Sharpening Focus: Market Segmentation
in Equipment Finance
By Joseph N. Lane
A kid who had strayed from the flock was
suddenly set upon by a wolf. The kid turned to
this attacker and exclaimed: “I am well aware,
Mr. Wolf, that I shall be your dinner. But why
don't we do the thing in style? Before dining, let
us have a bit of music. You play your flute and
I will dance.” The wolf played, the kid danced,
and the noise attracted a pack of dogs who
instantly set upon the wolf. The wolf turned
to the kid and exclaimed, “It is only what I
deserve. A competent butcher has no business
playing the flute.”1
Over the last few years, the equipment finance
industry has seen large-scale changes of direction
among its participants, including continued bank
mergers, large-scale portfolio sales among all types
of participants, captives adding noncaptive lines
of business, and an increase in outsourced
operations.
Whereas many of these changes have been
mandated by corporate parents, decisions about
business direction remain at least partly in the
hands of the equipment finance management
team. When a management team considers
changing its strategy, it makes sense to think
carefully about why a particular direction might
offer profitable opportunities. This article suggests
that a large part of the market evaluation should
focus on what creates value for customers in these
new markets: the fit between the equipment
finance company's business strategy and the needs
of customers in that particular market segment.
The purpose of this article is to suggest that
deliberate, planned market segmentation can
become a valuable tool to assist equipment finance
companies in making decisions about company
direction. Most of the article focuses on how
equipment finance companies have been using
this approach by outlining a suggested
classification of current strategies employed by
industry-leading companies. After describing this A large part of the
classification, the article provides and illustrates
the thinking steps required to use market market evaluation
segmentation to focus business strategy.
should focus on what
GETTING AND KEEPING creates value for
COMPETITIVE ADVANTAGE
customers in these new
In any marketplace, competitors look for ways
to differentiate what they offer, to make markets: the fit between
themselves the best at something in order to
capture the group of customers who most value the equipment finance
that something. Over the last decade or so,
successful equipment finance companies have company's business
gotten better at differentiating themselves and
honing their competitive edge by investing in the strategy and the needs
capabilities that make them more appealing to
their target audiences. of customers in that
They hire well, for example, by hiring people particular market
who are good at the things that their best
customers value the most. They invest in segment.
employees, processes, and systems that make
them better at winning the business they focus on
winning. They don't waste their resources chasing
opportunities that demand benefits they cannot
effectively deliver. As Aesop described it three
millennia ago, symphony orchestras don't recruit
“competent butchers” any more than the military
seeks out concert flutists.
Smaller companies, for example, can compete
with larger companies by picking a target set of
customers, focusing on their needs, and serving
them extremely well. The question is no longer
one of finding the best people, the best processes or
the best systems, but developing people with the
right skills, honing processes that work for this
business, and implementing systems that provide
the right capabilities. Everything in the business
can be developed and refined to provide the right
benefits to a target group of customers. Resources
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Eventually, even a large get allocated in accordance with priorities that are
determined in relation to the needs of the target
company can make customer base.
It can be surprising how quickly a focused
money only by
small company can grow, simply by maintaining
a clear focus on providing excellent benefits to
segmenting the market
its target market segment. Much has been written
about the impact of mergers and acquisitions on
and focusing on specific
the Monitor 100 over the past few years; this is
only half the story. The other side of the story
customer needs,
is the emergence of new powerhouse leasing
companies that did not exist a few years ago
attacking each customer
but that now dominate particular segments
of the market.
segment with an
As focused competitors begin to dominate
appropriately focused
particular market niches, other players are forced
to provide the same focused benefits or threatened
business unit. with losing business to these more focused
competitors. Eventually, even a large company can
make money only by segmenting the market and
focusing on specific customer needs, attacking
each customer segment with an appropriately
focused business unit.
There is another approach that the large player
can take: to offer the lowest price. This approach
can succeed if the player can successfully drive
costs out of the business and can leverage its size
to gain the lowest cost of money. However, there
can be only one lowest price. Everyone else must
choose another way to compete.
• True captive
• Vendor program specialist
5. Bank generalist
6. Bundled solution provider
7. Process outsource partner
The first six strategies have been well
established as profitable approaches; the last has
begun to emerge more recently. In each case, the
equipment finance provider has found a particular
market or customer segment and then tailored a
business to become increasingly better at
predictably, consistently meeting the needs and
expectations of that customer segment.
The next seven sections take a closer look at
each of these strategies.
1. THE SMALL-TICKET, HIGH-VOLUME
SPECIALIST
Small businesses, regional offices, and home
office businesses have predictable needs when it
comes to equipment, such as copiers, computers,
fax machines, printers, and small phone systems.
The small-ticket, high-volume specialist
capitalizes on these needs (table 1). This
equipment finance business makes money by
making equipment financing quick and easy for
customers. It often does so more efficiently by
offering financing through vendor or dealer
agreements. The key to its success is that the
equipment involved is commoditized, plug-and-

Table 1
COMPETITIVE ADVANTAGE IN
SMALL-TICKET, HIGH-VOLUME SPECIALIST
EQUIPMENT FINANCE
Primary customer Small businesses,
How have equipment finance companies made regional offices,
use of market segmentation? At least seven home businesses
different marketing strategies appear to be Competitive advantage Convenience, speed
working in equipment finance today: Origination focus Quick turnaround
1. Small-ticket, high-volume specialist Ease of doing business
2. Middle-market, middle-ticket focusers Risk management Safety in numbers
• Asset category Credit bureaus/credit scoring
Fraud prevention
• Vertical industry
Professional collections
3. Large-ticket specialist
Funding sources Securitization
4. Sales support partners Bank lines

