Which would you prefer ─ to compete against 3 to 5 other financial institutions or compete against only one other bank?
Now it’s not a trick question. But why do commercial lenders consistently put themselves in an unenviable position of having to compete against 3 to 5 other institutions to close a transaction? Why do commercial lenders consistently pursue sales opportunities where at best they are positioned as a commodity where rates are a primary differentiator?
The answer isn’t all that complex ─ it’s rather simple. The reason that commercial lenders nationally do this is that’s what they’ve always done! This is how the bulk of commercial lenders nationally generate deal flow. By soliciting referrals from the traditional COIs ─ namely CPAs, real estate brokers, and the occasional attorney.
In this blog, we’ll discuss the pros and cons of what we refer to as “Red Ocean” sales opportunities which are sales opportunities that result from receiving a referral from a CPA, real estate broker, or attorney. We’ll also discuss the pros and cons of what we refer to as “Blue Ocean” sales opportunities which result from developing a relationship directly with business owners or senior executives of a company in your market that matches well with your bank’s credit culture and lending limits.
What Is A Red Ocean Sales Strategy?
We’ve all seen sharks in a feeding frenzy on the Discovery channel. Multiple sharks circling in bloody waters all competing for their prey. It’s a highly competitive situation, to say the least.
Bankers do a good job of developing relationships with traditional COIs who provide referrals to their clients. We refer to referrals from traditional COIs as “Red Ocean” sales opportunities because there are usually 3 to 5 other banks competing for the same piece of business. You get the shark analogy now, don’t you?
The real estate broker, wanting to increase their odds success, introduces their client to multiple lenders. The client receives multiple term sheets and “plays” one lender against the other.
The primary “pro” of a red ocean sales opportunity is there is a high probability a transaction will get done by one of the multiple institutions competing for the business. That client is actively shopping for financing.
That said, there are multiple “cons” that exist in Red Ocean sales opportunities:
- Significant Competition: Given traditional COIs have many relationships with bankers, there are multiple banks typically competing for that same piece of business.
- Pricing Is Often The Primary Differentiator: Prospective borrowers layout the term sheets received from the various banks and evaluate line item by line weighing the rates and terms offered. The rate is typically the 1st or 2nd item compared among competing term sheets.
- No Prior Relationship: Because the banker has – in essence – been dropped into the transaction by the CPA or real estate broker, the banker has no “relationship” with the borrower. Because of that, there is no affinity or loyalty between the borrower and the various lenders bidding for the business.
- Shrinking Margins and Fees: Because red ocean sales opportunities are highly competitive, banks are positioned as commodities. As a result, when you do win the business, that transaction often yields lower profitability due to competitive pressures.
- Inconsistent Quality and Quantity: The quality and quantity of traditional COI referrals vary significantly in terms of the number of referrals provided over the course of a year as well as the quality of those referrals. Various studies document that somewhere between 50% and 60% of all lenders nationally don’t hit their annual sales goals. A primary reason many lenders rely too heavily on broker and CPA referrals for deal flow. Many bankers are simply not very comfortable sourcing new business on their own.
In summary, Red Ocean sales opportunities remain the primary way in which bankers develop business and “market” themselves ─ and it’s been like this for decades. While it remains a viable channel for developing business, bankers must become more savvy marketers specifically in their ability to market directly to business owners and principles of quality companies in their market.
What Is A Blue Ocean Sales Opportunity?
Author Neil Rackham in his famous book SPIN Selling documented that at any given time, only 5% of qualified prospects are actively shopping for your product or service. That means the other 95% of qualified prospects are not actively shopping for a loan or to switch banks.
A couple reflective questions to consider as it relates to this statistic:
- Are the bulk of your business development activities aimed at 5% of prospective customers who are actively looking for a loan, or the 95% who aren’t?
- Does that mean you can’t market and sell to the 95% of qualified prospects who aren’t in the market currently?
The answer to the second question is obviously “no.” Blue Ocean marketing opportunities are where bankers, using various complimenting strategies, develop relationships directly with business owners and company executives of quality companies in their markets. Analogous to a calm, blue ocean where there are no other boats in sight, we call these “Blue Ocean” sales strategies because you’re only competing with one other bank rather than the three to five banks competing in Red Ocean sales opportunities.
The purpose of utilizing Blue Ocean sales strategies is to:
- Align and focus the bank’s (and banker’s) resources for greater business development effectiveness/productivity
- Work smarter, not harder after laying the necessary foundation
- Develop a secondary/complementary source of deal flow
Just as with Red Ocean strategies, there are pros and cons to Blue Ocean strategies.
The primary con of Blue Ocean sales strategies is because the prospect isn’t in the market for a loan, there is no pending sales opportunity. Other than that, there are several pros to building Blue Ocean sales opportunities into your weekly business development activities:
- Minimal Competition: You’re only competition is the prospect’s current bank.
- No Commoditization: Because there is no buying motivation, your focus is on developing a relationship as well as creating the opportunity to differentiate yourself and add value by being a resource and taking a consultative approach.
- Develop The Relationship: Because there’s no pending buying decision, the sole focus is on creating deep and lasting relationships.
- Build Loyalty: Considerable emotional attachment and loyalty are built between banker and prospect over time because of positioning yourself a resource, solving non-banking needs, and demonstrating genuine care.
Simply stated, the best time to start to develop a banking relationship with a business owner or company executive is when there’s no need for financing and they’re happy with their current bank. I also believe that when a prospect says “I’m happy with my current bank” what they’re telling you is that no other banker has come along and raised their expectations of what they can expect from a banker. So if you can differentiate yourself and add value that your competition isn’t providing, then you’ve created a true opportunity to have that customer move to your bank.
To summarize, the discussion of “Red Oceans” and “Blue Oceans” is not a discussion of good or bad, but rather a discussion of choices in how you spend your time and the markets in which you choose to compete. Red Ocean marketing strategies seldom produce Blue Ocean sales opportunities. The creation of Blue Ocean sales opportunities requires different marketing strategies.
To discuss how Blue Ocean sales strategies can help your bank out-perform the competition, click here to schedule an appointment with Ray Adler, founder, and CEO.