The word "segmentation" is a much bandied about in the banking industry, but does it deserve the lip service it is getting?

Consultants tout it as an important part of competing effectively for business in the future. I am in full agreement.

However, what segmentation really means and how best to apply it in the banking industry have been far from clear.

Most segmentation proponents employ simplistic techniques that classify bank consumers on the basis of publicly available demographic data. This gives rise to customer categories such as "young suburbanites" and "older affluent people."

This kind of segmentation is not very useful - and nonbank competitors are light years ahead of it. They use behavioral segmentation, traveling far beyond basic demographics to slice target segments fine.

For future successes, bank marketers will need more than age, income, and homeownership demographics. They will need to link those with at least two more categories of information: the need for different types of financial services, and the attitudes that indicate propensity to buy the financial products.

Here are some examples of what I believe will be useful in future targeting of bank customers.

Matching changes in life stages and financial means. Nearly every financial product or service meets one or more of the five basic consumer financial needs: transactions, credit, protection, asset accumulation, and information and advice.

Every household has all these needs, but their importance varies according to life stage. In fact, it even varies somewhat during the course of that stage.

If a household does not progress smoothly from one stage to the next, but skips a stage or reverts to an earlier stage, the shift in the household's financial needs can be even more extreme. Examples are a married household bypassing the child-rearing stage or getting divorced.

Financial institutions can use life stages as a target marketing tool for meeting consumer financial needs more efficiently. The trick is to learn how, when, and why consumer needs for financial services change.

With such knowledge, financial providers can time their marketing more accurately and meet the household's needs more precisely. Furthermore, changing your offerings as customers' needs change may help you do better in developing long-term relationships them.

Let's examine a couple of examples.

According to data from SRI International, the best time to start a financial relationship and become the primary financial institution for your customers is when they are recently married or have recently become parents. Seven out of 10 such households have recently opened a transaction-related financial account.

By obtaining the list of marriage licenses in your local market or the names of newborns, you can target transaction accounts customized to a market segment that will let you make back marketing costs or reduce acquisition costs per transaction account.

Credit needs, like transaction needs, are more important among recently marrieds and households with a new child, SRI found. The need to obtain credit starts to decline as children move out of the household; for recent retirees it is just 6%.

The impact of phases of life on purchases of life insurance is even more clear. For instance, by far the most likely segment to buy life insurance is recently married couples - not households with new children.

And predictably, asset-accumulation needs increase when people have children. The likelihood of seeking financial advice is quite high among recently married people (25%) and even higher among recent "empty-nesters" and retirees (up to 35%).

For marketing, such knowledge has real power.

Other major life events - divorce, death of a spouse, promotion, and so on - also bring changes in financial needs that merit analysis. And segmentation can be refined further to recognize the age of the children in the household and the age of the retirees. Household lifestyles also affect the level and timing of financial needs.

Deepening the overall relationship not only enhances customer loyalty and expands "share of the wallet,' but also relieves the pressure to compete on price alone.

Attitudinal segmentation. The discussion to this point has showed how demographics and life events can be used to micro-segment the population for much-improved targeting. But that is only half of the story.

Though statistics may indicate that a certain household is interested in a specific product, a person's overall attitudes and behavior patterns also make buying more or less likely.

Ultimately, segmentation has two purposes - to reduce the cost of acquiring new customers and to increase customer profitability by selling products and services your customers are likely to consume.

In achieving this second goal, simple demographic analysis can provide only limited help. But customers' answers to questions like the following be very helpful.

*Do you ask for directions when lost?

*Do you adhere to a routine personal schedule?

*Do you exercise regularly?

*Do you overeat?

*Do you enjoy crossword puzzles?

*Do you enjoy managing your financial affairs?

*Do you trust your financial institution?

Questions like these can be used to segment customers for trying to sell them services they are likely to buy.

For example, self-reliant people who feel they are doing fine are unlikely to be good candidates for investment advice. Conversely, such people might be good prospects for brokerage accounts, self-directed IRAs, and other bank products that let customers direct their financial assets.

On the other hand, people who are not self-reliant but have primary financial institutions, save as much as they plan to save, and are in charge of their own affairs are good candidates for automatic save-and-pay products, asset-allocation products, and the like.

Such fine-sliced segmentation is more useful than simple categories like upper-middle-class suburban or blue-collar urban.

Ms. Bird, chairman of the New York consulting firm Finexc Group LLC, was recently named chief operating officer of Roosevelt Financial Group, St. Louis.

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