Building brand equity.

Too often, banks, market on the basis of high deposit and low loan rates. This is the wrong approach, If you think you have no choice you are precisely the person who should read on.

While this may sound like one of those "lose weight pill" ads promising something too good to be true, I submit that you actually can learn how to:

1. Remove the need to sell on time basis of rates.

2. Spend fewer marketing dollars.

3. still enjoy stable and glowing business.

These three things are made possible by marketing your brand based on other elements of the customers' bank selection and decision to-stay process.

No, I haven't lost touch with reality. Yes, there are rate shoppers who will tread over their own grandmother for 5 basis points. But: Do you really want them? (It costs money to process them in and then back out.) Besides, successfully selling oilier than on the basis of low loan rates and high deposit rates means much more profits.

Permit me, please, to proceed to discuss the following items:

* Why not sell on the basis of price?

* What is brand equity and why seek it?

* As proof of my thesis, let's consider your (and my) brand preferences and how they affect you and time provider.

* What tools, besides price, are at your disposal to create brand equity?

* Summary and conclusion.

Why not sell on the basis of price?

Consider the following real (not concocted for this article) balance sheet, Table No. 1, from a community bank. (The numbers are not rounded because it is, in fact, real.)

What should jump out and impress you about this statement is that the largest asset by far--it's not even close--is total interest bearing funds. And the largest liability by far--again--is total purchased funds.

Therefore wheal you look at the corresponding income statement for the same bank for the same time period, you would expect the largest income item by far to be interest income and the largest expense item by far to be interest expense And you're right on both counts. (See Table No. 2, below.)

Note that net interest margin of $39,566-21,610 = $17,956, means that the difference (that wonderful thing called spread) pays the bills and that non-interest margin of $4,396-15,454 = ($11,058) is a losing proposition. With all due instruct to those who provide non-interest income, and we do need it, it is the difference between interest income and interest expense that makes or breaks a commercial bank. Interest income of $39,566 absolutely dwarfs non-interest income of $4,396, and interest expense of $21,610 exceeds another expense combined by over $5 million!

So the answer to the question posed by the title of this section is that selling on the basis of price raises interest expense and lowers interest income, reducing spread, which is the very lifeblood of a commercial bank. The practice is widespread, I think, for two reasons:

Marketers don't appreciate the importance of, order of magnitude and impact on profits of spread and thus how critical it is to preserve it.

They think they have to do rate marketing when the fact is that many things beside a few basis points--while nothing to a customer and possibly millions to a bank--can bring and keep customers to a bank that is not the rate leader or even number two or three.

Let's look at the order of magnitude of the spread issue, using the same bank, to see how dangerous rate marketing can be and how profitable nonrate marketing can be. I call this 'The Power of the Basis Point," for obvious reasons. Please reference the balance sheet and income statement (Tables No. 1 and 2) as you look at this.

* 1 percent of $382,880,000 (interest-bearing funds) is $3,828,000.

* 1 basis point (1/100 of 1 percent) on $382,880,000 is $38,828.

* 1 percent of $389,754,000 (total purchased funds) is $3,897,400.

* 1 basis point (1/100 of 1 percent) on $389,754,000 is $38,975.

Together 1 basis point of interest-bearing funds and purchased funds added together is $77,803, i.e., one lousy basis point higher on loam and one point lower on deposits totals $77,803 in additional pretax income for this community bank, raising it from $6,966,000 to $7,043,803!

If you want to think bigger, let's look at what additional basis points will bring:

* 10 basis points (1/10 of 1 percent) higher on loans and lower on deposits totals $778,030. (Pretax income would have been $7,744,030 rather than $6,966,000!)

* 20 basis points (1/5 of 1 percent) higher on loans and lower on deposits totals $1,556,060. (Pretax income would have been $8,522,060 rather than $6,966,000!)

* 50 basis points (1/2 of 1 percent) higher on loans and lower on deposits totals $3,890,150. (Pretax income would have been $10,856,150 rather than $6,966,000!)

The numbers are huge, and the marketer who knows that and chooses a route other than rate marketing has a lot of "house money" to use. And remember, you needn't be that much lower or higher than the market to have a great impact on earnings. Again, basis points don't mean much to the customer. To the bank, however, they can mean thousands or even millions of dollars more. (And obviously this has to be a long-term strategy, because you can't change the rates on both portfolios overnight.)

Whet is brand equity end why seek it?

Brand equity means brand value, which comes to the company as current customers prefer or even insist on using the company's service or product, in consideration of the total value package--including, but not limited to, price--and new customers begin to do the same.

The creation of customer "preference for" and even "insistence upon" a brand leads to

* Stable and growing revenue.

* Reduced marketing costs (as the pull of brand preference replaces the push of marketing expense).

A reduced need to sell on the basis of price.

Price is overrated as a marketing tool, and value is underrated, lf I ask you, "Is $10 too much?" you immediately ask, "For what?" What happened there is that I asked you a price question, and you asked me a value question. No price is deemed high or low until it is compared with perceived value. So if I say $10 for a candy bar, you say it's too much. If I say $10 for a fine dinner for two, you say it's not too much.

When smart marketers want volume, they ascertain what constitutes value in the mind of the target market. Then, they install it, promote it and command the price they want. Not-so-smart marketers just lower the price.

If price were really that important, why wouldn't the only banks with deposits and loans be those with the highest and lowest rates, respectively? If price is that important, where are Plymouths, Yugos, Chevettes and Pintos? Where are Bradlees and Caldor? Why is Kmart in Chapter 11? Where are those black and white generic boxes in grocery stores? Why isn't Amazon.com rolling in profits?

