Chapter 3: Price Getting
Price Getting covers people and process issues, but it essentially boils down to one question: How good are we at actually booking that price after we set it?
Like Frankenstein Bank in Chapter 2, many banks are discovering they can’t just “out-math” the competition. It does no good to be really great at setting prices if we end up having to discount to get deals on the books, or losing deals because we couldn’t find a creative way to make it meet our targets. So, what is Price Getting and how do banks get better at it in a way that builds relationships and positively affects the bank’s brand? That is the focus of the rest of this book, but in this chapter we will introduce some of the big concepts.
Price Getting covers all the people and processes issues involved in actually booking the price that is set. We describe these two functions with the terms “back of the bank” and “front of the bank.” The back of the bank focuses on Price Setting, and typically includes all of the finance, credit, and risk management inputs that go into calculating an acceptable risk-based price. The front of the bank is the sales and production staff that “gets” the customers to agree to those prices. The act of balancing Price Setting with Price Getting can be difficult, but it is an absolutely vital task for banks.
As we’ve noted, pricing is an inherently cross-functional task, and bridging the gap between Price Setting and Price Getting (or the back of the bank and the front of the bank) is really hard. We’ve pointed out that there are a lot of resources to fix Price Setting, as it is the foundation upon which we build everything else. But once the math is in place, how important is the Price Getting part?
We put it pretty bluntly when talking to our clients, telling them that “effective pricing is at least 90% effective selling.” That effective selling component is far reaching, but here are the biggest components to get you started.
The first step to successful Price Getting is the proper alignment of pricing within the bank’s overall strategy. This may seem like an obvious first step, but we often see a huge disconnect between marketing and reality. In other words, we try to price like the Ritz but our customer base and our service levels are more like Motel 6. Or vice versa, as a miss either way is a problem.
For further illustration, let’s start with a pretty common statement from bankers. “I’m not sure you understand. Our market is REALLY competitive, and there is just no way we can get those kinds of rates here.”
We hear some version of that statement every time we talk to a new bank. And we don’t mean most of the time. Every time we talk to a bank, someone tells us that the pricing philosophy we are describing might work in a lot of places, but it just won’t work in a market that’s as competitive as theirs is. Now, we should start by clarifying that we believe those statements. We can see in the data just how brutal the competition is for the best loans, and we can also see that just about every market has a “that guy” who is putting painfully aggressive pricing in front of your customers and prospects.
Our assertion, though, is that while your current approach might make it impossible to “get those kinds of rates” on the best deals, there is another approach that will get you there. However, the answer is not to simply tell your lenders to ask for better pricing, or to be better at the math. Instead, you have to first do a little homework so that you can better arm your lenders to approach the right kind of borrowers with the right kind of deal.
Don’t Just “Sell More Stuff”
The best place to start is with a solid game plan. We find an awful lot of banks that are still haphazard in their approach to the market, with the only strategy being to “sell more stuff to more customers.” Heck, if we’re honest, we have struggled with this exact problem ourselves. The issue is covered in a Harvard Business Review article written by Frank Cespedes and Steve Thompson called, “Don’t Turn Your Sales Team Loose Without a Strategy.” This passage in particular is applicable to banks:
“The problem is few firms clarify their deal selection criteria. Either directly in meetings or implicitly in their compensation plans, they basically tell their sales forces to ‘Go forth and multiply!’ And that is exactly what happens.
As a consequence, salespeople tend to sell to anyone they can, often at discounted prices to make a volume quota target. There are also opportunity costs: since money, time, and people are allocated to customer A, they are not available to customers B, C, and so on.
This is ineffective deal management, and it eventually leads to loss of positioning with customers, and, over time, the nurturing of ‘commodity competencies.’ In other words, the sales force gets better and better at striking deals that more customers value less and less.”
Does any of that sound familiar? How many banks give their lenders a portfolio growth number, and then send them on their way? Especially for community banks, trying to be all things to all people is a dangerous strategy. The big guys are playing the same game, and they are exceptionally good at it.
The real problem is what the authors describe as the “nurturing of commodity competencies.” We all know what this looks like in the world of commercial lending. It means that most banks in a market offer similar terms, and the only differentiator is rate. The question you have to ask is, what do you want your brand to be? Do you want to be the bank that everyone comes to last so they can shave the rate by another eighth of a point? Or, do you want to be the bank that everyone comes to first because they know you will be creative and fair in finding a deal that best fits their needs?
The borrower tells us they are buying a commercial property, and we look up our current price for a standard deal. In some markets this is a 5-year balloon on a 25 amortization schedule, and in others it might be a fully amortizing 15-year deal, but the point is that most banks are afraid to offer something markedly different from what the borrower is seeing from competitors. So, we put our deal on the table and hope that our lender is tight enough with the borrower that we can win without having the lowest bid. Did we take them to play golf enough times?
Identify the Good Deals
What we need is to be able to offer real value to that borrower. For example, consider Bill Ragle, a lender at Comerica Bank. His team specializes in lending to medical groups, and they don’t have to win deals with low rates. Instead, they build relationships by making life easier for their borrowers and providing advice that has real value because they know the industry inside and out. You don’t get that by being all things to all people.
Start by understanding what the “good deals” are for your bank. Which ones are profitable, and which ones are you really good at? Then, spend your time and effort figuring out a way to get more of those, and spend less time chasing everything else. If you do those deals better than anyone else in your market, and you can be creative in finding ways to make them work for your borrowers, you’ll find yourself in far fewer bidding wars.
