Earn It – Chapters 2 & 3: Price Setting and Price Getting [Podcast]

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Podcast Transcript

Welcome to another episode of 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 Dallas Wells and this week we’ve kicked Jess out of the studio and we have a different co-host, PrecisionLender’s Director of Communications, Jim Young.

It was a bloodless coup. Hello everyone, thanks for joining us. We switch things up this week because we’re going to be discussing something that Dallas and I have spent a great deal of time on this past few months and that’s the book we’ve been co-writing along with PrecisionLender’s CEO Carl Ryden. It’s called Earn It: Building your Bank’s Brand One Relationship at a Time. If you’re just now hearing about the book we’re releasing it in sections a month at a time. After starting with the intro in chapter one in March we released chapters two and three just last week. It’s available at the theearnitbook.com.

Dallas, I wasn’t here when the idea of writing this book was born. In fact I was brought on in a large part to help write this book. Can you take our listeners through the thought process that was involved in saying hey let’s write a book?

Sure and the initial idea was actually sitting out there when I arrived too but it was just sort of a hey we should write a book at some point and I think the logic behind that is basically that this thing that our tool does and that we as a company work on, pricing is really complicated and it’s one of those butterfly effect kind of things. Where when you move one little piece of it it touches something else in a far corner of the organization. It’s this big beast of a thing that banks have to deal with and we get these little bite-sized chunks to talk about it.

It will be with a prospect, maybe we get thirty or forty five minutes to demo our solution and talk about why we view it the way we do, why we tackle the problem the way we do and it was either that or these six or eight hundred-word blog post, so it was taking this big complex thing and coming at it in this little bitty chunks. I think that caused us to feel like sometimes we were oversimplifying things, just out of necessity for the brevity of getting to the point. So, we wanted to find a way to have that longer form conversation and so there was two things that we really thought were solutions to that.

One was the conference; BankOnPurpose that we’re putting on this April and the other one is this book but a chance for us to lay out those topics in a little more detail and talk about how they’re connected and talk about all those implications, where when you start changing something there’s these really far-reaching things within the organization that you have to be ready for. On top of that Carl is just a really great storyteller and so he has a ton of things that we kept wishing, man we wish we can capture this and share it, these crazy analogies and stories that are really helpful for people to understand things and so we wanted to just get all that stuff down in print, so that people see where we’re coming from what we think is an interesting and an entertaining way.

Yeah, I call them Carlisms and we’ll touch on those a little bit later. Now I confess when I first started working on this, to me my thought process was this is a book on pricing but as obviously as you can tell, the title of it says it’s about relationships. That’s something that I know kind of morphed for us. What is for lack of a better word, how would you describe the relationship between relationship building and pricing?

Yeah, good question. It’s the leap that we have a hard time making in those small chunks and why the book we feel like it’s so important is because pricing to a lot of bankers feels very transactional but when you really back up and look at it, it’s the most important conversation that you have with your clients and especially when you’re talking about commercial loan pricing, it’s the most important conversation you’re having with your very best customers. Getting that right and that’s usually the first point at which there’s some friction in that interaction with the customer. To that point they’ve been talking about a deal and you’ve been talking about how wonderful it will be if we can do that deal and everything’s all happy touchy-feely and then we have to actually price that sucker and that’s now there’s some conflict and some push and pull.

A lot of banks and bankers are ill-equipped to handle that so we cave or we go too far the other way and we just stick to the price is the price and there’s no fluid conversation there. That pricing discussion is really the core of what relationships are built on and not just because they’re hard but because also that’s where, especially community banks that always talk about hey we’re really fast and we’re really flexible and will kind of meet you on your terms and we’ll provide a custom built thing for your business. That is pricing. That’s coming up with a custom structure and knowing how to price it in a fair way and being able to get to that answer really quickly.

When bankers talk about we’re all about relationships, that is the thing they’re talking about. It’s not playing golf, it’s being able to put together the right kind of deal. Those two things in our mind are kind of linked together and can’t really be pulled apart and as you get into the bits and pieces of pricing and again how they touch other parts of the organization, you see how really important that is to relationships and brands and what banks are really all about.

Yeah and it seems to me, I know some people tend to think of it as sort of a zero-sum game but you can’t really- if you’ve gone through a scorched-earth procedure to get that price with a customer you can’t turn around and then say okay, now let’s have a nice relationship built on customer service. I would think that would always kind of stick in the back of the mind. If a customer feels like they really got a price rammed down their throat that that’s something you’re always going to taint that relationship.

