We got the opportunity to speak with John Barlow, President, Middle Market Banking Program Director, at Barlow Research about the Small Office/Home Office (SOHO) market. Barlow Research recently completed a comprehensive, multi-sponsored study that gathered the information needed to segment the SOHO market, examine their financial management, payment and credit card behaviors, measure the value of the SOHO customer, analyze product usage and explore business Internet banking and mobile device habits. For more on the study, visit our earlier post and infographic.
Q: Why is the SOHO market the fastest growing business segment in the U.S. and how can banks take advantage of this opportunity?
A: From 2002 to 2010, the SOHO market had a 25 percent growth rate and now includes over 20 million entities nation-wide. Residual effects of the recession, such as increased unemployment and involuntary part-time employment, have aided in the growth of this market by increasing the number of people who started their own businesses because they had their hours cut, had been laid off or had to find supplemental employment. Another fundamental facilitator in the growth of the SOHO market is the rising costs of having employees and the decreasing cost of technology. With the technological advancements in the past 10 years (increased Internet functionality and mobile capabilities), starting and sustaining a SOHO business has become much more feasible, allowing many Americans to run small firms to supplement their income or generate earnings from a passion or hobby. Lastly, with the baby boomer generation nearing retirement age, retirees may be looking to do something they are passionate about while simultaneously supplementing their retirement savings. Nearly a quarter of the SOHO population is 65 years or older.
Banks already have an advantage in the SOHO market: approximately seven in 10 business customers are SOHOs that are already in the bank. Taking advantage of this market comes down to learning how to provide adequate service to this market to maximize its potential.
Q: What financial/banking advice would you give someone looking to start a SOHO?
A: Many SOHOs would benefit from help with the “business part” of being a business, which often includes putting together the paper work to become a legal entity, figuring out tax requirements, tracking expenses and bookkeeping. Individuals interested in starting a SOHO firm should document their vision. Write down what their intentions are as a business (or not-for-profit), define their goals and determine how they intend to meet their goals. Because this market is so diverse, each SOHO will have different expectations and different measures of success. With a baseline business plan mapped out, it will be easier to talk to people about their firm and discuss their intentions with financial institutions.
Q: What are the top products and services they need from a bank?
A: Providing ways to make business operations simple and easy is key in the SOHO market. This may include offering or educating SOHOs on products such as online banking, mobile banking, mobile remote deposit capture, etc. Also, providing SOHOs with products to help perform tasks such as managing cash flow, keeping records, organizing receipts to track expenses and collecting receivables is important. Since the SOHO market is comprised of predominantly non-employer businesses and over a third of SOHO owners have another job, time is of the essence. The owners of these small firms have to wear many hats. One of these hats is that of accountant and bookkeeper – a role that requires time and a certain level of skill and expertise. Providing a simplistic solution to this pain point will be welcomed. It is important to know that often it isn’t always about providing a specific product as much as providing the right product at the right time. When a buying opportunity presents itself, there needs to be a product that is simple and intuitive for this market to purchase.
Q: What are some traits a SOHO should look for when seeking a banking partner?
A: A SOHO may want to seek a banking partner that provides information quickly, uses language SOHOs understand, provides simple and concise solutions and operates transparently. When a SOHO owner walks in the door they need to be able to say, “This place is for me.” SOHOs want to know that their bank understands them. This may be difficult for financial institutions because each SOHO is unique and their individual needs in a banking partner will vary greatly. However, there are simple ways financial institutions can relay that they value a SOHO’s business. This includes being responsive, treating them as a valued customer and being easy to do business with.
Q: How can banks ensure loyalty when working with SOHOs?
A: To effectively serve the SOHO market, financial institutions need to understand the entire customer relationship, not just the SOHO business relationship. Seventy percent of SOHOs have a personal relationship at the same bank as their SOHO firm. Furthermore, it is common for SOHOs to own other businesses or re-appear at the same bank as a different business if their initial SOHO firm closes. Even though a singular SOHO relationship may appear minuscule, the consumer relationship and/or other business relationships associated with each SOHO must be considered when evaluating the contribution a SOHO makes to the bank.