Communicating the Price
Communicating is really about the tools we use to translate pricing from the back of the bank to the front. These range from the old-fashioned printed rate sheet to full-blown enterprise level pricing systems like PrecisionLender.
Whatever tool you use, your lenders need more than just the “sticker price” for each product. They also need to know where the line in the sand is for pricing exceptions and customized structures. Banks complain about their products being commoditized, but they often become the primary instigators of that mentality by limiting the ability of their lenders to price anything that isn’t predefined on the rate sheet. To be truly effective, we need to communicate clear targets and boundaries to our lenders, as well as the relative value of each deal component.
Related to that concept is the creation of a basic framework for negotiating. The top performing banks have clear boundaries set for negotiations between lenders and borrowers, and the lenders have authority to agree to pricing within those ranges. In addition, they also have clarity and efficiency built into the approval process for any deals outside the boundaries.
The other banks? That’s where we still see a lot of the “let me check with my manager” approach to negotiations that people love so much from their car buying experiences, and way too many response times measured in weeks instead of minutes. When the customer experience suffers to this degree, we can’t expect to get premium pricing.
The industry is facing an acute shortage of experienced and productive commercial lenders. This shortage is tied directly to the majority of banks killing off their formal training programs, leaving no pipeline of homegrown lending talent. Has your bank trained lenders on how to effectively sell your value proposition? Do your lenders know how to negotiate with their borrowers? A few banks have gone the extra mile with this and they are in the process of eating everyone else’s lunch.
Lender Incentives and Accountability
This concept is straightforward, though the execution of it can admittedly get overly complex in a hurry.
The basic idea is that while bankers will complain to lenders about the compressing spreads on their deals, lenders know what REALLY matters when the year end review comes around. No matter how many metrics or reports we show them, it’s all about portfolio growth. Is your personal portfolio up 25%? Then you are golden, and there are raises and promotions headed your way.
We talk a good game about loan profitability, but very few banks actually measure and reward their lenders based on profitability. Give them some real incentive to balance profitability and growth just like the bank as a whole must do, and you will be amazed at how well your lenders respond.
You can see why Price Setting receives more attention than Price Getting. The Getting is really hard, and requires some organizational change that won’t happen overnight. The good news though, is that it is also an incredibly powerful lever for improving performance. You don’t have to get it perfect right out of the gate, and you don’t have to tackle it all at once; even incremental changes will quickly translate to better results. Just remember that you have to balance both dimensions, and you have to bridge the gap between the front and back of your bank. Do that well, and you are on your way to being a high-performing bank with happy lenders AND happy borrowers.
What Kind of Bank Is Your Bank?
Now that we have outlined the two dimensions of pricing, what does success or failure look like along those dimensions? In other words, what are the consequences of ignoring one dimension?
While determining the exact cause of the failures in pricing can be difficult, the outcomes are pretty straightforward. Are you wondering which aspect of your pricing approach needs work? An honest appraisal of where you fall on the diagram below should point you in the right direction.
The Reckless Gunslingers
These banks are a dwindling breed (since they keep failing), but we still run across more than you might expect. They are the banks that are terrible at setting the right price for their credit and interest rate risk, and are willing to discount from there when necessary. These banks are dangerous, not just to themselves, but to everyone else in their market. The good news is that if you have any borrowers that you are worried about, this is exactly where you should point them.
The Stubborn Old Mules
These banks struggle with Price Setting, but stick to their guns once they come to a decision. The problem is that the prices they are defending don’t always make sense. Sometimes they are stubbornly staying with above-market rates in search of margin, and are sacrificing top-line growth to get it (look for the giant bond portfolios).
Other times they have set prices for certain structures too low, and stick to them even when the outsized production should tell them they got it wrong (look for the concentrations in risky loan types or long-term fixed rates).
These banks have the shortest path to improvement, but in our experience, are also the least likely to actually take it. Because they already have it figured out, thank you very much.
This quadrant represents most of the larger banks. They have sophisticated tools and entire teams dedicated to calculating the right price … usually out to four decimal places. The trouble is that the lenders trying to book deals at those rates find it impossible, because they don’t have access to those same tools, they haven’t been properly trained, or they know they can simply ignore the nerds with the calculators.
These banks are the hardest fix, as massive organizational change is far more daunting than simply improving the math. The good news (or bad if they are a competitor) is that a growing number are willing to try, as the results are impossible to ignore.
Finally we have the rarest of all, the banks in the top right corner that are good at both Price Setting and Price Getting. You can spot these banks from a distance, because they are the ones that are growing like crazy while still generating top decile earnings.
When asked about performance, their leaders never talk about pricing methodology. Instead they talk about relationships and their strong teams. What they are really saying is that they’ve mastered the Price Getting component that eludes most of their peers.
So, which category best describes your bank? The right fix depends on a proper diagnosis, and in most cases, better math alone won’t fix your performance.
Our friends at Frankenstein Bank came to exactly that conclusion. They had spent plenty of time and money on the Price Setting, but had completely ignored the Price Getting Dimension. The solution for them has been to start investing in the tools, processes, and people to pay more attention to one aspect of their business that had been largely ignored; that pesky little detail called the customers.
There are two dimensions to pricing: Price Setting and Price Getting. Banks usually prefer to focus on Price Setting, but that doesn’t mean they’ve all mastered it. What are some of the common roadblocks bankers encounter in Price Setting? And why should we never let perfect be the enemy of good?
Chapter 4: Moving Pricing Forward
To compete in this age of rising customer expectations, banks must take steps to shorten their lending timelines and be more creative with the options they offer borrowers. To do that, they must move the pricing process from the back of the bank to the front.