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play, and simple to identify and install. PCs, fax
machines, simple copiers and printers, water
coolers, and some traditional office furnishings
(desks, chairs, and tables) fit this category. Most of
the assets are generic, with predictable, short lives
and low values.
For the customer, leasing these types of
equipment offers several advantages, but the most
significant may be the ability to expense the lease
payments, instead of tying up limited capital; the
ability to pay a fixed or predictable amount in line
with expected earnings; and, in some cases, the
opportunity to trade up to better or newer
equipment when convenient. Although the
transaction may be called leasing or financing,
many customers in this market segment are
comfortable with small-ticket leases because
the experience feels more like a credit card
account than like a large investment — a quick,
convenient approval process followed by small,
convenient monthly payments.
The small-ticket, high-volume specialist
succeeds by driving cost and delay out of the
business in every way imaginable. Automated
credit scoring has long been one of the favorite
tools of this equipment finance specialist, along
with telemarketing and often a phone system
featuring automated rollovers to ensure that no
call is abandoned. The biggest technological
impact on this business has been the Internet:
on the front end, as a vehicle for speeding up
origination and decision-making; on the back
end, as a vehicle for automating routine
customer service.
2. THE MIDDLE-MARKET, MIDDLE-
TICKET FOCUSER
Businesses that need to invest in more
expensive, specialized equipment may have
completely different concerns from the small
office or home office. If the original cost of the
equipment is $250,000 or more, then each
decision about how to finance that equipment has
a significant impact on the business's profitability.
In this case, it makes sense to take the time and
effort to consider alternative means of acquiring
the use of the equipment.
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I N E Q U I P M E N T F I N A N C E
Whether it is the new phone system for several The small-ticket,
hundred employees, a new backhoe for a county
highway department, or the diagnostic equipment high-volume specialist
for a hospital, the decision is likely to be
important enough to the business involved to succeeds by driving
consider all of its ramifications — cash-flow
considerations, financial reporting considerations, cost and delay out of
tax considerations, and future implications related
to replacement of the equipment. the business in every
The middle-ticket, middle-market focuser is
way imaginable.
an equipment finance business that makes money
by leveraging superior knowledge of specific
equipment types, specific industries, or specific
complex customer needs (table 2, next page). It
does this by focusing intently on an industry, asset
category, or group of customers with common
needs, staying abreast of cutting-edge knowledge
in the chosen area, and approaching the customer
as a consultant and expert in one of these areas.
For asset category focusers, the knowledge
involved may include maintaining databases on
equipment values, down to the details of age,
extent of usage, or even type of usage. For
example, machinery used around the clock, on
three manufacturing shifts, may have a shorter
expected life than machinery used for a limited
number of hours per day. Asset category focusers
track these details and use them in pricing, to
more accurately predict end-of-lease and early
buyout values.
Asset category focusers may employ a number
of individuals experienced in working with the
type of equipment involved, ideally with more
than one manufacturer of the equipment.
Vertical industry focusers know the businesses
they serve. They may know, for example, how to
evaluate a customer's ability to make money when
they are presented with the opportunity to fund
MRI or CT scan machines for a group of new
imaging centers. They often have the knowledge
to estimate related opportunities with this same
customer in financing nonmedical equipment like
PCs, copiers, or fixtures.
Vertical industry focusers tend to be owned by,
or to employ, people who have worked in the type
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Vertical industry focusers of business that they serve, and who have a deep
understanding of the customer businesses they
tend to be owned by, serve. Because they understand the whole
business, they see the financing of a particular
or to employ, people piece of equipment as an element of the larger
solution their customers need.
who have worked in the
For both types of market focusers, two
principles are critical to success:
type of business that
• Risk management must be done both on a
deal-by-deal basis and at the level of the
portfolio. The value of each individual piece of
equipment in the middle-market, middle-ticket
arena is significant; by definition, each asset
could be worth anywhere from $250,000 to
several million dollars. Small percentage
variations in pricing lead to significant variations
in profit, and expert residual evaluation can be a

they serve, and who have Table 22

Table
MIDDLE-MARKET, MIDDLE-TICKET FOCUSERS
a deep understanding
Primary customer • Asset category: Any user of a defined type of specialized equipment
of the customer (health-care equipment, high-speed printing equipment, scientific
laboratory equipment, agricultural equipment)
businesses they serve.
• Vertical industry: Any participant in the targeted industry served by the
finance company (health-care companies, professional printing facilities,
scientific laboratories)

Competitive advantage • Asset category: Unmatched knowledge and capability with that asset
category — knowledge of values, maintenance requirements, supply
requirements, technology requirements

• Vertical industry: Unmatched knowledge of the latest developments in

the customer's industry, including an understanding of the elements of
a total solution for industry participants, beyond the value of the asset itself

Origination focus • Asset category: Marketing to and selling through multiple channels,
sometimes with multiple partners, to reach all of the types of customers
needing to use equipment in the defined asset category

