Financial Services Take Segmentation to the Next Level

The numbers eighty and twenty are tossed around quite a bit by bankers and other financial services executives; a numerical representation of how the greatest percentage of profits is derived from a small percentage of customers.

The idea, of course, is that if you can identify the wealthiest customers and get the best share of their wallet while saving expenses by serving the rest of your customers through lower cost channels like ATMs and the Internet, you've reached the nirvana of profitability. For some, it is the core of their customer segmentation; personalized private banking for the rich and emerging affluent, and low-touch, self-service banking for just about everyone else.

For others, it is absurd.

Financial services companies are sitting on a wealth of customer data, yet lag behind many other industries in their approach to segmenting and targeting customers. This may be changing. As with any change, it is typically preceded by a period of discomfort. Or, to use marketing terminology, when the gap between the actual state and desired state becomes unbearable enough that action is taken.

The Credit Card Industry is Stepping Forward

The credit card industry is a good example. The credit card industry is facing an unusual number of profound challenges from numerous directions. These include potentially significant changes in the business models followed by some of the payment systems, partly as a result of recent court decisions; new technologies that could disintermediate existing players; a significant decline in the growth of borrowing on credit cards, together with an apparent maturation of that business; and legal and regulatory challenges that could affect how firms do business. The seriousness of these challenges and whether they will lead to drastic changes in the nature of today's payment card industry will be revealed over the next decade.

Few disagree that the card industry is maturing. In order to bolster growth, many card companies are focusing on alternative channels, new and/or enhanced product development, and customer loyalty. The successful execution of these strategic imperatives requires deep insight into the customer. Within financial services, card companies have been a leader in understanding customer behaviors, and savvy companies are beginning to enhance their insight by also understanding their customers' attitudes and the impact those attitudes have on their strategic initiatives.

Making decisions based only upon how customers behaved in the past is like driving a car by looking only in the rear-view mirror. Not only do we need to understand where customers are today, but also where they will be in the future and how we can help them get there. For credit card companies, the goals are to have consumers to switch to their card and activate their new card, and to optimize customer relationships and retain those who are advocates of their brand.

Segmentation efforts that incorporate both behavioral and attitudinal data are making a favorable impact in all these areas. It is at the intersection between behavioral and attitudinal that powerful insight can be obtained.

Marketing Strategy and Process

Segmentation is both a process and a marketing strategy. As a process, it involves taking a heterogeneous marketplace of customer needs and wants and employing an appropriate analytic technique to break it up into smaller, homogeneous groups composed of individuals with similar attitudes, behaviors, or needs.

As a marketing strategy, segmentation addresses two truths: (1) no company can satisfy the entire marketplace with its products or services, and (2) every company needs to prioritize resource allocation and areas of expertise in order to reach their most lucrative (target) markets with the least amount of expense.

A good segmentation study identifies and profiles promising target markets so companies can reach them efficiently and effectively with optimal marketing mixes. It should allow the company to improve its revenue, market share, customer loyalty, or brand position by accomplishing objectives such as

• identifying opportunities to develop products and services that address unmet needs of certain segments;
• establishing or improving positioning and messaging among appealing segments; and
• devising marketing strategies to enhance appeal across multiple market segments

In every case, the segmentation should contribute to profitability because it will promote better understanding and facilitate meeting different groups' wants and needs through tailored products, services, or marketing--and customers will consequently be more willing to pay a premium price for these offerings.

Establishing Goals

To generate a high quality, actionable segmentation solution and recommendations, begin your study by developing a robust hypothesis in the study planning and qualitative phase. This hypothesis should center on how the market may segment meaningfully in terms of dimensions or personas that may emerge and actionable distinctions.

The goals of every segmentation study will be different, but here are some examples:

• Get a clearer understanding of the market Find segments seeking specific benefits from your offer that will allow you to differentiate the offer and make it more meaningful to attractive segments. Discover customers' product purchase and product use patterns (e.g., heavy users, frequent flyers) and identify ideal products for them.
• Improve competitive positioning Find segments with specific perceptions of your client company relative to the competition (e.g., core loyal, prospects, vulnerables, price shoppers, system beaters). Discover their product purchase and product use patterns. Fine-tune marketing and products for greater appeal to chosen segments.
• Shape marketing mix and improve marketing efficiency Uncover segments with distinct attitudes, behaviors, and needs or wants regarding price, deals, advertising, store preferences, etc., to reveal the most promising markets or determine whether any changes should be made to the mix. Segmentation can help avoid sending the wrong message, or sending the right message to the wrong people, and in developing effective and cost-efficient promotional tactics and campaigns.
• Realize economies Concentrate on profitable products or services and determine the most efficient ways of marketing and selling them.
• Simplify marketing efforts Discover if different segments have some characteristics in common (e.g. seek the same benefits, same age, gender, etc.) that make it practical to simplify the marketing effort.
• Identify opportunities (niches) Identify underserved or unserviced markets, which can help you to target less contested buyers with new products or help seek new buyers a mature product.
• Score databases Score databases by assigning market segmentation characteristics to database records and generate prioritized prospecting lists.
• Maximize lifetime values Maximize lifetime value of the product by repositioning during each stage of the product life cycle: (1) introduction, in which innovators would be targeted; (2) growth, where adopters would be targeted; (3) maturity, where the majority would be targeted since innovators and adopters will be now have moved on to other products; and (4) decline, where the laggard segment would be targeted with low prices and inventory clearing deals.

Evaluation Variables

A segmentation study can only be considered successful if it produces actionable results. This includes discovering at least one segment that is attractive enough that your company will want to target it with marketing or product offerings. Therefore, a measure of attractiveness should be built into the study design.

The variables that compose this measure of attractiveness are called evaluator variables. In most cases, an evaluation variable must be something the respondent can control. For example, a respondent has no control over gender but can control the amount they spend on a product or service.

Examples of evaluation variables: a) Occasion/frequency b) Planned behavior c) Attitude/perception d) Amount spent/plan to spend/usage

The attractiveness of segments goes beyond financial measures to include creative definitions of attractiveness. For example, in a recent study, the measure of attractiveness was determined to be a high degree of consistency between a segment's attitudes and the positioning of the brand. Another example of an attractiveness measure would be a company's ability to serve a segment in ways the competition is not; the only way to know if this is the case would be to ask the respondent a series of category-level questions about brand usage and brand loyalty.

If the goal of the segmentation research is to develop an algorithm for scoring databases, the attractiveness of the segmentation can be measured by determining the reliability (hit rate) of the algorithm to correctly assign people to the correct segments. The algorithm will necessarily have a high hit rate if the classification variables are used to profile or evaluate the segments. Caution! Beware of researchers who say they have created an algorithm with a high correct assignment rate if they used the same variables to create the clusters (classification variables) and to develop the algorithm (descriptor variables). This is tautological. As a validity check, the variables used to cluster the respondents should not be used to develop the algorithm.

The credit card industry has begun to see the value of such actionable segmentation approaches. With such rich data, industry leaders are exceeding growth targets and expectations. They have been able to effectively allocate their budget between new product development, marketing and communication, and service. They have also been able to determine the proper allocation of investment in new customer acquisition, deepening existing customer relationships, and/or retaining the more valuable customers. The true leaders have even been able to eliminate spend on the non-profitable clients without ignoring them. And there are still breakthrough advantages to be had both within the credit card industry and in other financial services sectors.