Yeah, it’s a very short-term way of thinking and a lot of bankers have felt this unease with where the industry is headed over the last few years, where the way banks make money is we sort of trick our customers into paying something extra. Maybe we can squeeze another basis point out of them just by like sticking it in there or maybe we can have this hidden overdraft fee and we can order transactions just right so we catch them by surprise. Banks like the revenue that showed up but they didn’t like all of a sudden the evil banker jokes that replaced all the evil lawyer jokes. I think that a lot of bankers felt this sort of cognitive dissonance of what they viewed the business was supposed to be like and what it was becoming. This is the means to that end of having a better way of earning that revenue instead of trying to trick somebody into it.

On the opposite end of the spectrum from the evil banker is George Bailey from It’s a Wonderful Life. If you do take the time to read the book you’ll see a picture of George right there in our intro. You might kind of roll your eyes a little bit at that because I mean who doesn’t like George Bailey but there’s more to it and our choice of spotlighting the fact that George Bailey is actually- his character is in the movie is a banker. Talk a little bit about that because I mean he’s a guy- it’s not just in that book. His name comes up around here during regular conversation. He’s a little bit of I guess an icon for PrecisionLender and how we think about things.

Yeah, if you back up and look at where things have headed and that sort of evil banker joke, it wasn’t always like that and George Bailey is kind of the epitome of that, of this all-American character played by Jimmy Stewart of all people, who was really at the very center of this community. Bedford Falls was George Bailey and vice versa and that’s how community banks have been built from the very beginning, with these very local routes and feeling like they’re part of the community and that kind of greater good of we’re here to help build something that’s more than just a loan transaction.

That rings true with a lot of bankers and what they want to really be and what they want their business to be built around. We wanted to go back to that route of what does it really mean to have a relationship. It’s a word that gets thrown around a lot in banking and all the community banks say that- and all banks of all sizes not just community banks but they all say our business is built on our relationships and we have really good ones and our customers really love us. We wanted to talk about what’s that really mean and what was George really about. As we look at what makes a good bank and what makes the relationship with their customers good and what makes a good lender, we kept coming back to George.

A lot of those characteristics and qualities are what drives those real deep relationships. Things like empathy and about looking at the long-term. George was always talking about how much his business was struggling and how thin the margins were and how it was really tough but he had this long-term view of it, of take care of the people and earn that future business. I’m guessing George Bailey didn’t have a whole lot of his customers shopping for rate. That’s what it really comes back to, is to really have a relationship. There has to be some trust and some transparency and some belief that you’re in it for the good of the customer and not just to put a few bucks in your own pocket.

Yeah and again while you can kind of roll your eyes and think about sort of this George Bailey is a bit saccharine character and a point we make in the book is that Hollywood reflects society, so you don’t throw out George Bailey as his character and if you don’t get a sense that people would look at that and identify with it to some extent. In a lot of ways it’s reflecting the way that America used to look at bankers. Nowadays of course we’ve got the big short and too big to fail and that sort of evil banker stereotype out there that you and I know and people at PrecisionLender know from working with our customers is couldn’t be any further from the truth on that.

Again that concept really hit home with me and it sort of dovetails into- it’s sort of a Carlism in itself right there. Carl is a a sucker for a good analogy and the book it is loaded with them. Any one or two, in particular in the first chapter I think we’ve got about three or four in there. Is there one or two from there that kind of stuck out in your mind when maybe he mentioned them to you that you went well that really illustrates the point in a really elegant way?

Yeah, so I remember a lot of these because of the way … you see a blog post show up at PrecisionLender. The back stories is always usually an interesting one. I got a text on a Sunday afternoon and it was- you could tell Carl was really excited. He said I just watched the movie Any Given Sunday and that movie is awesome with all caps and lots of exclamation points. Then he says and that Game Of Inches speech is really true about banking. We talked about it a little bit on Monday and flushed it out a little bit but that’s kind of how Carl’s brain works, is he’s watching Any Given Sunday and he’s always connecting it back to how it works in banks. That one is true and it’s true from a lot of different angles of how banks take these- again those transactions, those little bitty things in the short term, none of which are very profitable, but you you package them up into this bigger greater thing which is really profitable and is a very viable business and it’s also this long-term relationship building.

A game of inches is where you can talk about banks making small little incremental improvements and just because of the volume and the number of things that banks do, how that can pretty quickly turn the ship around but also those little bitty conversations about pricing and structure and how we’re putting deals together and how those are building relationships too. I thought that was a really good one. The one talking about the big rocks and I think we’ve talked about that on the podcast before of just really the really solid career advice that that is of figuring out what the big rocks are in life and in business and in your job and putting those in the jar first so that all then the other stuff fits around it.

Several good ones, I think there are several good ones that got left on the cutting room floor so to speak just because there’s too many to include and it becomes shorthand lingo where I’ll be talking to Carl about hey, we’re kind of struggling with this client and figuring out how to get this problem solved. He’ll go well tell him the bowling ball story. I’d love to include all those but there’s just isn’t room for them so know that if you come and read the book you’ll get the best of the best that we’ve called through there.

