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Sorting out customers: a valuable technique for enhancing top-line revenue growth is to classify and pigeonhole your customers by various categories and demographic subgroups--and then focus on meeting the specific needs of these clusters.


Research has shown that Hispanic and Afro-American customers prefer a fragrance in their laundry detergent. Using this information, Procter & Gamble developed a new fragranced detergent and marketed this product in communities that were heavily Hispanic or Afro-American. The result was that Procter & Gamble displaced its competitors, Colgate-Palmolive and Unilever, in this product category among these ethnic groups. This is how market segmentation works in the retail industry.

We can define market segmentation as "the recognition of the diversity in demand among customers, and the clustering or partition of their needs into reasonably homogenous subgroups, as well as the rational alignment of products/services/marketing/delivery channels to meet customer's coherent needs." Market segmentation is the opposite of trying to be "all things to all people," or the "one size fits all" approach.

Market segmentation, therefore, provides fresh information that is useful for marketing (including timing of promotional efforts), new product selection and pricing. Market segmentation also helps to uncover new and emerging customer needs that currently are ignored or are not being adequately met. If you am selling investment and financial advice, you might want to use market segmentation to identify those prospects who are recent beneficiaries of life insurance--or winners of lotteries. Resistance to buying these products is lowest among prospects who have recently received a financial windfall (the equivalent of targeting a community in winter for the sale of snow shovels, especially when a snow storm is forecast).

Segmentation, in short, allows you to detect untapped or emerging market opportunities, so that a differential advantage can be gained over competition--by spotting trends/microtrends, such as second-home buyers, working retired, commuter couples, and those in need of tax refund or tax anticipation loans (a most profitable product offered by a California bank).

We also know that segmented focus is likewise applied, with excellent success, in our political campaigns. Hence, customer segmentation helps to enhance top-line revenue growth, which is as critical as bottom-line cost reduction--even though most of senior management focuses on the latter.


Research at the Harvard Business School on strategy at the business unit level shows that businesses with a higher share of their target market segments are more profitable than those with low shares. Target market is that part of the total market that an institution chooses to focus, making a concerted marketing and promotional effort by offering products and services tailored to that segment, in order to maximize profits and growth. Large shares provide an institution: economies of scale in processing, servicing, marketing and other business functions, and lower costs via greater experience curve impact and bargaining power with service providers such as technology vendors. This result is not a simple matter of large businesses earning greater profits than smaller businesses. HBS research on business strategy, for example, also shows that large banks with a small share of a large market segment are generally less profitable than smaller banks with a larger share of a much smaller target segment. What matters most is not how large a frog you are, but how you rank in your particular puddle. Another relevant research finding in marketing is that by trying to drum up revenue growth of a business through increased marketing of a low-quality service will wind up in further depressing its profits, since customers will become more aware of how bad the service is.


Segmentation is not differentiation. Segmentation is based on the demand side of the target market, which requires tailoring of your products/services and supporting needs to various clusters of customers' product and service needs, since your target market consists of heterogeneous groups of customers, with different combination of such needs. In other words, segmentation is a merchandizing strategy that strives to customize products and services needs to each slice of the total market pie, ensuring greater customer satisfaction, helping to build a more loyal and secure customer base. Differentiation, on the other hand, seeks to secure a larger share of the total market space, without regard to its component segments.

It is important to remember that cost information will be critical when implementing a segmentation strategy. This is because the upper limit to which segmentation can be carried out is largely determined by processing and servicing costs, and because segmentation is a strategy of dividing markets in order to conquer and dominate those sections of the market worth cultivating. Examples of segmentation include state, national and international editions of major newspapers--The Wall Street Journal, The New York Times. A bad example of the misuse of segmented focus is the subprime mortgage market, causing dire consequences by failing to warn customers of the risks involved by lax regulators and security rating agencies such as S&P, Moody's, and sloppy underwriting of loans by loan originators.


Key questions to ask in planning a segmentation strategy are:

* Who are your customers? Who do you wish to have as customers?

