Are Your Customers & Prospects Lovers, Haters, or Swingers?

I recently attended the Pacific Coast Bankers’ School at the University of Washington as an observer. Instead of observing, I went to learn from the many quality industry professionals and college professors that make up the faculty. One was Michael Swenson, a Ford Professor of Marketing at Brigham Young University. 

During his class, he discussed a case where the American Plastics Council (APC, now the Plastics Division of the American Chemistry Council) was trying to get people to feel better about using plastic. It seemed to me that the advertising campaign that ensued was specifically designed to get you to respond “plastic” when confronted by the pimply teenager at the supermarket checkout line that mumbles “paper or plastic”.

After spending millions, the APC was getting no traction. In fact, public opinion of plastics was getting slightly worse. That must have been an uncomfortable conference call.

So the APC brought in some fresh blood to figure out what to do. I can’t recall the agency they hired. But their approach was to divide their constituents into three groups: lovers, haters, and swingers. I think Professor Swenson called them the love group, hate group, and swing group, but I like my names better.

My first thought was, how could somebody “love” plastic? Not that there is anything wrong with that. But the context was that plastic had some positive influence in this group’s lives, such as the local little league switching from a chain link to a plastic-based fence just before their son Timmy (or Justin in modern day) plowed into the fence shagging a deep shot to left. So you get the picture where this group’s heads were (see video).

The hate group generally was of the tree hugging variety... plastic clogs landfills, never biodegrades, kills Flipper, etc. Swingers were indifferent. You may add a funny line now.

Based on the results of the study, you would think the APC would go about changing the hearts and minds of the haters. It’s human nature to try to get those that don’t like us to like us. But you would be wrong. Instead, the APC set to work on the swing group.

Here is where the big learning moment came for me. Instead of parading swingers into a room to do a focus group [insert joke here], the APC brought in the lovers to learn why they felt the way they did about plastic.

They took what they learned from the love group, and began a campaign to change the hearts and minds of the swing group through the eyes of the love group. And it worked.

Aha! *insert light bulb on top of head*

~ Jeff

Much Maligned Banking Business Model: Lean and Mean

Does your financial institution pursue a relationship driven strategy? If so, you would be in the majority for community FIs. If not, you are much maligned.

In my last post I identified five things I don't understand. One was "Our Money Is No Different Than the Bank Down the Street". I discussed my confusion as to how bankers could believe this and still pursue a more expensive relationship driven strategy. Instead, why don't you get lean and mean?.

I discussed this with bankers I met at the Pacific Coast Bankers School, where I am currently serving as a Faculty Fellow. As an aside, I'm still not sure what that means, except I go to class to form an opinion about the school and its subject matter. But I digress.

The bankers here did not have an appreciation for the business model of a California bank, who shall remain nameless, that sports a near 1.50% ROA, and trades at over 3x tangible book and 18x earnings. The model, is designed to be highly efficient, having an efficiency ratio in the mid 40's and an expense ratio (non-interest expense/AA) at about 2.3%. In other words, this bank is cheap.

If my experience is any gauge, most community FIs choose a more expensive business model, the relationship driven model. This strategy typically delivers a higher net interest margin, because customers won't dump you at the slightest price variation, and is more expensive as the FI invests heavily in relationship managers and high touch service.

But what does the market think of the two models?

I took a look at publicly traded FIs between $1B-$10B in assets, that had ROA's greater than 1%. I controlled for fee income businesses, as high fee income FIs skew the ratios significantly. So the FIs had to generate less than 30% of total revenue in fees. The criteria delivered 61 FIs. I then split them up into top and bottom quartiles based on the expense ratio. The results are in the table below.

Although community FIs choose the higher expense ratio, higher net interest margin strategy, the markets currently reward the more efficient FIs with higher trading multiples. 

This does not make Porter's "low-cost" model superior, as it calls into question the sustainability versus the "differentiation" strategy, especially for community FIs that lack the scale of our largest banks. But I think it's time to get off of our high horse and recognize, as Michael Porter did, that the low cost model is an option.

Any thoughts on low cost versus differentiation?

~ Jeff