Winning with Small Businesses—Part 3 (of 6-part series)

3 Steps to Designing Effective Products for Small Businesses: Pricing   

When you’re a financial institution serving small businesses, the need for customized products and solutions is critical. No two businesses are alike and these profitable customers demand solutions made to fit their needs. Vantiv research shows that while branch location is a major driver of bank switching, customers who switch for product-related reasons are disproportionately profitable.1 So what can banks and credit unions do to design products that attract new small businesses and keep them as long-term clients?

Vantiv research focused on the top 10 banks that have been gaining market share with small businesses over the last few years. By examining their websites, branch locations, and other sales and marketing efforts, Vantiv found that the most successful banks in the country tend to have small business product suites with three similarities: simple/segmented, easy to buy/easy to sell, and priced to maximize the value exchange.  The third installment of this series discusses the concept of pricing in further detail.

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Priced to Maximize the Value Exchange

What does it mean for a product to be priced to maximize the value exchange? Simply put, products must generate value both for the customer and for the financial institution. When more value is created for the customer, the more value they are willing to share with the bank or credit union. If products had only two features – say interest rate and fees – the math would be simple. But in a world where the core checking package has dozens of features, figuring out how to simultaneously maximize customer-perceived and bank-realized value is more difficult. While there are many techniques for doing so, they all lead back to the concept of “know your customer”.

Let’s use as an example three features of a small business checking account:

1.    The interest rate

2.    The speed at which deposited funds clear and are available to the customer

3.    The number of included transactions before item fees kick in

Starting with the interest rate, one would think that an interest rate that is five times the national average would fare significantly better than an interest rate that is only double the national average. However, the Vantiv study finds that features such as interest rate materially drive preference but only insofar as they are offered, not meaningfully proportional to their level. This means that there is a big difference between noninterest bearing and interest bearing but beyond that, small business owners aren’t too picky. Financial institutions can use this knowledge to invest in features that are more meaningful to small businesses rather than investing precious marketing dollars focusing on interest rates.

The next feature - funds availability - raises an interesting paradox. Vantiv found that customers have a strong preference for instant funds availability despite the fact that the vast majority of small businesses would have no need for such a feature. Most small businesses maintain relatively stable balances and rarely transact with such precision that accelerating the receivables cycle by one day would make a material difference in their working capital position or earnings. That said, the perceived value is quite high. So, if a financial institution can manage the operational complexity and the fraud risk inherent in accelerating funds availability, there is market share to be gained.

The last feature, included transactions, behaves a bit more as one would expect. Three times the included transactions generates three times the perceived value. But note, this is more an exception than rule governing small business owner preferences for product features.

In Part 1 of this series, we discussed why small businesses are so critical to the US economy and how they represent significant profit potential for financial institutions.

Part 2 of our series focused on growing small business portfolios for financial institutions.

The next installment of this series will discuss the next key feature in product design: making them easy to buy and easy to sell.

If you can’t wait for the series finale—you can find Vantiv’s full whitepaper, and access a webinar, at the Winning with Small Businesses home.

1 Vantiv, “Winning with Small Businesses”, 2015.