• Vertical industry: Providing financing for a variety of equipment within one

or more defined industries; for example, real estate, construction, furniture
and fixtures for the hospitality industry

Risk management • Asset category: Leverage superior knowledge of the asset, perhaps including
remarketing, refurbishment, secondary markets, and aggressive residual
practices. Balance the portfolio to avoid dependence on a single vertical
industry or group of customers

• Vertical industry: Leverage superior knowledge of the industry to identify

the best credit risks, perhaps including risk-based pricing. Balance the
portfolio to avoid dependence on a single asset category or group of customers

Funding sources • Asset category: Often have funding dilemmas. Some develop strong
relationships with a limited number of financial institutions; some
match-fund; some are pulled in the direction of becoming more
vendor-oriented

• Vertical industry: Often have funding dilemmas. Need a strong equity

partner or investing parent who at the same time is not restrictive about
the asset categories funded

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significant competitive advantage. Slight middle-ticket focuser builds its business. This For the purpose of
differences in expertise can be the difference knowledge or expertise is the core resource of
between successful and bankrupt specialized this type of business. To compete profitably as marketing strategy,
businesses. a middle-market, middle-ticket focuser, the
business must operate efficiently, streamlining however, it might make
It pays middle-ticket focusers to expend their
processes and cutting costs wherever possible
resources to become increasingly sophisticated
— except when it comes to enhancing its sense to define large
in these critical areas, not only because it will
knowledge and expertise in its area of focus,
make their offerings more competitive but also
its area of competitive advantage. ticket more in terms of
because it may be the only way to manage risk
effectively. A credit score is useful, but it is only
what drives the business:
one element, and usually is only the beginning
of the analysis of risk. 3. THE LARGE-TICKET SPECIALIST
dilution of financial risk.
Large-ticket transactions are defined in
At the same time, the middle-market focuser
different ways, given that “large” is a relative term.
must be cognizant of its level of risk with
Most industry participants would agree that large
particular asset categories, particular industries,
ticket usually means multimillion dollar
and particular customer groups. Most
transactions, in excess of $10 million of original
successful competitors regularly analyze their
equipment cost. For the purpose of marketing
portfolio composition by each of these
strategy, however, it might make sense to define
variables, making sure to maintain sufficient
large ticket more in terms of what drives the
diversification to sustain their profitability
business: dilution of financial risk. Transactions
through downturns specific to particular asset
of this size are visible, major decisions of large
categories, industries, or customer groups.
corporations and governments (table 3).
• In depth, up-to-date knowledge is the key
Competition for this type of transaction tends to
resource. Superior knowledge of the asset, the
be fierce, and decision cycles may be extremely
type of business, or the particular customer
long — often measured in “budget years.” Pricing
group is the basis on which the middle-market,
differences are measured to the fifth, sixth, or

Table 3

THE LARGE-TICKET SPECIALIST

Primary customer Corporate CFOs

State and local governments
Federal agencies
Foreign governments

Competitive advantage Packaging

Transaction structuring
Solution positioning

Origination focus Networking

Focused market investigation

Risk management Sharing risk through participations,

syndications, and leveraged leasing

Funding sources Funding partners

Funding structure

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Although there may not
be general agreement as
to what size transaction
constitutes large ticket,
it is safe to say that true
large-ticket transactions
are those of a size and
scope for which no single
funding source is willing
to take the full risk.
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seventh decimal place. The ante to play in this complex structures may be the engine that powers
arena, however, is the ability to bring a strong a solid large-ticket proposal, the proposing team is
financial partnership to the table — the ability the driver. The broker-packager succeeds
to spread and hedge risk sufficiently to make primarily on the basis of its ability to build a
a multimillion dollar transaction a prudent strong, flexible, creative team, whether
investment. researching the needs of the lessee and the legal,
accounting, and tax alternatives; crafting the
The large-ticket specialist makes money by
detailed proposal; or conducting the negotiations.
applying a high level of specialized skill and
The lead lessor, if it does enough business, may
sophistication in three areas: prospecting, financial
choose to employ people with all of these skills.
structuring, and partnership building.
More commonly, some of the skills reside in house
Prospecting. Almost all large-ticket business is (often prospecting and partnership building), and
done by a small number of highly sophisticated the rest are paid fees to work with particular
players. Typically a broker or packager, through transactions.
networking and trade journal research, identifies
Most of the assets involved in large-ticket
a potential opportunity for a large-ticket trans-
transactions are complex — large-scale transpor-
action. This individual puts together a team with
tation assets (rail, aircraft, and shipping), power
a lead lessor, additional participating funders,
generation projects, or major public construction
and sometimes one or more vendors. Often the
initiatives. Because of their size, these projects
broker-packager is an agent of the lead lessor but
can be highly sensitive to changes in economic
may be an independent consultant. This team
and political conditions. As a result, the large-
develops a proposal to the lessee that provides
ticket specialist cannot be successful without
a financial structure, plan, and partners to put
a clear understanding of macroeconomic trends
a deal together.
as well as a capability to stay abreast of changes.
Financial structuring. Although there may not
For the customer, leasing has several
be general agreement as to what size transaction
advantages, but the most significant may be that
constitutes large ticket, it is safe to say that true
leasing provides a flexible element in a larger
large-ticket transactions are those of a size and
toolbox, often offering a key economic advantage
scope for which no single funding source is willing
in making a large transaction work for all parties.
to take the full risk. So the structuring of the deal
The key element offered by leasing may result, for
is the art and science of creating a financial vehicle
example, from a tax advantage or from the
that successfully shares risk among multiple
optimization of the cash flows in the financial
parties; offers an attractive rate of return to each of
structure.
its participants; and ensures an economic,
competitive solution for the lessee. The biggest technological impacts on this
business have been the explosion in the
In the past, leveraged leases accounted for a
availability of business, economic, and political
large share of transactions done in this market. In
information, through a wide variety of media, but
recent years, transactions have trended more
particularly online. In addition, advances in
toward participated direct finance leases or
calculation software have made optimization of
conditional sales, depending on the tax status of
financial structures something that can be
the customer. Regardless of the financial product
achieved in a reasonable amount of time.
involved, a finance company cannot successfully
compete in the large-ticket arena without a high
level of skill and sophistication in financial
AN ASIDE ON TICKET SIZE
transaction structuring.
Partnership building. Although innovative, It should be clear that ticket size alone can be a
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major determinant of the kinds of strategies that
work for companies pursuing each type of
financing business. The three strategies outlined
(or four, counting the two middle-ticket
substrategies) lead to very different businesses.
Competing successfully in small-ticket, for
example, dictates a completely different use of
business resources from large-ticket. Even
between small-ticket and middle-ticket, or
between middle-ticket and large-ticket, there are
enough discontinuities of tactics that one line of
business cannot effectively compete in both
markets. Only by segmenting the business and
targeting the right types of opportunities can an
equipment finance business develop consistent
competitive success.
The last three types of strategies (or four, The sales support
counting the two substrategies) are less focused
on transaction size but just as focused in other partner makes money
ways. Players that compete using these strategies
often blur the lines in ticket size, looking for the by providing the
widest possible arena in which to compete on
a different basis. means to increase
4. THE SALES SUPPORT PARTNER the sales of a particular
This business makes money by providing the
means to increase the sales of a particular line of line of products.
products (table 4). The true captive exists to
support the sales of its manufacturer or distributor
parent by sealing the deal, bringing to the table the
last piece of the equipment sale — the money. It is
most successful when its charter is clearly defined,
especially around economic expectations, and it

