For them, info drives decisions
They're young, they're Web-savvy, and their loyalty and growing assets are still up for grabs. These are the members of the "emerging affluent," a burgeoning customer segment that, in some ways, resembles the traditional affluent and, in others, looks more like lower middle class.
Complex and underserved, this group accounts for 15 percent of U.S. households and 34 percent of the country's wages, according to a recent Forrester Research report.
These emerging affluent households earn between $50,000 and $150,000 annually, with the head of household between 25 and 44 years of age. Those who invest in winning them over now, say Forrester sources, stand to reap considerable benefits later.
Customers in the emerging affluent segment often fall between the cracks of traditional financial marketing strategies, particularly those of brokerages. "Most full-service brokerages won't even look at you unless you have $300,000 in investable assets," says Shelley Morrisette, Forrester Research analyst and co-author of the report, entitled "Finance Surges On- line."
Key findings on the emerging affluent group include:
n They are younger and less well-off than elite early adopters of on- line financial services and possess an average net worth of $165,000;
n They use the Internet for convenience, with 54 percent conducting on- line product research, 26 percent purchasing products on-line, 14 percent visiting financial sites and 11 percent conducting banking transactions.
n Nearly 32 percent of 25- to 44-year-olds are on-line today, and 66 percent will be by 2003.
While only 17 percent of this group currently have more than $250,000 in investable assets, all have incomes that are steadily rising. And, having been bombarded for years with blaring headlines about dwindling Social Security funds, these customers are far more likely than their predecessors to aggressively seek retirement investment products and packages, says John Rosen, partner of Oliver Wyman & Co, a New York-based financial services consulting firm.
Gaining Brand Loyalty
In addition, the emerging affluent are much less expensive to target and service because of their comfort level with the Internet and on-line services in general. "Most of them are very self-directed, and they want to get the best deal as far as financial services," says Morrisette. Overall, emerging affluent consumers account for 27 percent of the on-line population, according to Forrester's study; 38 percent have been on-line for at least two years and 88 percent use a computer at work.
The challenge is how to capture brand loyalty while relying largely on a medium in which every competitor is just one mouse click away, and consumers will almost never meet an officer or step foot in a branch.
According to Forrester research, nearly one-quarter of all emerging affluent consumers have no inclination at all toward any particular type of financial services provider-bank, brokerage, or insurance. More than 60 percent say they prefer banks to consolidate their financial assets, but most view their banking relationships as necessities, while brokerages and insurance providers are expected to deliver the best financial products.
Almost no respondents would consider transferring their financial relationships to an IT provider such as Microsoft. And the one-stop financial shop, according to the report, is dead in the water. Not only is it not a selling point, but 63 percent of these consumers say they prefer to diversify the companies managing their assets.
They key, then, to the hearts and wallets of the emerging affluent, says Morrisette and other analysts, is information: the more the better. According to the report, 35 percent of emerging affluent consumers say they would pay more than $250 per year for advice on retirement planning and investing. Marketing consolidated information, rather than cross-selling products, will prove most appealing to this segment.
That's something that Ameritrade Holding Corp. is banking on. The 23- year-old discount brokerage company is now focusing almost exclusively on the on-line brokerage market, targeting what it considers the most lucrative consumers. "The individual investor is becoming more affluent," says Joe Ricketts, Ameritrade chairman and CEO. "They have a degree of sophistication with regard to securities and managing their own finances; they make good salaries. And we're now beginning the greatest transfer of wealth in the history of the world, with money moving from one generation to the next."
Ameritrade is attempting to appeal to this segment with lower-than-low trading fees ($8 per Web trade, $12 by phone, and $18 by broker), but also with information and service. Specifically, fast executions and immediate posting of trade confirmations are essential for the company to gain market share. And in April 1999, Ameritrade plans to go live with "OnMoney," a Web site service headed by Ameritrade's subsidiary of the same name. OnMoney will be a financial services hub or portal, where consumers can get "anything and everything for management of their personal finances," says Ricketts.
