Financial Services: Take Segmentation to the Next Level

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

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

The idea 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, this idea is absurd.

What can financial service firms do to better segment and target their consumers?

The Credit Card Industry is Stepping Forward

The credit card industry is a good example. It's currently facing challenges from numerous directions including changes in the business models of some of the payment systems; a decline in the growth of borrowing on credit cards and an increase in charge-offs; and legal and regulatory changes effective July 2010. The seriousness of these challenges will unfold over the next few years.

As easy credit expanded the credit card industry in the US, in order to bolster growth many card companies focused on alternative channels, new and/or enhanced product development, and customer loyalty. The successful execution of these strategic imperatives required deep insight into the customer. Within financial services, card companies have been a leader in understanding customer behavior, with savvy companies enhancing their insight by 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 credit-worthy consumers switch to their card and use them often, but responsibly, 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 that no company can satisfy the entire marketplace with its products or services and 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.

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.
• Improve competitive positioning Find segments with specific perceptions of your client company relative to the competition.
• 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.
• 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 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 for a mature product.
• Score databases Score databases by assigning market segmentation characteristics to database records and generate prioritized prospecting lists.
• Maximize lifetime values Reposition the product 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; and (4) decline, where the laggard segment would be targeted.

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.

Examples of evaluation variables:

• Occasion/frequency
• Planned behavior
• Attitude/perception
• 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.

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.

In these difficult economic times, the financial services industry is beginning to see the value of such actionable segmentation approaches. With such rich data, new industry leaders will emerge. These new leaders will effectively allocate their budget between product enhancement and development, marketing and communication, and service while determining the proper allocation of investment in new customer acquisition, deepening existing customer relationships, and/or retaining the more valuable customers. Despite the global financial crisis at hand, there are still breakthrough advantages to be had within the financial services sector, and those companies that embrace innovation in a changing world will emerge as clear winners.