Table 4
THE SALES SUPPORT PARTNER

Strategy • True captive: Support the sales of the parent manufacturer by offering an
answer to the question of financing
• Vendor program specialist: Offer an option for a manufacturer or other
vendor to outsource their captive financing — to support its sales with
financing without the cost or risk of setting up a captive — “Let us be
your captive”
Primary customer • True captive: manufacturer parent
• Vendor program specialist: the vendor partner
Competitive advantage • True captive: Seamless partnership at point of sale
• Vendor program specialist: Ability to approximate the seamless partnership
at point of sale, to negotiate a premium for doing so, and to spread risk over
multiple vendor relationships
Origination focus • True captive: Close relationship with the manufacturer's sales force
• Vendor program specialist: Close relationship with the vendor's sales and
marketing groups
Risk management • True captive: Knowledge of equipment, including values, useful life, and
product life cycles
• Vendor program specialist: Terms and conditions of agreement with the
vendor, including recourse arrangements; ability to spread risk over multiple
vendors; ability to leverage core functional capabilities (management,
systems, processes, scarce knowledge resources) over multiple vendor
programs
Funding sources • True captive: Usually primarily the parent; however, with growth, can access
other funding sources (syndications, securitizations, bank lines)
• Vendor program specialist:
Bank lines and securitizations
Some owned by cash-rich parents (insurance companies, banks)

