REQUIRED READING: Although advertising is an important component of a firm's marketing mix, it does not define it. This misconception is rooted in the fact that many industry executives simply do not understand what marketing means.
Have you ever wondered about what type of experience, result and value customers place in a mortgage transaction? What value proposition is perceived by the customer from using one firm's mortgage services as opposed to the competition's services? The quicker a firm can answer these questions, the better it will be able to develop its marketing strategy around its customers' needs and do so in a profitable manner.Â
Peter Drucker once remarked, ‘The aim of marketing is to make selling superfluous.’ Too many firms have imploded in recent years and continue to operate under unsustainable business models, pouring resources into patching the problems, rather than addressing the underlying foundation that is their strategic plan. In a time of regulatory scrutiny, new legislation and a looming shift in consumers' sentiment toward the financial sector, management must be prudent.
As the financial services industry is encouraged by society, shareholders and regulators to get back to basics, it only seems fitting that we take a look into the fundamentals of marketing in the mortgage banking industry and make clear distinctions on what tactics successful firms will utilize.Â
Looking within
Start with a basic look into your organizational mirror, and ask yourself or senior members, ‘Who are we, and what is our strategic plan?’ Any executive at your firm should be able recite (or at least express) the firm's mission statement.
An elementary exercise, right? Believe me, it surely isn't. The idea of a strong vision starts at the top. If the executive leaders are not brand ambassadors, your firm's production line (i.e., originators, processors, closers, etc.) will not buy into the vision, and you will come up short.
A well-designed marketing plan should be merely an extension of your overall strategy to sustain a profitable business. It is the most important component of the question, how are we going to sustain profitability? In order to achieve this objective, your firm must design a loan pricing structure, with measurable goals in place. You should consider the three C's of marketing: costs, customer and competition.
A community bank will have a much different strategy than will a large financial services company. Don't get caught up benchmarking yourself with industry giants, because they operate on a different scale and often multiple streams of revenue. This, again, seems elementary, but firms across the country struggle with identity issues as they evolve. You must be cognizant of your firm's growth strategy and look to optimize on economies of scale.
Effective secondary marketing management no longer means just juggling investors, hedging pipelines and dealing with pull-through. Now, firms are looking for a dynamic understanding of accounting principles and a breakdown of per-loan contribution margin.
Ask yourself the following: How do we price? What is the range of feasible prices? What is our acceptable gain on sale? Hopefully, your answer is not, ‘We look at the local community bank rates and market our loans an eighth lower in rate!’
When determining your pricing strategy for selling loans servicing-released, it is essential to understand your fixed and variable costs. The absolute minimum spread at which you can price loans is equal to the variable cost per unit.
But be careful here – at that price, the firm will make no contribution to fixed costs, and this situation may not be sustainable. The lower the gain on sale per unit, the less you can contribute to paying overhead, salaries, etc.
On the opposite side of the pricing pendulum, there is price skimming. Essentially, this takes place when you have a devoted customer base that perceives your brand value as superior to that of the competition. At this level, gain on sale is higher, but loan volume is lower than penetration pricing. Fixed costs are also generally higher here because of the additional promotional/brand value work that is involved.
Thus, it is important to know where your board of directors or management leadership expects you to be. Is driving in loan volume for servicing the goal? Or, do we want the lump-sum revenue with gain on sale margins? These are all important questions to ask when determining an appropriate pricing strategy.
Understanding what the customer values in a service industry is paramount and the root of any service business. Being able to drill down on these specifics through market research and developing the marketing strategy to sell your services based on the data are essential. Once you realize how your brand is perceived, you can fine-tune the pricing to find the maximum price you can charge the customer, without sacrificing loan volume. This is known as price elasticity of demand, or referred to in most industries as ‘not leaving money on the table.’
Those other guys
Competition plays a larger role in mortgage banking than other industries, but the dynamics are quite different. The first lesson to learn here is understanding your competition. Community banks should not compare themselves to large online players or small broker shops. Instead, they should look directly in their area and find similar community banks and credit unions.
This ties into the customer analysis, because you have to understand who your customers are, and why they are coming to you. Try doing a weekly comparison of rates and fees with your five largest competitors. Are you competitive? If your firm is a subsidiary or unit of a bank and the bank customers are your primary feed of business (which in itself can be problematic), there is no need to beat the competitors in rates/fees; matching them will suffice.
Competition in our business is funny in that you can provide top-notch customer service but still never be successful. Borrowers are strongly motivated by rates and fees, but if you develop a strong marketing plan, coupled with appropriately priced services, you will be successful.
Before we can master secondary marketing, we first need to dive into the roots of marketing itself. By developing a strong foundation through research and analysis, you can price, promote and profit effectively. With a contraction in mortgage brokers across the country and historically low rates, the timing could not be better for management to do a complete analysis of their marketing strategy and develop a sustainable path to profitability in the long run.
Charles S. Flick III is secondary market manager at Sun National Bank, based in Turnersville, N.J. He can be reached at cflick@sunnb.com.
