Critical Mass Could Pay Off for Service

Former loan officer Mitch Lichterman is banking on his company’s concept to attract the investors he needs to build Mortgage Saver Inc. into a major consumer brand name.

He’s been shopping his business plan around since spring, hoping to raise the capital he knows it will take to pursue the individual homeowners he wants as customers for his early mortgage-payoff service.

“I believe if we were funded, we could become the Priceline.com for this particular concept,” said Lichterman, a mortgage loan officer at Home Savings of America and Washington Mutual before launching his online business 18 months ago.

But raising money is rarely easy. Lichterman spent hours e-mailing investment bankers and venture capitalists, receiving just two replies, he said. He ended up rejecting an offer from an investment banker and an infomercial company to take his company public. He has tapped outside experts for entree to money sources and is trying to learn as much as possible about raising capital.

In the meantime, he and his small staff have largely sold the prepayment plan, which can trim a loan holder’s interest tab by shortening the life of a loan, through mortgage brokers and regional banks.

Mortgage Saver charges customers a $395 setup fee and $2.95 per payment. Payments are electronically debited from a customer’s checking account biweekly or semimonthly. By the end of a year, the customer has made the equivalent of 13 monthly mortgage payments and is on the road to paying off the loan early and building equity a bit faster.

Of course, anyone with the discipline to make additional payments can do the same thing on their own. But as Lichterman puts it: “We kind of compare it to Jenny Craig. Everybody could go on a diet. They know what to do. But they need help.”

It’s a good concept, said consultant Naj Allana of Deloitte & Touche in Los Angeles. So good, in fact, it’s vulnerable to being co-opted by big banks or mortgage lenders that have the deep pockets and trusted brand names to quickly capture thousands of consumers.

Bank One, for example, recently offered the same service, with no setup fee and a lower debit charge, to a group of homeowners in Arizona. There are a smattering of other companies offering the same service, often in conjunction with a bank.

“Because it’s a commodity business, it’s essentially about costs,” said Allana, who leads the e-business consulting practice for the Pacific Southwest Management Solutions unit at Deloitte & Touche. Mortgage Saver has “to be able to provide the service very cost-effectively,” he said.

To do that, the company needs to build a critical mass of subscribers relatively quickly in a segment of the market not being targeted by competitors, he said.

A larger customer base would also be more attractive to potential investors, the consultant said.

Allana suggested that the company focus on building its institutional business by targeting small and mid-size financial entities. In addition to building mass more quickly than a retail push, partnering with a local bank or credit union to offer the Mortgage Saver plan to the institution’s customers will mean lower customer acquisition costs. Also, spikes in the volume of responses will be less sharp and less likely to overwhelm Mortgage Saver than if the company made direct appeals to consumers through a radio or television ad campaign.

Credit unions could be a good match for Lichterman, Allana said. Their relatively smaller member numbers may not be attractive to bigger players but would give Mortgage Saver a solid boost.

Credit unions and other small institutions are also less likely to invest in the technology and infrastructure needed to offer the prepayment service. Lichterman could offer his service either on a private-label basis (the credit union’s name is on the marketing material) or on a co-brand basis (both the companies’ names are used).

“If he picks up 100 new members here and there, that’s pretty good,” Allana said. “The big players want to pick up thousands of members each time.”

The biggest hurdle will be getting the first few to sign up, he said. Once Mortgage Saver has those in the bag, the next 25 or 50 will be much easier.

The question Lichterman faces, particularly in the beginning of negotiations, is, “Would the credit union or the bank risk their own customer relationship with somebody they don’t know,” Allana said.

To help address that concern, he recommended that Lichterman further work his personal network in the financial community, and that of his staff members and independent contractors, many of whom have banking ties. That’s a more effective way to garner business than, for example, advertising as an unknown entity in a banking trade publication.

The effort to boost customer numbers needn’t take a long time, and shouldn’t, Allana said. A few months, not years, is the time period the company should be working within.

“There is an opportunity [to be a niche player] but they need to move quickly. . . . His focus needs to be just on sales,” the consultant said.

Lichterman said he is already talking with several potential institutional clients, including two e-businesses.

An institutional sales focus doesn’t mean Lichterman should abandon efforts to raise money or to expand his individual customer base, Allana said. But the consultant did suggest several adjustments in the company’s strategy in those areas.

First, revise the business plan, which Lichterman did not write, and sharpen its message, Allana said. Writing an effective business plan can be difficult, but the resulting increase in investor interest and improved business operations are worth it.

Mortgage Saver’s current plan, which focuses on expanding the company’s retail base, is cluttered with so many ideas that the main message is lost, the consultant said. He recommended identifying the key audience for the business plan and the key message Mortgage Saver wants to get across. Deliver that message in a focused business plan that includes an executive summary, he said.

“He needs a crisper marketing message,” Allana said.

Second, consider different funding sources. Venture capitalists, for example, look for an exit strategy when they consider investing in a business, the consultant said. The exit strategy usually takes the form of an initial public offering--selling stock in the company to the public, or an acquisition. He doesn’t see Mortgage Saver as an IPO candidate and cautioned that venture capitalists may not be easily attracted to the company.

An alternative route would be the very financial institutions, including mortgage origination or service companies, that Lichterman should target to build his institutional sales.

“You want to identify funding sources where there is a strategic fit,” Allana said.

A regional bank, for example, might be interested in funding the business as part of a strategy that would allow it to offer Mortgage Saver to its own customers and to market it to other financial institutions, as well, he said.

Third, when funds are available, try a limited direct-to-consumer approach. Given the costs involved with building a broad market brand, it’s unlikely the company will be successful trying to do so, the consultant said. But by picking consumer segments that are most effectively reached through highly targeted marketing, such as an infomercial, the company could build additional business at a relatively low cost.

Lichterman has investigated developing an infomercial, but the cost has been a constraint. Once the company has the funds and the infrastructure to handle the increased volume such an appeal might generate, an infomercial, even a short, five-minute one, could be effective, the consultant said.

“This is a product that needs to be explained. It gives you a chance to create some credibility by explaining the process and how the dollars work,” Allana said.

In the future, Lichterman could investigate outsourcing his customer service operations as an additional money-saving step.

Costs should remain a primary concern for the company, Allana said. Although the market opportunity is large--there are millions of new and current mortgages--Mortgage Saver is a small player with limited capital. By choosing its targets wisely and keeping an eye on customer acquisition costs, it can build business to a level that allows it to compete on price.

“They have to be at a point where they have some efficiency built into the process, where they have some economies of scale,” the consultant said.

“They can’t afford to be a small player long term,” he said.

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This Week’s Business Make-Over

Company: Mortgage Saver Inc.

Headquarters: Los Angeles

Type of business: Early loan-payoff service

Status: Corporation

Owner: Mitch Lichterman

Founded: February 1999

Start-up funds: $250,000 in savings

1999 sales: $150,000, estimated

Employees: 3

Independent contractors: 4

Customers: Individuals, financial institutions, mortgage brokers

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Main Business Problem

How to raise capital to jump-start business plan.

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Goal

Increase sales and become a recognized brand name.

Recommendations

Focus on institutional customers.

Monitor customer acquisition costs.

Rewrite and clarify business plan.

Consider alternative sources of funding.

Try a limited direct-to-consumer approach.

Meet the Consultant

Naj Allana leads the Deloitte & Touche e-business consulting practice for the Pacific Southwest Management Solutions unit.

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Cyndia Zwahlen can be reached at cyndia.zwahlen@latimes.com.

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