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The greater the coordinates seamlessly with the manufacturer
sales organization.
coordination between
The vendor program specialist capitalizes on
the same marketplace need — supporting sales
the financing entity and
of a manufacturer or other vendor at the point
of sale — by providing an opportunity for the
the vendor itself, the
vendor to outsource this function. This is a truly
symbiotic relationship, in which the vendor gets
more likely that both will
the benefit of a captive without investing in the
overhead to create and manage it, and the lessor
decrease operating costs
gets the benefit of a reliable source of transactions
without the cost of supporting a sales force —
and increase profits.
typically at a lower cost than a broker's fees.
Both strategies take advantage of the appeal of
a convenient solution: financing available at the
point of sale. Because this is their sweet spot, they
tend to work best in small-ticket and the low end
of the middle market, in situations in which the
end lessee is a small to mid-sized company, with
minimal resources invested in corporate
procurement infrastructure. Sole proprietors,
agriculture and construction companies, and
small manufacturing companies tend to be the
best end-use customers for both of these
strategies.
These hybrid strategies, which cut across
transactions sizes, benefit from multiple
advantages:
• The convenience for the customer of point-
of-sale financing
• The opportunity to leverage access to high
levels of equipment knowledge
• (For vendor program specialists) The oppor-
tunity to spread risk over multiple vendors
• (For true captives) The tax benefits of “sales-
type leases” and gross profit tax deferral
The sales support partner succeeds by
providing visible, measurable benefits to the
vendor partner (table 4). The greater the
coordination between the financing entity and
the vendor itself, the more likely that both will
decrease operating costs and increase profits.
As a result, one of the biggest technological
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impacts on these types of businesses has been
shared visibility in systems. For the true captive,
this may mean actual shared systems, where the
manufacturer's system actually feeds data
electronically, for example, to the captive. For the
vendor program specialist, there are increasingly
more sophisticated connections between vendor
and financing partner systems, making use of
today's integration tools like Web Services that rely
on standard technology protocols like XML and
SOAP to reduce costs on both sides.
5. THE BANK GENERALIST
This business makes money by defining one
or more clear focuses for its equipment finance
activities and sticking to its focus (table 5, next
page). For each focus, however, the successful
bank generalist sets up a separate group within
the company.
Funding and syndications. One of the most
common ways that banks enter the equipment
finance market, besides commercial lending,
is by funding transactions originated by indepen-
dent leasing companies. The relationship between
the lease originator and the bank funding source
can be a mutually beneficial one if each partner
knows what it expects to provide and to get in
return. Successful funding partnerships are
based on clear expectations, in terms of credit
quality, asset (or collateral) assessment, and
return expectations.
For some banks, funding transactions that are
originated or serviced by other companies is their
only engagement in equipment finance. To the
extent that the bank syndications officer negotiates
clear expectations, provides funding as agreed,
and monitors the return on its owned assets,
being a funding source is a complete line of
business in itself.
Banks as lessors. Many banks have developed
successful lines of business as lessors; however,
most have learned that there are ways that work
and ways that do not. Being all things to all
people, in a single line of business called bank
leasing, doesn't work. Like other generalist lessors,
this type of bank leasing is vulnerable to more
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focused competition—from small-ticket specialists
in smaller deals, from large-ticket specialists in
larger deals, and from more focused competitors
in mid-ticket deals. What focuses are working
for banks?
• Large ticket. Some of the strongest players in
the large-ticket market today are banks. To be
successful, though, these banks run the large
ticket business with a clear focus — dedicated
sales executives; dedicated pricing specialists;
dedicated legal, accounting, and tax advisors.
If specialists in these areas are not full-time
employees, they are consultative resources. No
one can operate successfully in the large ticket
arena without those types of resources.
• Middle market. Banks that focus on particular
asset categories, in middle-ticket equipment,
tend to be the most successful competitors.
Many banks have done well financing hard
assets: construction, agriculture, printing
equipment. Part of their success is directly
related to the fact that funding a $300,000
transaction is often less problematic for a bank
than for any other industry player.
Another major element in banks' success in
equipment finance is their experience
evaluating credit and collateral for their
commercial lending businesses. In some cases,
banks may benefit from less objective factors,
like a local identity, perhaps a cultural fit with
THE BANK GENERALIST
Primary customer
Competitive advantage
Origination focus
Risk management
Funding sources
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certain industries, and, more recently, a serious Banks that focus on
focus on building larger relationships with mid-
size customers. It all adds up to a market in particular asset
which banks can leverage natural competitive
advantages. categories, in
On the other hand, there are equipment finance
middle-ticket equipment,
markets that may look attractive but pose clear
and present dangers to banks as lessors.
tend to be the most
• Small ticket. Most small-ticket businesses, as
described above, succeed because of a small successful competitors.
number of powerful advantages: speed,
convenience, and efficiency. These are not areas
in which banks are traditionally strong. On the
other hand, providing funding for small-ticket
businesses, in the form of lines of credit, for
example, can be a profitable way for banks to
participate in small-ticket leasing.
Banks that do engage directly in small-ticket
leasing typically must fight pressure from the
existing bank culture and practices. They may
not be successful at all unless they can establish
a physical location at a distance from the rest of
the bank, while leveraging the superior funding
and other corporate resources of the parent
bank.
• Vehicle leasing. This has become a dangerous
financing market for anyone other than
manufacturer captives and large, dominant,
full-service fleet specialists. For smaller fleets,
Table 5
Customers of the bank
Leasing companies
Specific target markets
Funding
Syndications
Networking
Market-specific activities
Participant credit
evaluation: lessee, lessor, vendor
Market segmentation and monitoring
The bank
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The sheer cost of
servicing transactions
that have few common
characteristics virtually
guarantees that the
bank's leasing offering
will be less competitive
than almost any
focused competitor.
banks suffer from the same mismatch as in other
small-ticket markets. For larger fleets, banks are
hesitant to make the investment in full-service
operating leases, with specialized systems and
resources for tracking usage, maintenance, and
fluctuating vehicle values.
Although some bank car leasing companies
succeed, they have become the exception.
Commercial trucking, on the other hand,
because it looks and acts more like the middle-
ticket market described above, can be a
profitable market for banks that know how
to manage risk.
• Bank customer accommodation transactions.
One way banks enter the equipment finance
market is by providing whatever kind of
financing transaction an existing bank customer
happens to need. The headaches of the wildly
diverse collection of assets (not really a
portfolio) that result from this approach usually
pull the operation in too many directions,
destroying any chance there might have been
for a profitable line of business.
The sheer cost of servicing transactions that
have few common characteristics virtually
guarantees that the bank's leasing offering will
be less competitive than almost any focused
competitor. This is a difficult trap for most
banks to avoid, given that cross-selling has
become the Holy Grail in most bank
organizations.
A bank may retain its clear focus and profitable
operations, however, by leveraging appropriate
partnerships. For example, the bank might
establish clear guidelines about which
transactions it will originate and keep, because
they fit an already focused bank portfolio (say,
a mid-ticket printing portfolio). All other
transactions can be originated by the bank
(or better yet, by a private-label partner) and
syndicated to appropriate servicing partners.
6. THE BUNDLED SOLUTION
PROVIDER
Some businesses, particularly those that are
primarily distributors of products manufactured
by others, compete on the basis of coordinating
a variety of basic functions at the tactical level
(table 6). As these types of businesses grow, they
often standardize their most complex processes
(cash handling, credit checking, merchandising
and inventory, for example) so that they can take
advantage of commonly available technologies to
lower their operating costs. This standardization,
however, puts increasing pressure on the

