How should bankers handle those moments when their clients "test" them on their deal price? It's a situation every banker encounters - whether when it's time to renew a deal, the market has shifted, or a competitor is looking to peel away a client.
Are there ways to sometimes to make those moments less frequent? Or sometimes avoid them altogether? Or, if it's inevitable, is it possible to actually benefit from it?
Dallas Wells and Jim Young explore this issue from all angles in this week's episode of The Purposeful Banker.
Commercial Renewals: Market Best Practices (Webinar)
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Winning Tactics of Top RMs: Performance-Based Pricing (Podcast)
Is It Time for Your Bank to Implement Performance-Based Pricing? (Blog)
Reprice My Best Commercial Deal? Why? (Blog)
Jim Young: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, Director of Content for PrecisionLender, and I'm joined today by Dallas Wells, our EVP of Strategic Innovation.
Today we're going to talk about what you do when your customers test you on price, and that concept of testing is one we're all familiar with because we've all done it to companies, and because most of us have had it done to us by customers. Dallas and I will share some stories from the world outside of banking, and then we'll dig into the nitty gritty of detail negotiation and pricing tactics to talk about how you can hopefully diffuse that situation, maybe avoid it, or maybe even benefit from it.
I will also note that a lot of what we're talking about really segues well into our webinar later this week
that's going to be hosted by Gita Thollesson, in which she takes a really close and really interesting look at renewal pricing, a time period where obviously banks get tested quite a bit by customers. So, we'll have a link to that in our show notes. I encourage you to register for that webinar, which will be later this week on Thursday April 18th.
All right Dallas, the idea for this podcast actually came from a story that you were telling in a previous podcast about your experience with trying to cancel your Sirius XM subscription. I think that was it. You might have been trying to transfer, but I feel like there was a cancellation aspect to this. Can you retell that story, and focusing in particular on how they responded when you said you wanted out?
Dallas Wells: Yeah, I think this one's pretty common, especially as you buy a new car these days. Pretty much all of them come with a trial subscription to Sirius XM. The hard part comes is when you then want to cancel something that you've already started. So, that's what this was.
I called to cancel, and that's when you get the it's really hard to just turn it out. Sometimes it take a 30 minutes conversation to actually get it canceled because they're gonna make you 12 to 15 different offers to try to get you to stay. So, it'll go from the sticker price to eventually a small fraction of that sticker price to get you to stick around. So, it's a frustrating process for lots of different reasons.
Jim Young: That might be a little bit different because this is a case where they, it was included. They didn't necessarily sell you that upfront. But when that happens, when you buy something upfront or you take that introductory offer upfront and then you get to that point where you say, you know what I think I'm done with this, and they start throwing those offers at you, the reaction from me is usually, well if you're willing to do this to keep me now, why weren't those offers available to me earlier? What's the company rationale here?
Dallas Wells: Well, yeah, so the frustration is especially when you're an existing customer and the amount you're paying is different from someone who complains or different for new customers coming in, a lot of times you see those offers, new customers only. So all of those things are really frustrating, and I get the company's rationale. If you look at it just from the Sirius XM side, the cost of customer acquisition's really high for them. It's hard to get new accounts, so once you have one, the cost of actually continuing that service is almost free. Their marginal cost from there is basically non-existent. So all of their costs are in getting you to initially sign up. Once you're there, it's do anything and everything to actually keep you on board. There's lots of businesses like that.
Jim Young: Yeah, and one in particular that comes to mind for me is the cable company. I shared before with you my brother-in-law's approach to this, and he's much more organized about it. I admire his approach.
He keeps tabs on this sort of thing, essentially of I'm calling the cable company because I'm a month out from my subscription ending, and I'm going to go ahead and get a better deal. They're going to give me the better deal for X number of months, and then say it's going to go back to the previous rate. That's the offer a lot of times. We'll give you the next year for 35% off. So he would then mark it on his calendar, a month out from that one, and he'd say, "Okay, about to end that offer. I'm going to call them now and say I'm going to cancel again." He does that on ... It's a regular sort of thing.