As proof of my thesis, let's consider your own brand preferences and how they affect you and the provider.

We all like to think we're frugal, but the fact is that our provider selections are based on perception of value compared with price, and we seldom buy the lowest priced option.

I'm sure you can think of services or products you prefer or insist upon and that you would say that the providers can count on your revenue over time. I'm sure that you also know that you could get a competing product cheaper but won't (as long as your brand's price is somewhere in the ball park) and that they don't really have to market to you to keep your business.

In my case, I have an insurance agent who I believe is so capable and has me so properly covered that I never have a moment's concern about the matter. I have no idea if I could get what I have less expensively somewhere else, and I don't care, bemuse the real value is the peace of mind. I'm happy to pay for it.

Speaking of being covered, my dear wife blessed us with twins (who are now four years old). I know there are cheaper diapers, but we bought Huggies because of our perception of their value ... you know, absorbency, tight fit, few leaks, image of quality, an 800 number to call and all that.

At my bank, which is not the low-loan rate, high deposit rate bank, and never has been, I'm recognized pleasantly, helped, advised and counseled. Bank employees seem to have all the time for me that I need. They'll even bend a rule for me now and then and that package is worth a few basis points, which leads to the next section.

What tools, besides price, are at your disposal to create brand equity?

Note that you must conduct extensive (not expensive) customer and prospect research before you attempt to use these tools. That is to say, you ask a hundred or so (not the thousands a research supplier would recommend) people a few simple questions. As a result, you will offer the nonrate features they tell you will make them prefer you, i.e., you tend out what constitutes value in your market's minds and emphasize that so that when they do the price/value comparison, that exercise will cause them to choose you even if your rates aren't highest/lowest.

Positioning. Research desired attributes. Then, install or instill them, and say you have them.

Products. What do you have that they like? What is missing?

Channels of access, Can they access information and services when and as they wish?

Advice and counsel. Do they need it? (Of course they do: Money is a frightening and emotional subject.) Do they know how to get it? Do they know you offer it? (I once went to a batik thinking I needed a car loan, but that was the last thing I needed. You consumer lenders can relate to that, I'm sure.)

Personal relationships. It's easy to leave a bank. It's "hard to leave a banker who has pleasantly welcomed you by name, helped you, accommodated and advised you.

Training. with proper communication, you can create a marketing baulk as opposed to a bank with a marketing department.

When all employees, not just the marketing department, have been told the importance of being profitable, how spread contributes to profitability and what your nonrate strategy is, they will assume responsibility for the customer, and customer loyalty and lifetime revenue rise exponentially. By the way, employees won't balk or assume you're "ripping off" the customer. They will realize that a few basks points translate to nothing for the customer but much for the bank. And, it's still a free country. If customers come to you as a result of their (probably nonconscious) price/value analysis, it's their choice and theirs alone.

Summary and conclusion

You can remove the need to sell on the basis of rates, spend fewer marketing dollars and still enjoy stable and growing revenues. All this is made possible by positioning your brand based on other elements of the customers' bank selection and decision-to-stay process.

Interest expense and interest income are by far the two largest income and expense items a bank has. The difference between them (spread) runs the bank, and even the slightest change in either call translate to huge financial impact.

To sell on the basis of price can muse just that: a huge (negative) financial impact.

One, 2, 5, 10, not to mention 50 basis points, while possibly not much to the customers, can have a remarkable effect on income.

Using rate to attract variable-rate customers is especially- dangerous because you have to raise or lower the rates on the whole portfolio, not just the new business.

The spread numbers are so large that, over time, the combined costs of the other methods of obtaining brand preference or insistence will cost less than selling on the basis of price.

No one can waive a wand or lower interest expense and raise interest income, given competition and certain customers' preferences, but ill consideration of the downside of rate marketing and the upside of nonrate marketing, even modest success can become substantial financial success.

Rate marketing is overused. You can be much more profitable if you adopt a strategy whereby you seek to sell on other bases, keeping your rotes in the ball park--but no means highest or lowest. The difference between highest and lowest and "in the ball park," as demonstrated by the numbers in this article can have an immense effect on earnings.

Happily, selling on other than the basis of price--that is, by finding out what constitutes value in your market's minds and then installing it and promoting it--is not that difficult and will make the price/perceived value thought process (Is $10 too much?) work in your favor.

Table No. 1

Assets (000's)

Loans                                      $318,962

Investments and Fed Funds                    63,918

Total Interest Bearing Funds                382,880

Non-Earning Assets                           32,064

Total Assets                                414,944

Liabilities and Stockholders Equity (000's)

Liabilities

Deposits                                    360,183

Borrowed Funds                               29,571

Total Purchased Funds                       389,754

Other Liabilities                             3,049

Total Liabilities                           392,803

Stockholders Equity                          22,141

Total Liabilities and Shareholders Equity   414,944

Income (000%)                         $39,566

Interest Income                         4,396

Non-Interest Income (Trust, SB fees,   21,160
  Late charges, e.g.)

Security Gain                              68

Total Income                           44,030

Expense (000's)

Interest Expense                       21,610

Non-Interest Expense                    5,258

Salaries and Benefits                   1,738

Occupancy and Equipment                 4,266

Systems and Operation                   1,100

Other Expenses                          3,092

Total Non-Interest Expense             15,454

Total Expense                          37,064

Pre-Tax Income                          6,966

State and Federal Tax                   2,936

Net Income                              4,030

Paul Diesel is a lecturer in marketing at Bentley College in Waltham, Mass., and a financial-service industry speaker and consultant. He is a past president of the predecessor organization to the ABA Marketing Network. Telephone: [phone]; e-mail: [e-mail]