Table 66
Table

THE BUNDLED SOLUTION PROVIDER

Primary customer Any customer (most often retailers and wholesalers) that needs to coordinate
a complex constellation of products and services in order to be competitive

Competitive advantage Complete, full-service, turnkey solutions, often bridging multiple

technologies as a single provider

Origination focus Partnering with particular types of businesses to provide a full range of
packaged services, of which equipment financing is one component

Risk management Extreme customer intimacy, establishing a close relationship with each
customer, leveraging knowledge not only of the business but also of the
principals; putting a complete solution together by extensive partnering
with a limited number of third-party providers of elements of the bundle

Funding sources Usually part of a larger, more complex business; leasing may be a key strategic
enabler or an add-on profit opportunity

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headquarters to create packaged solutions. As a
result, there are increasing opportunities for third-
party businesses to create pre-packaged solutions
that enable retailers, for example, to outsource
whole areas of their businesses to expert pro-
viders. Equipment financing can be one of those
outsourced elements.
Bundled solution providers are ultimate
problem-solvers who craft carefully packaged
solutions for specific types of businesses.
Equipment financing, for this type of business,
is usually just one of the tools in a complex,
multidisciplinary toolbox, often a tool that acts as
an enabler for the other elements in the package.
Franchise businesses, for example, leverage
specialized equipment, systems, software, fixtures,
and even training to provide a startup kit that
increases the chances of early success for the
new business. The franchisor either may have
packaged all of these elements itself or may be
coordinating the efforts of multiple business
partners. Equipment finance can participate in the
franchise business by enabling the end franchisee
to lease one or more of these elements in the
bundled solution.
Bundled solution providers compete on the
effectiveness of the total package they deliver.
Equipment financing, although only one element
of the package, is one of the few elements that
lends itself to regular, ongoing contact with the
THE PROCESS OUTSOURCE PARTNER
Primary customer
Competitive advantage
Origination focus
Risk management
Funding sources
J O U R N A L O F E Q U I P M E N T L E A S E
S E G M E N T A T I O N I N E Q U I P M E N T F I N A N C E
end customer. As a result, it offers relationship Equipment financing,
opportunities that can tie the end customer much
closer to the provider. The most common of although only one
these opportunities may be the offer to upgrade
equipment. The database used to track the element of the package,
financing transaction is a natural place to find
and proactively leverage information about when is one of the few
a customer might be receptive to upgrading. The
monthly invoice might offer the opportunity to elements that lends itself
send targeted marketing messages at greatly
reduced cost. to regular, ongoing
7. THE PROCESS OUTSOURCE contact with the end
PARTNER
If it is true that manufacturing is a capital- customer. As a result,
intensive business, then it is probably fair to say
that equipment financing is a process-intensive it offers relationship
business (table 7). Due to the nature of equipment
financing, multiple standard processes are opportunities that can tie
required, not only to get a deal on the books but
also to maintain that transaction over its life. Some the end customer much
of these processes are core repetitive steps
required to originate a deal. Pricing and closer to the provider.
structuring, credit evaluation, documentation,
and booking, for example, usually constitute the
minimum processes required to originate a
financing transaction.
As anyone who has been in the business even
a short time knows, however, the devil is in the
details. This overview doesn't even begin to
mention the subprocesses that burn up time
Table
Table 7 7
Equipment finance businesses
Other businesses that engage in financing
Process competence
System efficiencies
NA — does not originate financing
Customer selection
Contracting expertise
NA — fee-based business
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The most common type
of process outsource
partner today may be
the back-end servicing
partner, which takes
charge of a portfolio at
the point of booking and
tracks each transaction
through its life.
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S H A R P E N I N G F O C U S : M A R K E T
and dollars, threatening to bleed profitability out
of the best structured transactions — subprocesses
for handling sales and use tax, property tax, UCC
filings, and insurance. If anything, with the advent
of Sarbanes-Oxley legislation, process and
subprocess requirements are becoming more
difficult every day.
One way to crack this process nut is to literally
reinvent the wheel: do the work to keep your
internal processes at least as efficient as your
competitors’. Most equipment finance companies
understand the cost and time required to do this,
because process improvement has become one
of their key operational imperatives. But another
way to handle process is to not handle it at all:
subcontract the noncore processes to a partner.
Early forms of this type of outsourcing in equip-
ment financing have long since developed in
many of the subprocesses, including the handling
of UCC filings and the whole area of property tax
management. Now, however, we are beginning
to see the emergence of a whole new type of
outsource partner.
The most common type of process outsource
partner today may be the back-end servicing
partner, which takes charge of a portfolio at the
point of booking and tracks each transaction
through its life, handling as little as billing and
collecting, or as much of the processes and
subprocesses of portfolio management. Such an
outsource partner — one with the internal
discipline to maintain standard process steps,
build and maintain a strong and efficient system,
and provide in-depth portfolio reporting — might
be capable of servicing a half-dozen, a dozen, or
more equipment finance companies, leveraging
expertise and efficiencies in these areas.
In its purest form, the outsource partner is
typically a fee-based business, with no risk in the
ultimate performance of the portfolio. But if the
individuals involved in these businesses display
half the creativity of the rest of the equipment
finance industry, hybrid models will undoubtedly
emerge in which even portfolio performance is
part of the service provided (and charged for) by
the partner.
O F E Q U I P M E N T L E A S E F I N A N C I N G
S E G M E N T A T I O N I N E Q U I P M E N T F I N A N C E
HOW MARKET SEGMENT FOCUS
CAN INCREASE A LESSOR'S
COMPETITIVE ADVANTAGE
Given the success of these seven strategies, what
can an equipment finance company do today
move toward a more focused approach to the
marketplace? Equipment finance companies —
like successful businesses in every other industry
— succeed because they consistently deliver value
that meets customer needs and expectations.
Customers' needs differ. A lessor that provides
a predictable offering with consistent benefits
for a particular type of lessee has a competitive
advantage with that lessee; this provider tends to
look more relevant, or feel more comfortable,
because its offerings seem to fit better. When the
benefits are significant enough to the customer,
the specialist can earn a premium over the
generalist, or even close the generalist out of
the market segment completely.
For example, origination through vendors has
become a preferred channel for small-ticket
leasing because of the fit between vendor-oriented
financing and the needs of small businesses. If a
leasing company wants to specialize in smaller
transactions, one of the most economical ways of
finding business is to have the vendor function as
a natural channel. As a result, successful vendor-
oriented leasing companies view the vendor as
their customer and strive to meet the vendor's
most important needs.
The greatest benefit to the vendor may be in the
ability to complete the sale before the end-user
customer leaves the vendor's place of business.
Leasing companies that successfully specialize in
vendor programs focus resources — time, energy,
and money — on making it possible for the vendor
to close the deal more quickly or more effectively.
• If the vendor needs a quick response, then
the equipment finance company needs the