* What needs and wants of customers are you now satisfying?

* What channels of distribution are you currently using?

* What channels should you be using to reach your target segments?

The ultimate objective is to marry your customer/prospect list to your institutions products/services mix. The quality of answers to these questions hinges on continuous input from trustworthy and relevant market research, and careful planning and analysis.


Segments selected should be definable in terms of the variables management can manipulate and control meaningfully.

Demographic segmentation in the consumer segment is based on income levels, family size, education, life-cycle stage, marital status, ethnic characteristics, socio-economic variables and so forth. In the commercial market: size of the firm, industry, market maturity, technology sophistication and so forth. Note, however, that in some cases, demographic segmentation may be misleading, since not all wealthy, young, and generation Y members behave similarly. Other demographic groups include the mass market, the "lunch bucket" crowd (as defined by TCF Financial Corp., Minneapolis), the mass affluent group (as Citicorp defines it in Asia), the payday loan customers. Note that one of the most progressive and profitable banks we worked with derived most profits from customers needing "tax-anticipation loans," compared to all other products. Social networking sites such as MySpace and Facebook offer a variety of information about their users who could be your existing or prospective customers. This information includes demographic profiles, interests, preferences, hobbies, value systems (fiscally conservative or liberal), financial sophistication--information that you can use to design and develop marketing and promotion programs. (These sites allow you to look through their membership lists by geographic areas.) By using these sites, you can determine which products to promote to specific segments, as well as which pricing strategies and reward programs to develop.

Behavioristic segmentation. This approach is based on the knowledge, attitudes, interests, opinions and so forth, of the customer, which in turn, determines how customers respond to actual products/services or their attributes. It may also include differences in the purchase occasion, for example, credit card use during business versus vacation travel, benefits sought. Other factors to consider, for example, are service quality, management expertise, buying behavior, loyalty to a particular brand or institution. It is also important to underscore that a given customer may in fact shift from one segment to another at different periods in their life cycle, i.e., from borrowers in early life cycle, to depositors in later life cycle, based on differences in needs.

Psychographic segmentation is based on lifestyle characteristics, which explain why people behave or believe the way they do. It also refers to personality traits, values, habits, interests and mores. Psychographics, in short, identifies the customer's orientation towards work, play, consumption and so forth. Furthermore, activity preferences such as hobbies, work, personal traits, create differences in financial planning needs for those who are security-versus risk-oriented.

Benefit segmentation is a form of behavioral segmentation based on causal factors, as opposed to descriptive factors, based on the benefits or rewards the customer is seeking in the purchase decision (example: long-term versus immediate benefit). In short, the existence or true credibility of a market segment is based on the assumption that benefits or clusters of benefits sought and channel preferences of the customer determine different segments.

Referral value segmentation (word-of-mouth sales). This approach is based on the principle that what your customers feel about your bank and what they will tell others about your services can influence revenues and profits, excluding the marketing costs involved. This approach was successfully tested at the financial services industry by Professor V. Kumar and associates at the University of Connecticut. In this segmentation method, customers are classified based on their referral value and the value of their purchases. They also found that some of your most loyal customers are not always willing to promote your bank's services as much as average customers. In short, managers can use this data to estimate both customer's referral value and life time value, which they may supplement with demographic profiles, to maximize your bank's chances for greater market penetration and organic growth.


Segmentation is also a viable strategy when your market position is weak or when you need to fortify your position in a given niche or when you need to plug market holes. Segments should also be defined in terms of the variables that management can control. However, always remember that you must solidify your position in your core markets to start with, before branching out into a segmentation strategy. A useful operating rule when segmenting customers is, first, to aggregate customers by similarity in buying behavior, second, within each such group, identify subgroups based on similarity in personal characteristics that differ in terms of product/ services purchased.

Segmenting your target market is a strategic decision, since your target markets are not fixed, but are constantly changing based on life-cycle stages and differences in product and services needs of customers, as well as competitor's strategies, and your bank's capabilities. Other reasons for segmentation include creating a perception of a new or improved service. At other times, it provides a wanted benefit to the customer, for example, for customers more concerned with service than price, or long-term versus short-term goals.

