Analyzing market potential: if you expect to grow market share, you first must determine the location of the most promising sources of new revenue. This means employing two measures: "share of the wallet" of existing customers and "market potential" of prospective ones.

One frequent business goal is to increase market share. There are three logical ways to capture a greater market share: (1) Secure more business from existing customers; (2) Enter new markets; and (3) Penetrate existing markets to a greater extent.

In order to choose which actions to take, a bank must first know the market potential associated with each approach. This article focuses on ways to assess the market potential of existing customers and prospective new ones. (Note that the methods of assessing new markets call also be employed in examining the potential in existing markets.)

More business from existing customers

To increase revenue, it is more efficient to grow sales with existing customers than to obtain new ones. A bank normally spends about $350 to attract each new customer.

The idea of determining the sales potential of existing customers orignally grew out of customer satisfaction research. Having customers who are satisfied with a bank overall does not necessarily mean they are satisfied with all of the bank's offerings. A customer might be very pleased with a bank for basic products such as checking. However, customers would never consider using the bank for investment activities. This is obviously a lost opportunity for the bank.

Realizing this situation led to the incorporation of "share of the wallet" into customer satisfaction research. "Share of the wallet" research asks how much of the customers' money the bank has.

Measuring "share of the wallet" periodically in customer satisfaction studies allows a bank to assess how well it is doing in capturing more business from its existing customers. Monitoring "share of the wallet" is especially pertinent to banks that are positioning themselves as total financial institutions.

Measuring share of the wallet

"Share of the wallet" research examines three types of financial activities:

1. Deposits: checking accounts, savings accounts.

2. Loans: installment loans, credit lines, home equity loans, mortgages.

3. Investments: CDs, IRAs, mutual funds, annuities, stocks, bonds.

For each of these activities, the researchers ask these questions:

* Which is the primary financial institution?

* What specific products are being used at the bank and elsewhere?

* What percentage of dollars are at the bank?

* How satisfied is the customer with whatever institution is being used as the primary financial institution?

Primary financial institution

An initial question in a customer satisfaction survey may be "Which is your primary financial institution?" This question is asked again in the "share of the wallet" section of the survey under the categories of deposits, loans and investments. Seeing what percentage of customers considers the bank to be their primary institution overall and for each of fine three financial activities provides insight into the position the bank occupies in the customers' minds.

Your products vs. the competition's

The question on products being used at the bank versus other institutions reveals business that is going to the corn petition. The results of this question will show where the bank is strong and weak from the customers' perspective. (See sidebar entitled, "Where Do You Have Your Deposit Products?")

Where Do You Have Your Deposit Products?

A question related to deposits would look like this:

What specific products are your using for deposits at ABC Bank versus
elsewhere. Check all that apply.

                 ABC Bank   Elsewhere
Checking            []         []
Savings             []         []
Christmas Club      []         []

Note: Table made from bar graph.

Percentage of dollars at your bank

The central measure of "share of the wallet" is the percentage of the customers' dollars the bank has. Tracking these percentages over time offers the bank a powerful tool in assessing its ability to capture more of its customers' business.

Of course, when customers report the extent to which they use the bank, they are estimating. Partly for this reason, the percentages used on the survey are given as ranges. (See sidebar entitled, "What Percentage of Dollars Do You Have at Various Financial Institutions?")

What Percentage of Dollars Do You Have with Various Financial
Institutions?

A "share of wallet" question would look like this:
Approximately what percentage of your deposit dollars do you have at
ABC Bank?
           ABA Bank

0%           []
Under 5%     []
5-24%        []
25-50%       []
51-75%       []
76-99%       []
100%         []

Note: Table made from bar graph.

Notice the percentage intervals are not equal. The "0 percent" and "100 percent" categories are essential since these are customers you absolutely have or do not have. The "under 5 percent" category is also important bemuse it shows minimal usage of the bank for that financial activity.

Satisfaction with primary institution

The final "share of the wallet" question addresses satisfaction with the primary financial institution for the financial activity. Of course, this could be an restitution other than yours. (See sidebar entitled, "How Satisfied Are You with Your Primary Financial Institution?")

How Satisfied Are You with Your Primary Financial Institution?

A "share of wallet" question dealing with customer satisfaction would
look like this: How satisfied are you with whichever is your primary
financial institution for deposits?

Very Dissatisfied                                  Very Satisfied

1               2               3               4               5

Note: Table made from bar graph.

Since the primary institution for the financial activity is known, a little data analysis allows you to compare satisfaction levels with your bank to those with the competition.

Assessing potential in new markets

While increasing the relationship with existing customers is one approach to business growth, another obvious strategy is to increase the number of branches. The critical question is where to locate the new branch. The market potential of a new site is an important component of this decision.

