionality. As a result, a business with $2 million in revenues might, on the surface, not look that attractive and may not have significant credit needs, but may have significant average monthly DDA balances. For many banks, a new or potential customer with this profile might be missed entirely or turned over to a retail branch if the initial contact was initiated by the business. For many regional and community banks, a customer with this profile would likely be attractive, but may not be actively pursued given its annual revenues and therefore viewed as less attractive in that type of segmentation scheme.

3. Identify growth businesses in current markets or markets that the bank would like to pursue. All businesses go through cycles. Some follow the general overall business cycle, others are interest-sensitive, and still others maybe leaders or tied to industries that are in an expansion or contraction mode. Again, focusing only on revenues may miss attractive targets given industry growth and markets factors.

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   Technology-related companies are a good example of this...