Market Segmentation: An Easy Way to Start.

A bank I am familiar with created a very simple market segmentation concept that it called the "Red, White and Blue System." The colors simply refer to three types of customers served by the bank. Using an MCIF as augmented by an appended database of lifestyle information, the bank divided the base into three groups: Red customers are borrowers or households who by virtue of their product usage profile and appended data are mostly likely to be interested in loan products. Similarly, white customers are most likely to be investors; and blue customers, transactors, or people who by virtue of their situation use the bank primarily for checking and checking-related services.

The red-white-blue labels could be anything, but it might be well to stay away from descriptors such as A-B-C or 1-2-3, which can carry preferential overtones. The beauty of the red-white-blue system is that it focuses on the customers. Of course, the profitability of each customer household and segment can be easily measured and tracked, but the marketing initiatives can now be dialed into the customer experience.

For example, the red/borrowers can be examined through a focus group and surveyed to ensure that the bank's loan products work. The white/investors can be coded to receive monthly newsletters on investment topics and special rate offers; and, the blue/transactors can be offered Internet banking, overdraft protection or other new products that allow them to get more and better information.

The next step: target marketing

The result here is that a bridge has been created between the bank's objective of improving its profitability and the customers (and bank employees) who will actually bring it about. The bridge is the customer relationship management (CRM) model for this bank. It most certainly will include some kind of central information file enabling access to customer data, but this is not the main focus. The driving impetus is a simple customer segmentation scheme based on the behavior and need of the customer. Once the simple concept is in place, it becomes much easier to envision a variety of well-developed marketing initiatives aimed at target groups.

Once the database is coded into the red-white-blue clusters, which is related to the bank's broad product offerings of loans-investments-transactions, a "Rosetta Stone" has been created. This translator will allow the marketer to implement an entire arsenal of marketing weaponry.

For example, now that customers are connected to product-usage habits, it becomes much easier to think through strategies to improve profitability. If the blue/transactors are the least profitable, then repricing core transaction accounts might make sense. Packages protecting or encouraging the borrowers might get factored in, if the "red/borrowers" are the most profitable type of customers. There are many possibilities here, but the key is a strategic linkage between the bank's product offerings and it customers.

Geographic and lifestyle coding

Once the MCIF households are coded with product usage codes (red-white-blue), it makes sense to "geo-code" and "lifestyle code" them also. Geo-coding connects the household to the real world--i.e., branch locations--while lifestyle coding allow the marketer to gain further insights into the customer's behavior and broader product usage.

This information--households organized into product usage clusters (with profitability calculated), supplemented with geo-codes and lifestyle codes, will allow the marketer to help the bank implement virtually any objective that might come along, whether it be better direct mail, branch expansion or contraction, branch sales development, deposit acquisition, loan growth, fee income growth or whatever.

If you can identify which customers might need which of your services, where they are located and then communicate with them, you are 90 percent of the way toward a complete CRM system.

L. Biff Motley is president of Motley & Associates, New Orleans.