"Listening to the customer" remains the foundation credo at many financial services companies.

Market research, such as customer surveys, focus groups, and the more sophisticated - and expensive - psychographic research, are often seen as the best ways to hear and understand the customer. They are viewed as the key to discovering the next major product or service offering.

Now, however, financial institutions are beginning to understand the limits of expecting customers alone to determine their future product or service requirements.

Fortune magazine recently quoted Barry Diller as saying: "We become slaves to demographics, to market research, to focus groups. We produce what the numbers tell us to produce. And gradually, in this dizzying chase, our senses lose feeling, and our instincts dim, corroded with safe action."

Market research remains important but by itself cannot supply the information and insight required for the future. Worse, heavy reliance on today's customer attitudes can even be dangerous to financial performance and growth.

What customers do not know. Customers often cannot tell you what new products or services they want. Asking customers about their wants would not have prompted development of the Sony Walkman. Consumer testing would not have shown that millions wanted and would buy a personal sound system.

Within financial services, the dominance of the automated teller machine and its redefinition of the role of the bank branch and teller interaction were also not predicted by customer research. In fact, many bank customers still say in focus groups that they want personal attention.

Avoiding inertia. Customers are often satisfied by current products and services. The "inertia factor" constrains them from being open to new options until an incentive to use those options is introduced.

The experience of banks such as Wells Fargo and nonbank competitors such as Merrill Lynch shows that customer satisfaction with a more nontraditional business approach can be high.

Merrill helped to identify and create a new small business customer, one who in contradiction of multiple customer surveys and interviews does not believe the branch system and a close relationship with a branch manager is paramount in choosing a financial institution.

Limits to vision. Reducing reliance on customer research is also supported by the fact that its conclusions are often more theoretical than practical. It fails to give banks a clear roadmap for action.

For example, psychographic research has increased in popularity in recent years. This analysis leads to the microsegmentation of current customers based upon their psychological or sociological characteristics, for example, DINKs (double income, no kids), empty nesters, and couch potatoes.

Segments are then sized and the revenue potential is estimated for selling a product or products to each group.

Not only is the accuracy of this quantitative analysis dubious, but also a company's ability to locate and market to the segments uncovered by this process is often problematic at best.

Further, competitors employing the same research techniques could find the same customers and prospects. Even when developed successfully, microsegmentation alone does not offer a significant competitive advantage, given the cost of effectively reaching the desired markets.

Banks, in particular, must force themselves to go beyond linear analysis if they are to meet the dynamically changing needs of a customer base that may want to be led rather than followed.

Mr. Wendel is president of Financial Institutions Consulting Inc., New York. He is the author of "The Middle Market" and co-author of "Business Buzzwords."

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