Market potential in this situation is assessed using:

* Secondary data: Data that already exists, such as demographic U.S. Census Bureau data.

* Primary data: Data that is collected for the project, including personal and telephone interviews.

Secondary data

Whether you are looking for sites with potential or you have a particular site in mind, starting with secondary data is an efficient use of resources. The secondary data used most often is Census Bureau data. The Census Bureau's website offers access to a wealth of demographic data (www.census.gov) If you are unable to locate the data in which you are interested, the bureaus' "help" function enables you to send e-mails to a responsive member of the Census staff

For site planning purposes, Census data is available at the municipal, ZIP code, or county level. A problem with this is that rarely do you anticipate a branch pulling customers from areas this large. Our research has shown that nearly three-fourths of consumers use a branch that is within three miles of their home. An alternative to using Census data is to purchase data from a for-profit company. Using Census data, these companies can produce demographic information for a designated area surrounding the proposed site. An example of this is obtaining data for concentric circles of one, three and five miles around the proposed location.

Another advantage to these companies is they are often associated with a credit bureau, which gives you access to financial as well as demographic data. Demographic projections for years between the decennial Census are also available from these sources.

Measuring morel potential

Typically, a bank is interested in finding areas characterized by growth and at least moderate affluence. Other criteria for evaluating the potential of an area may be appropriate. The exact criteria to be used depends upon how the bank is being positioned. For example, a bank may be more interested in targeting consumers with moderate rather than high incomes.

One of the first factors to examine when assessing market potential in a new area is the size of the population. Most banks have a sense of the number of customers that are necessary to have a successful branch. An example of a recent bank study: Ten different areas were examined to identify one or two that offered significant market potential. The areas were initially selected because of the size of their populations. Upon looking at actual and projected population changes, five of the 10 lost population and were projected to continue losing population. They were immediately removed from further consideration.

An approach when comparing multiple possible areas is to rank each indicator of potential using the criteria of growth and financial status. In the same study mentioned above, 16 indicators of market potential were used. Assigning ranks to the 10 areas for each of the 16 indicators simplified the task of determining which areas had the greatest potential. The rankings were organized into a chart with the 10 areas listed down the side and the 16 indicators across the top. It was thus relatively easy to see which areas warranted further inspection.

Assumptions must be made when deciding how to rank areas on the indicators. This can be seen in ranking areas by age distribution. Imagine you have data on the percentage of persons in an area by the categories of "15 to 24," "25 to 44," and "45 to 64." What age category should be used as the criterion upon which to base a rank? In this case, the percentage of persons between 25 and 44 was used for ranking purposes. Research has found that this age category is the life cycle segment with the greatest number of financial goals, such as mortgages, college savings and retirement investments.

Information on the competition

In addition to consumer potential, you should also consider the presence of competition when evaluating areas. Often, banks will identify an area as having potential only to find other financial institutions have already made the same discovery and have acted upon it. The Federal Deposit Insurance Corporation's website (www.fdic.gov) provides information on the number of banks in an area, the number of offices, size of deposits and market share based upon deposits. This information is available at the county, city, ZIP code and metropolitan statistical area levels. While these levels may not precisely fit the area you are researching, they can still offer valuable insight into the competition.

When comparing areas, creating a ratio for the "number of bank offices per 1,000 people" in the population facilitates comparisons of different size areas.

Primary data

Once several areas have been targeted as having potential, you can employ primary research to provide a further examination of the market potential. Personal interviews with zoning officers or municipal planners will reveal what developments are in the planning stages. These contacts can also inform you of zoning ordinances, comprehensive plans and even available vacant land inventories.

It can aim be productive to conduct a survey with residents of the area. Such a survey can provide insight into the satisfaction and bank loyalty that exists, the images that your bank and the competition have, and what it would take for consumers to consider changing banks. This survey does not have to be very large. The sample size can be as small as 100.

If you use the methods described above, you can discover how well you am doing in capturing the business of your own customers--as well as uncover the potential that exists in new markets.

Market Potential: Which Data to Use

The types of demographic data that are useful when accessing market potential:

* Population.

* Number of households.

* Percentage of owners and renters.

* Year moved in.

* Year structure built.

* Households with related children.

* Age of population.

* Median household income.

* Households at or above poverty level

* Median home value.

* Educational attainment.

* Average travel time to work.

* Occupations of employed population.

* Number of businesses.

Additional data that can be useful in the analysis include:

* Number of competing banks, savings and lending institutions.

* Top psychographic groups.

* Consumer expenditures.

David T. Polk is president of Polk-Lepson Research Group, a marketing research company located in York, Pa. He is an instructor in market research at the ABA School of Bank Marketing and Management, Boulder, Colo. E-mail: [e-mail]