expertise to rapidly assess credit risk, make
a decision, and price appropriately.
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• The easier and more convenient the approval
process, the more likely it is that the lessee will
prefer the leasing program to the experience, for
example, of getting a loan from a bank.
• In this situation, the end user may not be as
sensitive to a slightly higher cost of financing,
especially if the lessee is comparing the cost of
the lease to the cost of revolving credit, rather
than shopping for a bank loan.
At least two of the strategies described in this
article provide examples of using market segmen-
tation to gain competitive advantage. For the
small-ticket, high-volume specialist (see table 1),
the competitive advantage comes from conven-
ience and speed. The smaller the transaction, the
more critical speed becomes, and the goal is to
approach the point-of-sale speed and convenience
of a credit card, but with the added convenience
of paying over a longer period of time. For the
sales support partner (table 4), the competitive
advantage comes from the closeness of the
relationship between the vendor and the provider
of financing. The more seamless that relationship,
the easier it is for the vendor to view the lease
signing as simply the final step in the sale.
There are differences in the two strategies: the
small-ticket, high-volume specialist, for example,
may be more likely to decline some transactions
and, as a result, may be just one of the financing
options used by a given vendor. On the other
hand, the sales support partner (captive or not)
may be more likely to accept some transactions
based on negotiated recourse to the vendor
partner. Both, however, have distinct competitive
advantages over traditional commercial lending,
and may be able to earn a premium margin as a
result. Even if competition is fierce enough that
most of the premium is “competed away,” though,
the specialist may still retain an edge because of
this fit. Market specialization has gradually
increased in equipment financing, and the most
sharply focused specialists have created some of
the biggest success stories in the industry.
J O U R N A L O F E Q U I P M E N T L E A S E
I N E Q U I P M E N T F I N A N C E
The clearer an equipment
STEPS TO INCREASING
COMPETITIVE ADVANTAGE
finance company is
The following five steps can help virtually any about the customer
leasing company to increase its competitive
advantage. segments that will be
1. Identify the target market segment(s). approached, the more
No business does everything well; successful
businesses do something better than anyone else. successful the company
The clearer an equipment finance company is
about the customer segments that will be can be in focusing
approached, the more successful the company
can be in focusing resources to gain and increase resources to gain and
competitive advantage in those segments. This
means identifying the types of customers and increase competitive
transactions that have been most profitable,
analyzing why they are profitable, and finding advantage in those
ways to increase the company's value in those
situations. The decision amounts to choosing segments.
customers on whom the business will be focused.
2. Focus business resources on results that
count for the chosen target segment(s).
No business can afford to invest equally in
everything. Competition forces choices. The way
to get better at winning is to get better at picking
the target: literally choosing where and when to
compete. To continue with the example above,
a company that chooses to compete in a small-
ticket, high-volume arena needs low-cost methods
for capturing sales opportunities. A sophisticated,
Web-based front end system may be simply part
of the ante to compete profitably, and therefore
represents an investment that must be made. An
office renovation might be put off another year,
however, because customers may never visit the
office. Building competitive advantage requires
the courage to spend on gaining capabilities that
customers value, and at the same time, the
discipline not to spend on capabilities that are
invisible to, or less valued by, the target market.
3. Remember that market and customer
segmentation are relative.
Once competitive advantage has been achieved,
it can be maintained only with a continued focus
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If the new target on increasing it. Players can examine their
business practices with an eye to getting better at
market segment is developing their competitive advantages. If all of
the competitors identified are focused small-ticket
not a good fit for the specialists, then a particular player succeeds by
getting better at some aspect or some type of
equipment finance small-ticket leasing.
•A particular small-ticket, high-volume
company's current
specialist might combine its advantage in speed
and efficiency with pricing incentives. Recently,
business model, then
equipment finance companies have moved toward
risk-based pricing, for example, as one way to
entering that new
gain an added advantage.
segment will require •A vendor program specialist, on the other
hand, might enhance the seamless relationship
a different allocation with the vendor by dedicating a team within the
business to each major vendor, tailoring the
of resources. origination and servicing of the transaction to the
specific needs of that vendor and its customers.
4. Analyze new market segment
opportunities.
Businesses sometimes fall prey to the idea that
the grass is greener in another market segment.
In fact, new segments do arise, particularly in
technology-oriented industries. Some of those
new prospect segments may have the same needs,
and customers may value the same benefits, as in
existing market segments in which an equipment
finance company is most successful. An example
of that situation has been the success that some
small ticket specialists have had in recent years
moving “up-market” to slightly higher trans-
action sizes.
The key to success, though, is in doing the
analysis. If the new target market segment is not
a good fit for the equipment finance company's
current business model, then entering that new
segment will require a different allocation of
resources. If the needs are different enough, it
might be best to enter that new segment by
defining and building another business unit in
which resources will be deployed in a way more
focused to that segment's needs. This strategy has
been used successfully by the largest equipment
finance companies in recent years that have built
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S E G M E N T A T I O N I N E Q U I P M E N T F I N A N C E
— or bought — additional business units with
different competitive advantages in order to enter
new market segments.
5. Understand that success in business is
driven by competitive advantage.
A business succeeds when it wins, particularly
when it does so at a lower cost than what it brings
in. A business wins consistently when customers
prefer it to other alternatives. Whatever causes that
preference is a competitive advantage. In the
equipment finance marketplace today, competi-
tion has intensified, and the players that are
surviving and thriving are those that not only have
a competitive advantage but know what it is, and
work every day to increase it.
Acknowledgments
The author wishes to thank Chuck Thomas of
IBM Global Financing for helping to shape this
article and for his insights on several topics.
Without his patient questions, this article would
not have seen the light of day.
The author, of course, assumes responsibility for
inaccuracies or misinterpretations in the article.
Market strategy is analytical but not an exact
science. Several reviewers suggested that the
article cite specific industry companies as examples.
In fact, the idea of the article began with observa-
tions of the ways that particular industry partici-
pants were winning in the marketplace. All
company examples, however, have been removed
for two reasons:
• Many of the author's insights were gained in
confidential conversations with managers and
executives, and thus cannot be attributed to
specific companies without violating confidences.
• Some of the author's insights are undoubtedly
off target. In these cases, citing company names
could prove embarrassing, if not libelous.
On the other hand, if the ideas in the article
make sense to the reader, listing examples should
not be difficult for any reader who participates in
the equipment finance industry.
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Endnote Joseph N. Lane