You raise a very good point about the cost of acquisition and that sort of thing, and why in those ways it makes economic sense for them, but I just wonder if it hurts their credibility, that the price is never really the price. The service is never really the service. Everything is negotiable. I don't know. I'm not sure exactly if I'm getting to something hard and fast here, or just a feeling, but I say cable company and you chuckle, because everybody knows that's what you ... oh of course. Have you called them and tell them you're threatening to cancel? I just wonder what effect that has on a company's credibility when that's always their approach when you come to them and say, "I don't want this anymore."
Dallas Wells: Well, I'll tell you a good example that shows it is absolutely a credibility thing, and I think it's a brand thing too. JC Penney, the retailer, they've always had the, when you walk in, there's clearance and 30% off and those signs everywhere. They tried to go to get away from the markdown style of pricing and just, this is the price. That's what it's going to be. And sales were horrible. They just fell off a cliff, and it's because their consumers were conditioned to expect if you go in and you see something and it's regular price and you don't like that price, just wait. It'll be on sale next time you come in probably. So they've conditioned their own customers. And they actually had to go back to the discounting style that their customers were used to.
Some retailers just operate that way. Sometimes it's the price. If you go into the Apple store, you're not going to see 40% off stickers all over everything, but you go into, especially a lot of the clothing retailers. I joke with my wife, she goes to Kohl's occasionally, and they do the same sort of thing. She'll bring out this receipt and it's like, "Look, I bought five towels and I saved $600." It's like, "Well I don't think that was ever the real price of those towels." So, it is absolutely a loss of credibility and it's this conditioned expectation. I think that translates not just to the retailing business or to cable.
That translates to things like banks too. What your customers expect matters a lot.
Jim Young: Yeah. That's where I'm headed to next is banking. I did want to share these, and we all have a million of them. But one was the furniture store on the corner of my neighborhood growing up. I don't remember, at some point when I was in high school, I think it finally dawned on me, and I think I said to my mom, "If there's always a sale at the furniture store, then is there ever really a sale at the furniture store?" Just sort of existential question about it. Then there is a clothier out there that I won't name names, but it's always like, "Buy one suit, get four more," every time. So basically you're telling me is that your suits are marked up four times their actual price on that.
Let's get this over to banking. I'm wondering, you mentioned it with cable. There's some industries where you just assume, this is the agreement, but obviously it's not really an agreement. I'm going to go back as soon as I can and I'm going to see if I can test them and push them to get better terms. Is banking like that too, in your mind? If the answer is yes, then is that just an unavoidable thing?
Dallas Wells: Here's what happens with banking. Situations like this come up whenever there is a service or a product that's perceived as somewhat of a commodity and there's lots of competition. In other words, if I can go get the same shirt somewhere else, then I know I can push. I can pressure you in some way. The banks that allow themselves to be commoditized, your customers aren't dummies. They know that there's a bank on every corner of some intersections, on all four corners. So, they can just go make the rounds and they can shop a deal, and someone will make them a pretty aggressive offer if they're a good strong credit. So, this is all about how banks set up that expectation. This is an industry that is prone to that because of the competition, because of the cyclical nature of it.
When times are good and liquidity is high and everybody has money to lend or everybody's chasing loan growth, it all happens at the same time, and the customers figure it out. This is one of those times where you see credit spread shrinking quarter after quarter in just about every market that we track, and it's because that's happening. The borrowers know that times are good for them, so they can shop around.
You see the flip side of it too, like during the financial crisis, no matter how good of a credit you were, it was hard to get one offer, much less multiple offers you could shop against each other. So, the nature of the business, it's going to happen sometimes.
Jim Young: Yeah. I remember as a home owner, refinancing, there were times where it was like, man we're going in and we're refinancing this thing now because they're absolutely going to go ... yeah, go ahead and get into it again and again. Right.
What you describe in those situations wouldn't apply here, but are there situations in which you can essentially use what I call the Car Max approach? Is it possible to structure a deal and have that transparency we talk about and just be upfront and say, "Here's the deal. This is why I think it works for you. This is why it works for us. This is going to be the deal, so don't bother essentially coming back and asking me for something better because this is the deal."