The site's main attraction will be the availability of consolidated financial statements from any number of institutions. "Really, banking, brokerage and insurance are commodities on the Internet. The way you get around that is to offer value-added services" such as OnMoney, he says. In an effort to offer greater choice, OnMoney has two pricing models: If the customer chooses to receive targeted promotional advertising, the monthly fee of between $5 and $7 is waived; but if the customer finds advertising a nuisance, he or she can opt to pay for the service.
To consolidate information for customers, however, requires financial institutions to be willing to submit their customer data to Ameritrade-a fairly large and contentious condition. But Ricketts feels certain that customer demand will drive participation. "If (the institution) declines, then the motivation of the individual probably is to find another bank." Opinions differ as to whether affluent consumers will be motivated to switch financial institutions and for what services; right now, the closest thing to an answer is "best-of-breed" products. "They like the idea of tailored offerings or comprehensive views of their holdings, but they're not willing to take a second-rate product simply because it's provided by their bank or insurance company," says Forrester's Morrisette.
Because this emerging market has not been specifically analyzed and studied over years, their individual likes and dislikes, other than speed and easy accessibility, are still sketchy. "We've found that there just isn't a one-size-fits-all segmentation that you can manage the affluent around," says Scott Birnbaum, partner with New York-based Mercer Management Consulting. Therefore, in addition to market research, institutions will have to test various marketing programs and methods of reaching and retaining consumers, learn from those experiments, and implement solutions. "And then you'll find there are ways to categorize people into different kinds of service segmentations and (then) build your network around that," says Mercer's Birnbaum.
Ameritrade, for its part, is constantly updating its Web pages in response to customer preferences. "We find out real quick what our customers like and what they don't like. You can't go out and ask them what they like because they don't know. They have to try it and see."
Doing your homework
Countrywide Home Loans has spent considerable resources researching this segment and developing tailored marketing strategies, according to David Doyle, svp of consumer marketing. It's a group Countrywide is particularly interested in, given that around 45 percent of all home buyers in a given year are first-time home buyers, and most first-time home buyers fall into this emerging affluent category. "We find them an attractive target audience. They have a lot of earnings power, and the ability to handle a mortgage payment on a monthly basis," he says. "On the other hand, the down payment and the cash required to close on a home is a challenge for them."
Recognizing this, the company came up with products designed to fit their needs, including home loans that allow a 95 percent loan-to-value, or just 5 percent down; some are virtually 100 percent loan-to-value. They're higher risk products, but Doyle says the company doesn't expect these customers to be in their first home for very long.
Soon enough, first-time home buyers need bigger homes, backyards, and nearby schools for children, says Doyle. And when they move up, Countrywide wants to be there to move up with them. "We'd much rather get them with their first loan when they're 29 than with their fourth home loan when they're 49."
Giving them info
Further, Countrywide's primary and secondary research, as well as extensive evaluations of the demographics and psychographics of this young and affluent segment, reveal a group of very self-directed individuals who prefer to do things on the Internet and on their own. "I wouldn't call them reluctant to trust, but they are going to keep some control until a brand or service provider earns some of their trust," says Doyle.
To help these proactive consumers feel more in control, Countrywide provides tools such as sophisticated calculators to determine how much home they can afford, and how much money they might save in taxes by owning versus renting.
Charles Schwab, the on-line brokerage leader with approximately 30 percent of the market (E*Trade is second with 11 percent), offers a Web site tailored to the desires of emerging affluent consumers.
Active Trader, marketed to customers with $50,000 in investable assets and who place 48 or more commissionable trades per year, is a fountain of information-on-demand, from downloadable research reports to e-mail alerts on price to intraday margin position updates. Schwab even designed sales employee compensation to be based on customer satisfaction ratings, not on commission, says spokesperson Daniel Hubbard.
As companies continue to experiment with and evaluate different approaches to the emerging affluent segment, the only thing certain is that no one financial services sector has a lock on the market, says Birnbaum. Banks are being disintermediated by traditional brokerage firms, which are being disintermediated by upstart on-line brokerages like E*Trade.
The key for all institutions is to rethink traditional channels and price points. "The challenge is to figure out what a customer considers important and then provide it to them, rather than what you think is important," Birnbaum says. "And that's a very different mind-set for all the segments."