1
The Fables of Aesop, selected and illustrated by David
Levine, translated by Patrick and Justina Gregory
(Boston: Gambit, 1975), p. 68.
Annotated References
Moore, Geoffrey, Crossing the Chasm (New York:
HarperCollins, 1991).
This book was intended specifically for technology-
oriented companies, addressing the difficulty of moving
innovative technology into the mainstream marketplace.
In the process of addressing this problem, Moore
provides a powerful definition and approach for
accomplishing effective customer segmentation.
Porter, Michael, Competitive Strategy: Techniques for
Analyzing Industries and Competitors (New York: The Free
Press, 1980).
Porter, Michael, Competitive Advantage: Creating and
Sustaining Superior Performance (New York: The Free
Press, 1985).
Porter is the guru of competitive advantage. Although
his work may be more appealing to consultants than
practitioners, the analytical thinking processes taught in
these books provide a great foundation for thinking
through strategic choices. Allow time to digest.
jlane@idsgrp.com
Joseph N. Lane, an account
manager with International
Decision Systems Inc., has
more than a decade of
experience as an observer of
the equipment finance industry, including three
years with the Equipment Leasing Association
of America as foundation manager and director of
professional development. He is the author
of a handbook on strategic marketing as well
as a series of articles on strategic thinking and
group process, and he has facilitated strategic
planning processes for businesses in three different
industries. He holds a MA in teaching from Brown
University, Providence, R.I. Mr. Lane also is a
member of this journal's editorial
review board.

Treacy, Michael and Wiersma, Fred, The Discipline of

Market Leaders (Reading, Mass.: Addison-Wesley, 1995).

Treacy, Michael, Double-Digit Growth, Portfolio

(Penguin), New York: 2003.
Although the first book may be considered a simplified
summary of Michael Porter's most important principles,
the second book takes the practical guidance a step
further. Double-Digit Growth, which was provided to
participants at the ELA 2003 Annual Convention,
provides a useful model for evaluating new market
opportunities. Treacy identifies what he calls the five
disciplines for growth, each of which addresses a
particular “place” and tactics required to grow into
that place.

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