Can you do that? Is that possible or, like you said, are market conditions such that you just, there's no possible way to put something like that upfront?
Dallas Wells: I think there's times where you can create some stability for the deals. Used to be, this could happen with a handshake. You build good relationships. And especially where a bank would go out on a limb for someone, stretch things a little bit to make something happen or be creative in structure. They could have the expectation that the borrower would say, "Well since you did this deal when no one else would, I'll stick around. I'm not going to shop this. I'm not going to push things when things change, and just because I can."
At least anecdotally, bankers feel like there's less of that loyalty now, that they can't just expect that borrowers will honor that. So, you have to be a little more stringent on the front end. If you do stretch a little bit, if you do push the policy a little bit, or if you get creative in structure, you have to put something in there like a pre-payment penalty or something like that to lock down that deal.
That's where it's okay to have that, as you put it, a Car Max discussion of saying, "Look, we're doing something a little bit out of the ordinary. We're happy to do it. Happy with the relationship, but for this deal to make sense for us, we've got to keep it exactly like this for the whole three years or five years," or whatever the deal is. If you explain that upfront, we've found that generally customers are okay with that. They get the trade-off and they're usually okay with it.
Yeah, I guess I could also see, we had Gita Thollesson on here a few weeks ago talking about the merits of performance based or grid pricing
. I could see that sort of thing. It's not the Car Max approach exactly, but in a way it is because you're basically saying, "Here's how it's going to change when things change. Essentially understand that this, if things get worse for you or that sort of thing, this is going to change in this direction. If things get better for you, then it's going to change in that direction, and we're gonna go ahead and have what the negotiation would be already set in stone so we don't actually have to have that conversation." Maybe that's again, a little bit of that transparency and you avoid the bad feelings on both sides.
Dallas Wells: I think the big issue that you're describing there, Jim, is customers hate to feel like it's a gotcha, like they've been had. I think if it's pre-decided, if you're transparent, if they don't feel like it was in the fine print, that's a much different thing than a, hey surprise. That little tiny print on page 17 of your loan agreement says that we can raise your rate by a half point, so here you go. That will get shopped. So, I think that Gita's point is a good one. It's not just the mechanics of it. It's also in how it's communicated. That's equally as important.
Jim Young: Yeah, don't get me started on auto renewals and the ... I think I shared that before about what happened to me when I forgot that I had signed up for an offer about a year later. Let's go then though into the you can't Car Max it, you can't have that front end thing. It's a deal that's either the market is changed or it's a renewal deal. You're gonna have that conversation. So, you're gonna get that test, so to speak. So first, what are some of the tests that you've gotten back in your time as a banker or that you've heard from conversations? What are the ways that customers will typically come in and, I'm using the word test here, but one of the things we'll talk about a little bit later is it's sometimes not a test. Sometimes it's literally, this is what I want. I'm not probing. This is what I'm asking.
Dallas Wells: Yeah. I think it's generally pretty obvious when someone's unhappy. They'll start to hint around at, gosh that feels a little expensive, seems a little high. A lot of times that's them giving you the opportunity to do something different with it. You just have to know your customers, if that's a true test or they say that for every deal and it just doesn't matter.
So, you can feel some of those tests coming, but the other more sure fire signs are when they actually start shopping it. A lot of times to start shopping it, they need information to send to the other bank. So, if you start getting requests for, hey I need account history on this thing, and all those financials I've been sending you every quarter, can you package that stuff up for me? You start to see little red flags of a deal being shopped. A lot of times that doesn't mean that your customer got up and actively went to shop the deal on you. It could just be somebody knocked on their door. You go and call on other people's customers. Guess what, they're calling on yours, too.
So, you'll know for sure when you get there. A lot of times unfortunately the way you find out now is there's an offer letter in hand. They've got terms from someone. Again, whether they cold called or whether your customer went out seeking it. They've got terms in hand. As you said, that means that it's pretty straightforward. They're like, "Look, match this or I'm gone, or at least match some aspects of it." That's the bad news. The good news is at least you know where you stand, and you're not competing just against yourself, which I think is where a lot of banks get in trouble. If there's truly an offer out there and you're competing against it and you've got to do what you've got to do to win, there's at least a framework and some lines in the sand there that you can make good decisions around.