We should also be cognizant of organizational rigidities that can constrain, for instance, a product manager reporting to a marketing manager from taking the necessary segmentation decision when detecting changing customer preferences in order to prevent loss of market share.

Market segmentation, in a nutshell, is philosophy of management, with an intense focus on your key customers and their rapidly changing needs and wants, in an emerging and intensely competitive global market place, facing a rapidly changing digital environment.

How Two Banks Keep on Top of their Customer Segments

We asked two bankers about the successful approaches they had used to sharpen the focus on the wants and needs of specific customer segments. Their responses are described below.

Bill Frisbie, senior vice president, market segmentation strategy, BB&T Corp., Winston-Salem, N.C. (assets: $117 billion)

They utilize extensive "voice of the client research," which includes customer satisfaction surveys, mystery shopping, attrition research and focus groups, which includes front-line personnel, relationship managers, financial consultants, branch managers, tellers, to validate programs and strategies. They also utilize pilots and tests when launching major initiatives, to focus programs around client needs and wants prior to rolling out the programs to the entire bank. Once the programs are implemented, they conduct extensive back-end analysis of each major program to track results, to determine how successful they are, and if they need to be modified to optimize results--based on the feedback from customers/service personnel. BB&T has employed most of the segmentation methods described in the main article.

In the retail sector, they classify customers based on their deposits/assets with BB&T, age, and behavior-based classification. In the business sector, segmentation factors utilized include the size of loans/deposits with the bank, and firmagraphics--size of the business, number of employees, SIC codes. They have used client segmentation software to analyze internal marketing databases, using analytical tools from SAS for analysis, databases from Claritas and Personix.

Jason Korsage, vice president, public relations, TCF National Bank, Wayseta, Minn. (assets: $14 billion)

They have successfully employed the concept of a "best fit strategy" to implement demographic segmentation in the consumer (retail) and small-business sectors, in the Minneapolis and St. Paul markets, using focus groups and listening to the customer. In essence, they select a targeted market area by geography, or other appropriate criteria, to execute this strategy, to achieve greater market penetration, by direct marketing and by mail, by selling convenience (open seven days a week, 8 a.m. to 8 p.m., with shorter hours on Sunday). Once a strategy is successful, they extend this approach to others areas and compare the results to determine if any modifications are needed.

In the retail market, this research enabled the bank to reduce the number of checking accounts to three: (1) Totally free checking, with no minimum balance needs, and no interest for 10w-income customers; (2) Power checking, for the middle-income segment that offers some interest for those with up to $25,000 on average balances; and (3) Premier checking, which offers higher interest for customers with average deposit balances between $25,000 to $100,000. What works in one geographic segment is compared with other geographic areas as well to refine the results.

In the small business sector, they also apply the concept of best fit strategy. Account managers interview small-business owners in their offices, and receive multiple perspectives from different customer groups. The small-business sector is classified into three segments: One, those with $100,000 to $2 million in revenue are offered free checking, debit cards. Two, the SBA- level customers with $500,000 and above and up to $20 million in revenue. Three, with over $20 million in revenue. They also market the deposit business to each segment in the same fashion.

Chicago's Foster Bank: 20 years of marketing to ethnic segments

Banks familiar with marketing to the general population have sometimes had difficulty communicating with a new ethnic community.

Targeting an ethnic group is nothing new to Foster Bank (assets: $530 million), Chicago. Founded almost 20 years ago to serve the city's Korean-American community, the bank has used the lessons it learned from serving its primary market to reach out in recent years to other ethnic communities.

The bank was created by Korean businesspeople with the goal of providing both retail and commercial services to the neighborhood sometimes referred to as "Little Seoul," on the city's northwest side. The bank knew that the first way to engage an ethnic community is to literally "speak its language." At its founding in 1989, the bank had more employees who could speak Korean than could speak fluent English, according to James G. Gorst, senior vice president and chief operating officer.

