Small-Business Quarry: Neither Fish nor Fowl: To Hunt Down Small-Business Customers, You Can't Treat Them like Big Businesses; nor Can You Engage Them like Ordinary Retail Customers. the Secret Is to Approach Them as a 'Different Breed of Consumer.' Here's Insight into How Banks Today Are Successfully Marketing to the Small-Business Community

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Since the "late 1990s, "large banks have been bundling products and increasing loan portfolios with zeal in order to attract the small-business market. And why not? Small business, defined as firms with less than 500 employees, represents 99 percent of all U.S. business, according to the Small Business Administration. These companies accounted for more than $8 trillion of the nation's $19.4 trillion in corporate wealth in 2000.

From self-employed nannies to newspaper publishers to warehouse superstores, the small-business arena is an extremely varied market. Different types of small business offer different opportunities, and big banks are aggressively courting them at all levels.

"You can see signs everywhere in banking that business is recovering, and if I'm a small bank, I'm worried right now about what a good job the large banks are doing," claims Bill Madway, president of Madway Business Marketing in Bryn Mawr, Pa., adjunct professor of marketing at Villanova University and former director of the Small Business Development Center (SBDC) at the Wharton School in Philadelphia. "They're encroaching on the territory that has really been the province of smaller banks, such as micro small business, and they're cleaning tip."

For one thing, larger banks can offer a full array of services at a much better price than small banks due to economies of scale. So a smaller bank must exploit its own arsenal of advantages or lose out, advises Madway. He sees two main advantages:

1. Preference. People have a built-in preference for dealing with a smaller bank. They feel they're going to get a better deal and more respect.

2. Personalization: Smaller banks can compete with larger banks on personalized service and personal involvement, As Madway says, "They know the neighborhoods."

He also advises banks to stop chasing the new customer and focus on existing clients. Otherwise, the existing client will eventually migrate all his business elsewhere.

"As clients get bigger, they may outgrow their small bank," says Madway. "So the bank has to press that advantage by figuring out a way to cost-effectively provide a wider range of services and retain that personalized feel."

Think consumer, not corporate

One key to effectively marketing to the small business, says First Charter marketing director Kevin Toomb, is to change your mindset. Based in Charlotte, N.C., in the "valley of the shadow of the giants," Toomb says the bank can easily sell the idea to small business that large means impersonal and small means personal. Just think consumer, not corporate.

"One of the things about the small-business market is that the lower end resembles the consumer market in behavior and appetites," explains Toomb, of First Charter, a financial services company with $4 billion in assets. "The error on behalf of many people is to look at them as small commercial entities instead of a different breed of consumer."

This consumer mindset requires a new 1-2-3 strategy for making money from small business. It's deposits first, fees second and loans last--a complete reversal from popular thinking.

"Most people go in thinking loan first, and then they get worried because they don't have enough people to do the loan volume," claims Toomb. "But if you treat them like consumers, you recognize what you really want first are deposits and possibly fees, because small business understand the concept of paying for service."

So why did they launch a campaign for free--no-fee--business checking, with a free gift for signing up and cash back for unused checks in February 2003? Several reasons. First, free checking offered to consumers led to an increase in account openings at a rate of 250 percent, and the bank anticipated similar behavior from small business. They got it. Small-business account openings tripled almost immediately. And one account with small business often leads to more. …