This actually brought out, what you described to me comes to mind a previous podcast and a blog post by George [Neal] about why you might want to re-price your best deals
. I'm wondering in this situation, is the merit there ... If your spouse has packed your suitcase and put it outside the house, it's probably too late for you to go ahead and start doing the things you should have done to repair the relationship. I guess I'm wondering, if you get the, hey this is the offer I got from another bank about this deal, is it already at a point where you're like, "Boy this is gonna be tough to rescue"?
What I'm getting at is that is there merit to being preemptive and saying, "I know this deal is great for us. The market has changed, and as much as it's great for us, they could clearly get a better deal somewhere else, so I should go ahead and offer them, say, 'Hey listen things have changed and we can renegotiate this deal down for you.'"
I'm always struck with these, is how you know the right time to do that sort of thing because if, let's be honest, if the customer hasn't complained, why would you cut into the profitability of your deal?
Dallas Wells: This goes to a philosophical thing of one of the things we talk about a lot with banks is that the days of just trying to sneak things past your customers are done and over. If that's how you're trying to generate spread and margin and fee income is with gotchas and being sneaky about things here and there, you may get away with it in the short term, but in the long term that sort of play in the business is done. So, I think George makes a really good point there. One of the things we help banks do is actually measure it. So, some of it is gut feel. You know which customers are likely to shop, and especially your seasoned bankers will have just a good intuition for this, and that's part of what you pay them for, is to have those relationships and to know. But you can also do some math on it.
So, one of the things we measure is for existing customers, you can measure the same risk adjusted pro forma profitability on your existing business as you do on the new business. In other words, if I booked a 10 year fixed rate loan five years ago, I can look at the next five years and see how profitable those remaining five years are. The key to remember there is you may have booked it five years ago, and that's how you're looking at it and that's how you looked at the profitability of it. That's not how your customer sees it, and that's sure as heck not how your competition sees it. They look at that remaining five years and that's their opportunity. So they say, "Well how much could I go get a five year deal for today to take out the back end of that thing?" So, we look at deals like that that are really rich, meaning risk adjusted ROEs sometimes in the 60%, 70% areas. That's a pretty vulnerable deal, and banks have probably more of those than they realize sitting on their books.
It's worth doing two things. Number one, going through and seeing are there any in that range that would be really painful to lose. Then it's time to do that gut check of what do you think? How vulnerable is it really? The other thing is just measure it over time. Usually you can find a threshold, and it's a little different for every bank and every market, but we help banks find that and say, "Hey when you hit this number, your likelihood of being paid off early goes up by X%," so it's worth actually proactively coming to your customer and saying, "Hey we need to adjust this deal down for you."
Do that once or twice, talk about building some brand equity and some loyalty, and it's because you're doing what's right, what's fair, even if it is some self preservation just to keep it from going away. So, do the math on it. Combine that with some gut feel. The humans and the machines combined together can figure this problem out.
Jim Young: Yeah, and you mentioned, you and I were just talking off air about the car accident I was in. I was not at fault, let me be clear on that too. But dealing with my insurance company. I will tell you, I unabashedly love my insurance company, which talk about commodity area and that sort of thing and how many times I've been bombarded with 15 minutes can save you 15% or more.
But one of the things they always do is I get a check just about every year. Other ones have followed in suit, but these guys have been doing it from day one. You know, you didn't cost us anything this year, so you know what, take back a little bit of what you paid us. That is a tremendous loyalty thing. Yes, it's the same sort of principle at that.
I wanted to talk though a little bit about this. We're tackling this from the client point of view and how they feel about you and how when they might say, you know what forget it, I'm gonna go to someone else, are you justified at any point in saying, you know what I am so tired of being, essentially like my brother-in-law, I know what you're doing and I know why you're doing it, and you're constantly hammering me for this. And saying, "You know what, no. Take it or leave it." Or do you have to just swallow that because hey, it's a customer and you keep customers.