The bank networked extensively with Korean community leaders, sponsored community events and built relationships with respected community organizations. The aim of these efforts was to attract the personal referrals that are so crucial to winning over an ethnic segment. Bank managers also learned to adjust business practices to meet the unique needs of Korean culture. For example, since many Korean households consist of close-knit, extended families, loan officers learned that they have to be understanding when dealing with a Korean family. Sometimes, it made sense to include the income of other members of the extended family when determining loan eligibility for an individual.

Over time, the financial institution became successful and expanded to another location not far from Little Seoul.

In recent years, the demographic situation started to change. As the original Korean immigrants prospered, they resettled to the city's northern and western suburbs--away from the Foster branches. Other ethnic groups began to move into Little Seoul. Second-generation Koreans no longer had a need for a Korean-speaking bank. Since English was their primary language, younger Koreans felt free to patronize any Chicago-area bank.

"We didn't make the decision to change," says Jacob Silker, marketing officer. "Things simply changed all around us, and we had to adapt."

Foster evolved to maintain growth in two ways. First, the bank began planning to offer new products and services designed to appeal to the second-generation Koreans. Online banking, bill pay, mobile banking, e-statements, gift and debit cards have little interest to first-generation Koreans, but they are of greater importance to the second generation. The bank began requiring that new employees speak fluent English as well as Korean.


The second thing that bank did was to follow its market out to the suburbs, where it opened five new branches. These locations, however, created a fresh set of challenges. Since the suburban Koreans lived in scattered areas, it was clear that Korean customers alone could not sustain all those branches. Foster had to reach out to non-Korean customers.


Since the bank started by serving a niche market, it expanded by focusing on other underserved ethnic segments--Polish, Russian, Pakistani, Chinese, Japanese. The first step was to ensure that at least one fluent speaker of the language of the targeted ethnic group was available at the needed branch. Next, the bank reached out to the targeted segment through sponsoring events, attending social functions and taking a leadership role in their communities.

As always, the bank learned as much as it could about targeted segments through research. Managers conducted surveys. They also queried workers. "Talking to frontline staff is an excellent way to identify customers' needs," says Silker. "Customers may voice their opinion and never spend the time to fill out a survey. Asking an employee, 'What can we do to serve our customer better?' 'What do you think we do wrong or right?' will not always get a tangible response. 'What do you hear most often from our customers?' is a direct question that takes the weight and responsibility off of their shoulders. Some employees are afraid to tell you what they think, but will be more than happy to tell you what the customer thinks."

Simply advertising in the language of the targeted group is not sufficient to draw in prospects, notes Silker. You also have to learn their unique lifestyles, activities, beliefs, attitudes and financial needs. "It can be costly to learn these, but this expense is repaid with appreciation and loyalty."

One wide-ranging campaign to draw in non-Koreans involved a simple offer for a higher-rate certificate of deposit. "Because of the rate, we were able to attract many non-Koreans," says Gorst.

The bank started advertising--for the first time--in English in a suburban weekly newspaper. "We've had great results with that," notes Silker. For its latest branch opening, the bank also did an English-language direct-mail postcard.

The English-language campaigns may reach and attract nonethnic customers, but that is not the primary intent. Gorst notes that in some ethnic communities--Russian is an example--there is less need to communicate with the audience in their ethnic language than it is in other groups.

The bank has no illusion that marketing to other ethnic groups is anything more than a slow, painstaking process. "It will take a tremendous amount of time before potential customers really feel that we are more than just a Korean bank," adds Gorst.

--Walt Albro

Thomas Thamara is the principal of FSIC Associates, North Andover, Mass., a financial industry consulting and research firm (formerly part of a Harvard Business School banking program). He is the author of a book entitled, "Bankers Guide to New Growth Opportunities" (Prentice-Hall).
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Title Annotation:Market Segmentation
Author:Thamara, Thomas
Publication:ABA Bank Marketing
Article Type:Cover story
Date:Jul 1, 2008
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