Q.: How do banks stand to benefit most from improved segmentation of their customer bases? Joel Epstein Vice president Chase Manhattan Corp. New York
I believe there are three areas where a bank can reap the benefits from customer segmentation.
The first is having a more targeted marketing approach. We are able to identify groups of customers that share important characteristics. We compile a data base and get a more accurate idea of which customers use which products. This enables us to fine-tune our marketing activities.
The second area is in product development. As we gain greater insight into customer needs, we incorporate segment-specific feedback from prospects into product development. We begin to tailor our products around the needs of our customers - in effect, creating multiple variations around a product theme. We run focus groups with specific segments for each product.
The third area is in platform development. We have built service delivery platforms around the needs of different customer segments. For example, our personal banking group is designed to meet the needs of senior-level executives and professionals, and our new ChaseDirect offering is targeted at younger and more technologically sophisticated consumers. By gaining greater insights into customer needs, we can align them with the appropriate delivery system, thus ensuring that they receive the service levels that they expect.
Many banks are still measuring profitability at the product level alone. If you are operating in the world of customer segmentation, you really have to measure profitability on a segment basis as well. Sharon Edelman President Mosaic Marketing Inc., Buffalo
In general, customers will benefit because banks care about keeping them - especially the profitable ones - more than ever before. Banks are now more willing and able to shape their services around their customers' needs in a way that makes financial sense for everyone involved. They're moving steadily toward "mass customization" of banking services ... and segmentation makes it possible.
We work a great deal in communications for bank mergers and systems conversions, as well as for pricing changes and retention programs. In just the past year, we've noticed that banks have a much higher level of sensitivity and concern about customer retention - not only balance levels but also the overall relationship.
Many are turning to sophisticated segmentation techniques to help them find out more about what their customers actually want and need.
Some use statistical models based on banking behavior and transaction patterns, but other factors are also important: account relationships, life-cycle stages, geodemography, and primary customer research. As a result, banks are able to shape their products and services to reflect the actual needs and banking behavior of these segments.
Customers could easily believe that for the first time their bank is really talking to them. They won't have to pay for packaged services that they'll never use. Instead, they'll have a choice that will include the benefits and services they really want. And these will be priced in a way that rewards them for using the services - such as automated teller machines - that have the greatest value to them.
Because these "mass-customized" programs can be so closely targeted, they are best communicated by direct mail and - in the future - direct selling in the branches. This means that special offers can be made to the most desirable customers without raising the cost of doing business overall. Greg Gates VP, direct marketing Banc One Corp. Columbus, Ohio
One of the benefits is profitability, but the most important part of modeling or segmentation is figuring out customer need. No segmentation plan works for cross-selling a product if you do not calculate need.
How do you find this need? It's a combination of lifestyles, demographics, and the customer's financial behavior. The ideal data base is finding out the qualifications by household to identify a spending pattern and investigate who looks like the type of customer who needs a specific bank product.
When Credit Risk Management Report named us the best targeting model in 1994, our model looked at demographics and product combination. It identified households that mirrored our equity households, and it produced many segments we had not seen before.
The low-hanging fruit of direct marketing and segmentation is gone, so now you have to become more sophisticated. It costs much more to get a new customer than it does to retain the current customers.
Customer need is important, no matter how good your segmentation plan is. If it's built only around the corporation's need, ultimately you will have to identify the customers' needs. They are the ones buying your products. Steve Gasner Executive vice president North American Integrated Marketing West Paterson, N.J.
Segmentation aims for two primary objectives:
*A consumer profile of the target market and the market research issues concerning age, income, gender, offspring.
*The defining of the segments - what data are available to determine the people we are going after? Banks usually attempt to do this through their own customers and prospects.
In retail banking, when soliciting for mutual funds, banks typically analyze existing mutual fund customers. They investigate what the customers' characteristics are, how long they have been on file, what their balance levels are, and how the lines of communication and relationship are with them.
Then you ask if this customer is profitable enough. Sometimes it turns into an economic decision: If the mutual fund business is profitable but the customers who have the product are not profitable to the bank, then what?
Banks tend to look at lifetime value - they look at the highest- profitability people and the revenue streams over the life of the account. That justifies expensive marketing. Banks expect a program payout of a year to 18 months.
The most valuable segmentation is in the area of risk. By taking additional risk, the institution will generate a collectible risk-based profit, which is an independent limiting factor. This will enable the bank to be more realistic in its marketing. Jeff Infusino VP, financial services Mercer Management Consultants New York
Some bankers think of segmentation as a one-time event - you segment your customer base and then you study the needs of those segments.
Bankers must understand customer needs, and they should think about defining these as a continuous process.
Investment service providers who continually refine their treatment of those customers have an ongoing dialogue. They collect information on customer attitude toward products and learn how to change things to make them suitable to customers.
A bank cannot just acquire customers and do nothing to keep them.
The best examples of companies that know how to work with customers are credit card companies like Capital One. They are dealing with small groups of customers who might react to certain offers. Annuity products and investment products are a few other examples where this strategy works.
Also needed is the ability to segment continually and understand the actual behavior of your customers. When banks calculate customer profitability, most look only at the annual run rate. By contrast, nonbanks tend to look at profitability in terms of a lifetime value.
Relationships must be profitable for both the institution and the customer. Screen out customers who buy just on price.
Compiled by Dominick Fontana