Dallas Wells: Again, I think you can measure this. We see all the time relationship managers, they bring in a deal and it's below targets or it's even a pricing exception. It's always a, well we need to do this for the future, to hang onto the relationship or to win future business. You can see those relationships over time where that just never actually comes to realization. I remember a customer from one of the banks I used to work at, one of the largest commercial real estate borrowers in the area. Every bank wanted to do business with them. So, we had relationship managers come more than once and say, "This is our chance to do business with this guy." So, we would get really thin on a deal, and that's all we ever saw. He shopped every deal and somebody was always willing to get aggressive, and we never got the make us whole part of that relationship.
So, you can see when that happens. Eventually we learned our lesson and we stopped doing that. We had the same line in the sand for him as for everyone else. So, I think you just need to figure out where to be consistent with that.
One of the ways we've talked about this as a basic strategy before, but multiple equivalent simultaneous offers. It's another acronym for you, since bankers love those, but MESO. Where you can make multiple different structures that come out to the same profitability for the bank, but you can probe your borrower for what's really important. So when you have that borrower that just keeps coming back and saying, "This isn't good enough," you can ask questions, but those that are good negotiators, they may not reveal much, so the best way to get them to reveal, turn over some cards for you is to make them a fixed rate offer and a floating rate offer and one with a shorter term and longer term and extra guarantees, less collateral.
You can move all the parts around to where the returns come back to your target and you can see which ones they really hate, which ones they kind of like, and you can eventually piece together, mix and match them a little bit, and come up with something that they might like. That strategy works for new deals. It also works for these renewal things that we've been talking a lot about lately with Gita. When you're in that negotiation and when you're really being pushed on terms, find out what it really is. Do what you have to do to figure out the real reason for their pushing and where the real break even line is for them and for you, and just see where you can find some matches there.
Jim Young: The final note that I would make on this is I had put a question out there, which is the it feels like for the most part when you get tested like this, it's simply a matter of just surviving it. The win is not losing, but it seems like if you handle this right, if you're preemptive in some cases, if you're thoughtful and ask the right questions in other cases, I mean it's a chance to interact. Like you said, a lot of this is commodity sort of stuff, and it's behind the scenes running quietly, so to speak. This is, in a lot of ways, an opportunity to show the value of your bank and show your own personal value. I think if you can do that and do it well, it may not necessarily be always easy to show A leads to B, but in some ways I would think it would lead to more profitable, stronger relationships going forward.
Dallas Wells: It does. This really is the value in commercial banking. As we've heard many times and we've stolen it as a catchphrase to talk about this exact issue. Banks say, "Our money's just as green as everybody else's." The actual money that you're lending, there's no difference in it. So, the difference is in the relationships and in the structures and in the being proactive about these sort of things and coming to the right answers together.
So, this process, as frustrating as it can be, it's where banks make their money. It's where you as a relationship manager actually build your reputation and build your following. So, be good at it. Pay attention to it. Don't be a pushover. Don't ignore renewals. This is the value of the business. Sometimes it is just surviving it, but I think you just have to be strategic and consistent in how you do that.
So, where is that line? When do you say yes because it's worth it to keep the business, even if it's not as profitable as it was before that. And when do you say, "I'm sorry. We just can't do that and that's too far." You need to know where that line is and be consistent about it. You need to put those processes in place, and the returns will take care of themselves if you do that.
I will note again that this is coming out on ... You'll be hearing this on one Monday, April 15th. And later on this week on Thursday April 18th, Gita is gonna be having a hosting webinar in which she really delves into the numbers behind renewal pricing
. Quick spoiler, it's sobering. But if you want to do the glass half full way of looking at it, there's a lot of potential for improvement out there. So, definitely there'll be a link to that in our show notes. Definitely make sure to sign up, to register for that webinar and hear what Gita has to say on that.
So, that'll do it for this week's show. Now for a few friendly reminders. If you want to listen to more podcasts, or check out more of our content, you can visit our resource page at PrecisionLender.com or you can just head over to our home page to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Sound Cloud, Google Play, or Stitcher. We'd love ratings and feedback on any of those platforms. Until next time, this has been Jim Young and Dallas Wells, and you've been listening to The Purposeful Banker.
About the Author
Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer.
Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships.
Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.
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