The inches we need Dallas are right in front of our face.

That’s right, that’s right.

I wish I could do that in an Al Pacino voice but I’m not going to torture our listeners with that. We’ve taken a lot of pains in writing this book to make it about banking, state of banking in the industry and not sort of a thinly disguised sales pamphlet for PrecisionLender but we did make the decision at the end of chapter one to put some charts in there that show the results that some of our customers have had in using PrecisionLender. Can you kind of talk about sort of you and I had this back and forth in philosophical discussion about it before we decided yeah let’s put those in?

Yeah, this is something we really struggled with and especially to have it so early, we didn’t want it to be off-putting because our intention with this book is not to sell PrecisionLender, it’s to talk about the philosophy and how critically important we think it is for the business so yeah we sell software and that- this whole paradigm of banking and our software, those fit together because we’ve designed everything that way. The real intention is to get to the point that this philosophy no matter what tools you use to actually put it in motion, the philosophy works. We struggled with how do we prove that?

Bankers like to see results, they- just the nature of the business they are in, they want to see some proof rather than just some claims that some thing is going to work out. If you make loans on that basis you’re not a very good banker. We felt like they had to have some numbers behind that and the very best data we had was well, hey this philosophy, we’ve been putting this in place for quite a few years now with our client. Let’s just pull out the data and let’s just show what’s happened as proof that hey some of this stuff is going to seem a little odd to talk about relationships and pricing and tie those two sometimes very different things together, so let’s show why we’re really doing that.

The why is that there’s results there, it’s not just that your customers like you better and the customer satisfaction surveys improve, it’s also that there is real tangible results there because you’re earning better returns. You’re helping come to a a deal with your customer that really does work better for both sides and they’re willing to trade some pieces of the deal for other parts and build that long-term relationship with you as well. The results were proof that this stuff we’re going to talk about is really going to work, but we did struggle with how to frame that and hopefully that comes through, that it’s not a sales pitch.

Yeah, exactly. As I started thinking about it is if you aren’t sort of aligned with this philosophy it doesn’t matter what tools you’re trying to use.

Exactly.

It’s how you use them. Chapters two and three, the latest ones that have come out in the last week. These are your babies, we take turns in sort of…

Distancing himself from me …

More acknowledging that particular chapter two would not be something that I would be able to write with any coherency but anyway, those chapters are about price setting in chapter two and price getting which is chapter 3. Without spoilers here, tell us a little bit about the example that you used through those two chapters of Frankenstein Bank and what their story says about price setting and price getting.

Price setting and price getting is a concept we’ve been talking about a lot and we’ve talked about on the podcast, we’ve had blog posts about it. We’ve actually started on the clients success team that I’m a part, we’ve actually started designing our team around it a little bit. The basic story is that you have to be good at both setting the price and then actually getting that price on your books. Banks don’t always tend to remember that second part of getting it on the books. We wanted to lay out that concept of that there are two dimensions and so the good example of that is with Frankenstein Bank. It’s based on a real bank.

To7 protect the innocent we changed the name, called it Frankenstein because it was pieced together from several other banks through the financial crisis. They came out of that and they were now this larger bank and more complexity and more sophistication needed. They started building out a pricing model and short side story, Carl actually threatens to fire any of us who call our solution a pricing model. This kind of gets into the reason why, is these guys and gals spent a ton of time and effort and money really zeroing in on the modeling part. By the time they came to us they were really proud of their math. They were look, this part is right. We know it is. Okay, so why are we having this conversation then if you feel like you’ve got this thing nailed?

Well here’s the results and there’s a chart in the book that shows their net interest margins which are declining over time as everybody’s in large part have since the financial crisis, the industry as a whole has had compressing margins but they went from outperforming the peer group to under-performing the peer group. I would understand if the math is right why is this happening? It was really that second dimension that they had ignored entirely of how do the lenders then- first of all how do you communicate from the back of the bank to the front of the bank? What I affectionately call the nerds in the back since that was me who are calculating that number with the little propeller hats on, then how do you communicate that out to the people actually doing the production, the folks actually getting the business on the books? We have to be talking about the same number and that’s a simple thing in concept, it’s a hard thing to actually execute.

Excel spreadsheets only scale so far as you get bigger and so that plus how do you negotiate, how do you have those conversations, how do you have the right processes in place to really earn the kind of business that we’re talking about and so that’s the struggle that that bank has had. Their story arc kind of fits really well that what the industry is going through which is you can’t outmath everybody else. There’s no such thing as proprietary math, we’re all calculating the same thing, so how do we actually execute on that and that’s the price getting part that’s really tough and that that particular bank has struggled with. That kind of leads into what most of the rest of the book is about.

