Making Sense of Segmentation
By Steve Klinkerman
Playing to the distinct needs of major customer segments may offer the best hope to minimize commodity competition.
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Customer segmentation ought to be simple. While it may not be possible to customize the banking experience for each individual, arguably it should be feasible to tailor the approach for major customer groups. Equipped with segment insights and responses, the theory goes, the institution can efficiently offer differentiated services to the mass market.
Putting segmentation into practice has proved troublesome, however, starting with the frameworks themselves. Given all of the traits that can be used — including customer profitability, demographics, behaviors and attitudes — it is difficult to establish groupings that are clear, appropriate and pragmatic. There are questions of how to translate segment information into marketing and packaging insights, how to tell which customers fit which groups, and how to differentiate sales and service.
It adds up to an undertaking rife with costs, complexity and uncertainty. At some institutions, the frustration has grown so high that the very word "segmentation" has become a big red flag.
Does that mean the pursuit should be abandoned? While some executives swear they are on the verge, there's probably no turning back. To the contrary, it is becoming ever clearer that mass-market approaches simply will not suffice for a major institution serving people of all dispositions and from every walk of life.
Consider, for example, two depositor segments out of the six that were identified by Novantas and BAI Research as part of a recent statistical analysis of consumer survey findings. One segment's sensitivity to account rates is 56% higher than the average for all depositors, while its sensitivity to fees is 55% lower than the norm. By contrast, another segment exhibits the opposite propensities, with a rate sensitivity 21% lower than the norm and a fee sensitivity 39% higher.
There is no way that a single offer will resonate with these two diametrically opposed groups. And by extension, a major institution that relies on monotone value propositions and marketing messages typically is hitting only glancing blows at the "mass market" — large portions of the general population probably are innately unreceptive to any single offer.
The question, then, is not whether to proceed with segment-based initiatives, but how to do so in the most effective manner possible. One of the most basic insights from practitioners is to avoid the trap of analysis for its own sake and focus instead on pragmatic tools that can be used in product design, marketing, sales and service. It is also vital to establish priorities, so that the energies devoted to segment-based initiatives are expended on high-value opportunities and not squandered.
Bank of America Corp., for example, deployed a large team of people to pore through nine major categories of customer information to arrive at a segmentation template. The twenty potential priorities that initially emerged from the exercise were then evaluated in light of their magnitude and execution implications, and further ranked in terms of competitive distinctiveness. Five targets eventually were established, and now the institution is working to build out the offers and campaigns needed to capitalize on all of the effort.
Speaking at BAI's Retail Delivery conference last November, BofA enterprise marketing executive Libby Chambers said it typically takes between two and three years for segment-based initiatives to bear full fruit. That's not exactly music to the ears of senior executives facing quarterly earnings targets, but future profitability may well be influenced by the segmentation groundwork laid today.
Mr. Klinkerman is editor-in-chief of Banking Strategies.