A couple of weeks ago, we wrote a post called “Price Setting vs Price Getting.” In that post, we laid out the concept of the two dimensions of pricing, and how both are integral to effective pricing and overall bank performance. What we didn’t cover, though, is what exactly Price Getting entails. So, what is it, and how do banks get better at it?
Price Getting covers all the people and process issues involved in actually executing 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. During my time as a banker, I sat in both chairs, and let’s just say that the perspectives and incentives don’t always align as they should between the two camps.
Pricing is an inherently cross-functional task, and bridging the gap between the Price Setting and Price Getting (or the back of the bank and the front of the bank) is really hard. We have covered the Price Setting in a lot of posts over the years (start here for a good overview), 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? Carl Ryden puts 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 is the proper alignment of our pricing with the bank’s overall strategy. This is basic stuff, 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.
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. If the only lever they can move is the rate, expect to see a lot of discounts.
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 lots of the “Let me check with my manager” style of negotiations that people love so much from the 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 is 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 both, 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.