We did a little bit on the math, the common stumbling blocks just because we see those over and over and over again, so we wanted to get those out there. If we’re going to talk about pricing we had to cover them. Really the bulk of the effort that’s needed for that individual bank and for the industry as a whole is okay, now we know what the number is supposed to be go, how do we go get it and how do we earn that from our customers and how do we get them to see why that that’s the number etc. That’s all the hard parts that again don’t fit in a six hundred-word blog post or a thirty-minute conversation.

Brilliant segway then into our final section here which is taking a look ahead and the next chapter, chapter four of the book that’s going to be released in early May. It’s about moving pricing forward and in this sense it has that clever- and this is what we writers love, clever sort of double meaning there moving it forward in terms of innovation but also moving it forward in terms of moving it to the front of the bank, a phraseology that we use a lot here, back in the bank, front of the bank. Talk a little bit about what we’re saying here, I mean it’s not a literal physical movement sort of thing but what the general idea will be for this chapter?

Yeah, so there’s two concepts that are important here. Number one is just the way business is moving in general because of if nothing else the technological advances and the customer expectations that come from that. Which is that to speed everything up, so everything that comes downstream from hey here’s a rate quote of processing and underwriting and actually getting the deal booked. All of that in banking takes a really long time and we’ve got to speed it up, so to do that you have to move decisions closer to the customer. We’ve got too many middle steps in between that are just really time-consuming. Some that is driven by regulatory issues and I understand why there are- we understand why they are difficult but for banks to survive and thrive in kind of the new world all that stuff has to move closer to the customer.

The second piece of that is specifically when you talk about pricing, the way banks have historically done this and this is back to the Carl’s hey I’m not really kidding I’ll probably fire if you keep calling this thing a pricing model. Pricing models have been used as a back of the bank function so in other words here’s lenders kind of your general area where you can quote rates, they go quote that. They hand the deal off to the underwriting team and then one of their many tasks on their list is to put it into a pricing model and it’s a pass-fail system. The pricing model either says thumbs-up or thumbs-down.

If you think about it, you’re spending money on a pricing model, how can it add value? Well when it’s used that way the only value that it can add is that it will give you some thumbs down on deals you shouldn’t be doing. Realistically now what do you do with that? Do you go back and say sorry borrower, I know it quoted your rate but it turns out I’m an idiot and we didn’t really mean that. Or you just- what most banks do is you say well we’ll try better next time. We’ll kind of berate the lenders about it and tell them gosh you guys just can’t get anything right. Really what your model is doing is destroying value if anything. You’re paying money for this thing that’s just another step in that process that we’re trying to speed up anyway.

As Carl put’s it, if you’re going to buy a pricing model and you’re just going to calculate a number with it after the fact, buy the cheapest one you can because you’ll waste the least amount of money possible. You really have to take that pricing decision and put it with the customer. That conversation that a lender is having with a customer when the deal is still being shaped, that’s when you change the pricing, that when you need the options in from of you. Not two weeks later when somebody puts it in the model. Again that’s something that’s easy and as you say it’s not just like a physical move, pick up and move the thing from back to bank guy’s computer to the lender’s computer. It has to be a completely new framework of how do we get to that number, when does it happen, how does the conversation change. That’s really what this is about.

Yeah, by the way, after we get off this podcast I’m going to go back and double check, make sure I haven’t used the word model.

Yeah, might want to do that.

I’m a little bit paranoid about that now. I relate to this, I come to this full disclosure as a former journalist and not a former banker. I related to this part, to this chapter as it’s similar to the back of the bank, front of the bank sort of thing. It’s similar to the editor-writer relationship you have at newspapers where at a lot of places the editor has some great ideas but they don’t necessarily connect with what’s actually happening out there. When the reporter goes out there and talks to people out on the streets he gets maybe a different feel for what’s going on, is different from the original idea and you have to be able to allow that reporter to have the flexibility to adjust to the information that he’s got coming in for the story that he’s going to write, which would again going with the Carl analogy you would have the story would be like the deal in this scenario.

Yeah, absolutely.

It’s interesting stuff but we could go on this but we’d actually prefer that you do some reading on this, with this so that will wrap it up for this episode. Thanks again for listening and a reminder you can go to theearnitbook.com to read each section of the book as it’s released. You also- and this is what I would recommend, sign up with your email to have those sections sent straight to your inbox each month. The first five hundred to sign up will receive a free copy of the final print version of the book when it’s released later this year.

Those details and more will be in the show notes for this episode which you can always find at explore.precisionlender.com/podcast. If you like what you’ve been hearing, make sure to subscribe to the feed in iTunes, Soundcloud or Stitcher. We’d love to get ratings and feedback on any of those platforms. Thanks for tuning in again. Until next time for Dallas Wells, this has been Jim Young and you’ve been listening to The Purposeful Banker.