With the SOHO segment being as large as it is, small shifts in bank switching activity may be significant, so maintaining a loyal SOHO customer base is important. The average SOHO business relationship with their primary financial institution is 11 years on average. Given the tenure of this relationship and personal connection to their primary bank, it is not surprising that being treated as a valued customer is very important to this segment. However, only 50 percent of SOHOs believe their primary bank knows and understands their firm. Efforts to understand your SOHO customers and recognize their firm may help demonstrate that your financial institution values their business.
Q: How can banks increase their profitability by servicing SOHOs?
A: The SOHO market has been overlooked by the banking industry because many believe there is no value proposition. However, SOHOs appear to look for value first and consider cost second. For this reason, focusing on the SOHO segment can be a profitable endeavor for a financial institution. The needs of a typical SOHO business are simple, but the products they need are in different organizational silos throughout the bank. Herein lies the fundamental problem when it comes to servicing the SOHO market; most banks are simply not organized in a way that caters to the needs of these small firms. Without a fixed place for these small firms and a strategy for recognizing and servicing them, SOHOs are easily lost and the opportunity for the bank ceases to exist.
Individually, SOHO firms do not have high net potential revenues per relationship in terms of fee and balance income. However with the size of the SOHO segment being as large as it is, the net potential revenue of the entire segment is more valuable than the middle market ($10MM-<$500MM in sales). Many SOHOs are planning to remain at their primary bank. Therefore, mining the SOHOs that are already affiliated with your financial institution before focusing on attracting additional SOHO customers and offering simplistic, low-cost business solutions is going to be the more effective strategy. Pairing a segmentation strategy with a deeper understanding of the financial behaviors of the SOHO market is the only way to target profitable relationships and develop a strategy for servicing these small firms.
Q: How can banks tailor their services to provide options for a diverse range of businesses?
A: Although it is important to know and understand your SOHO customers and be an expert in the SOHO market, it is far more important to be an expert in the banking business. Offer simplistic solutions that support fundamental business operations and minimize pain points. There is not a one-size-fits-all product for this group. Many financial institutions often feel like they already service the SOHO segment because they “offer a free checking product.” Unfortunately, it’s not that simple. The SOHO space is as diverse as it comes and it not only takes collaboration among silos within the bank but a commitment to the SOHO market at an organizational level. Most banks may already offer the products needed to service the SOHO market, but don’t know the pain points within each SOHO segment to provide solutions.
Q: How can banks best market their SOHO expertise?
A: The line between consumer banking and SOHO banking is often blurred; so marketing business banking offerings to your consumer banking customer base will provide education to the right population of current and future SOHOs. Many banks have a misconception that their SOHO customer base is content with the current consumer products they use. This isn’t entirely true – SOHOs may simply be unaware of the various business products and services that are offered by their primary bank. This could be because most business products are not targeted specifically to this market.
Getting in front of this segment will require advertisements in their common market places and through networking/communication channels frequented by SOHOs such as blogs and social media. Having a SOHO location on a bank’s public-facing Web site and branch signage also creates an inviting business space for SOHOs.
About John Barlow: John Barlow, President, Middle Market Banking Program Director
John Barlow was a founder of Barlow Research Associates, Inc. in 1980 and is responsible for overall business strategy and research methodology. In his position he works with clients to understand their strategic needs and develops research methods for multi-client and proprietary research assignments. John graduated from the University of Iowa in 1972, and is a graduate of the ABA School of Commercial Lending and past President of the Minnesota Chapter of the Bank Marketing Association. Prior to Barlow Research he worked for Norwest Bank where he was a commercial lender and manager of marketing activities for the commercial, international and trust divisions of a regional bank. John and his wife Kathy, also a principal in the company, live on Lake Minnetonka near Minneapolis. He is an avid E-scow sailor.