You may have heard – or asked – questions such as:
“If our company does not hold a large market share in our markets, should we worry about market growth?”
“How would we even estimate market growth?”
“If most of our existing clients are in not in growth markets, should we abandon them and go after new ones?”
Those are very valid questions:
In most markets, companies with single-digit market shares feel no significant impact of market saturation (that feeling that you have exhausted all good leads). That means that as a general rule, regardless of whether the market is expanding or contracting, there is always an abundant supply of fresh, good prospects to be chased.
That also means that for the most part, there is enough supply of good, less price-sensitive clients to be acquired. Thus, discounting to acquire market share is usually not necessary because you can always find prospects who need value rather than price.
However, while competitive attrition and market saturation tend to be less significant for smaller players, the following factors still apply:
- Growing markets have growing needs. For example, your commercial clients will be investing to expand capacity and may need CRE and equipment loans to open new locations.
- Growing markets have more sophisticated needs. For example, companies in growing markets often need more attractive Group Benefits to attract talent and ward off poachers.
- Growing markets tend to supply better clients. For example, credit quality tends to be good and to improve over time in growing markets – thus not only improving the quality and value of your portfolio but also freeing up capital to invest in growth.
- Growing markets will carry you. This is because your existing clients, who have a lower acquisition cost than new clients, will continue to grow.
The bottom line is that market growth, especially one that is driven by growth in fundamentals of the client base, is great! Even if you are an early-stage fintech startup, you should at least understand the fundamental factors driving the expansion or contraction of your target clients.
The flip side of this is that each line of business should have different definitions of market growth. In the examples I mentioned, CRE and equipment loans tend to precede your clients’ actual market expansion, while the impact on the Group Benefits market may only become apparent in later stages once talent pools start to be squeezed.
For example, a bank client of mine had a number of sub-scale areas and wanted to devote its resources to a few where it could build sizeable, profitable businesses.
On one hand, we worked with the organization to identify a number of promising candidates: businesses where the bank already had the expertise, reputation, and resources and where existing opportunities were commensurate with achieving scale in less than 5 years.
We also cast a wide net and scanned the US economy to prioritize/de-prioritize specific markets based on their growth prospects.
Combining the two allowed us to identify some very attractive opportunities for the bank and the combination of bottom-up and top-down review gave senior management the confidence to marshall resources behind them.
In fact, we estimated that, while the bank set very aggressive growth targets for these businesses, about ⅓ of this growth would be the natural result of “internal growth” – that is, the expansion of existing and new clients’ needs and improvement of credit and price conditions.
Happy hunting!
