In last week’s post, we discussed the “Network Effect” – describing what it is, why it can benefit your Retail Branch strategy in a single market, and how to get started.

This week, we’ll go beyond the single market notion of the “Network Effect” and discuss an expanded concept. We’ll debate whether or not it makes sense to enter a new market and how the Micro Branch plays a role in this decision. Since this new, expanded version of the Network Effect doesn’t really have a name, we’ll call it the “Out of Network Effect.”

Many times, when we’re engaged in a Multi-Site Branch Growth Plan consulting engagement, we discuss geographic expansion strategies. A scenario always arises that proves to be a bit of a conundrum.

When we assess large, county-wide, or even state-wide geographies in an effort to find the best Trade Areas for branch expansion, there are some markets where the data implies a branch makes a lot of sense. Then, there are other Trade Areas that do not justify a fully staffed standalone branch.

This is where the Micro Branch comes into play – especially when considering the Out of Network Effect.

To further explain, I’ll use a recent example from a current client where this played out. I’ll be as specific as I can while maintaining our client’s privacy.

We recently executed a Multi-Site Branch Growth Plan where we looked at 4 cities across 4 counties. Each city represented the county seat, with one of these cities being a large metropolitan area. The remaining 3 cities were rural outposts with residents either working locally or commuting into the “big city.”

City A represents the large metropolitan area, where our study indicated the optimal number for the Network Effect at 6 branches. City B is their Headquarters branch, with a total Network Effect need at 3 branches. City C is a net new market, with a total Network Effect also at 3.

This is where the conundrum arose with City D. The data show that many employees and customers of this company live in City D. Yet, based on our Loans and Deposits forecasting, the data does not support a full standalone branch in City D.

But – the data does support a Micro Branch.

Executing a Micro Branch in City D is a win on several levels:
  1. It takes a cost-effective approach to branching, thanks to the smaller footprint and lower overhead costs of a Micro Branch
  2. It serves the needs of local customers, regardless of reduced loans and deposits compared to larger, neighboring towns
  3. It will aid in the Network Effect, but in this case, benefiting from the Out of Network Effect

Here’s why a Micro Branch makes sense in this smaller town. If you think about it, the Network Effect states that there will be a total lift in sales (Loans & Deposits) in a given market by adding locations and aiding total saturation. This economic philosophy typically works for a confined market.

When you expand this to a rural, multi-county setting in addition to a dense metro market, the theory still holds. People who live in a tightly packed metro market need not venture more than a couple miles beyond their home’s radius. When you live in the country, however, you’re often driving across county lines. Wether it’s for a job, to see family, to get groceries, or visit specialty shops, it’s always a journey.

That’s why we did not recommend a standalone branch in City D, despite the client stating they wanted one. The data did not support it. Since we ran a proforma on a Micro Branch, however, the client got the branch they desired. Not only that, but all other branches in the quad-county analysis benefited from this single Micro Branch. Thus, the Out of Network Effect took hold.

To learn more about Micro Branch strategies and how the right consulting engagement can give you the insights you need, Contact Us today.