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Breaking down segmentation

25th Jun 2009
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Infor's Tony Compton explains the best approach to segmentation and how it can help build customer loyalty and increase profitability.

Retail banks have been at the centre of the economic meltdown and the entire industry has taken it on the chin from a public relations perspective. Even banks with sound financials and no exposure to sub-prime mortgages are taking a hit in the eyes of consumers. This means that a small slip in service or just a lack of attention can quickly lead to a customer shopping elsewhere for banking products. For this reason, establishing loyalty and trust with the most profitable customers is paramount.

One of the key ways to do this easily and affordably is through segmentation, coupled with an interaction CRM engine that delivers targeted offers to customers. By identifying the right customers, tailoring special offers to those customers and then delivering those offers consistently across channels, banks can improve customer retention and engender long term loyalty from the very best customers.

This kind of strategic approach is ideal in a recession because the cost to acquire new customers is high, while marketing to existing customers is much less expensive – and the likelihood of acceptance is much higher due to the prior relationship.

What do you want to accomplish?

The first step in segmentation is to understand what you want to accomplish and put the segmentation campaign in line with that strategy. Too often, segmentation is treated tactically, with over-eager marketers slicing and dicing data sets and customer demographics to deliver all kinds of offers. Non-strategic, opportunistic event-based segmentation campaigns based on things like birthdays and anniversaries aren’t usually effective in the long-term. Managing a large number of these campaigns is difficult and often doesn’t deliver results because the customer sets are too thinly sliced.

Worse yet, the 'spaghetti on the wall' approach can confuse customers, with too many competing offers that can torpedo your loyalty efforts. Too much segmentation can lead to inaccuracies so, for example, you could be pestering a senior citizen with offers for retirement accounts or a 9-to-5 office manager with small business loans.

A better segmentation approach is to identify specific goals, such as moving customers to self-service channels where margins are high, engaging young consumers early in the lifecycle to sell long-term products, or engaging a specific demographic for products based on major life events.

Understand your customers

To accomplish any of these goals, the critical second step is to understand your customers. For instance, you need to know what channels they are using. That understanding can lead to the ability to segment customers based on their channels and then move them to lower-cost channels. If you know that a customer is using multiple channels, then there is a higher likelihood that they would be receptive to offers for other, even lower-cost channels.

For instance, with an understanding that customers are using traditional retail outlets, you can create offers at the point-of-service to encourage them to use channels such as ATM, web or mobile banking. If you know that a customer always walks into the bank but recently requested a new ATM card, is that indicating a propensity to use multiple channels? Are they now a candidate for web banking? When they call in to activate their ATM card, a decision engine can direct the agent to provide an offer related to web banking. 

Of course, the one-to-one relationship will always be important and so it’s important to strike a balance. Nudging your customers to self-service with special offers available through specific channels is better than burying the direct customer service line deep on the website where it’s hard to find. However, we do know that in many instances, customers are doing more prior research into products and then selecting their bank based on the availability and ease of use of that channel.

If you understand your high-value customers and have the technologies that make interactions across self-service channels valuable, offers can be made with event-based marketing and real-time decision engines to engender customer loyalty. Customers will find value and continue to use these channels. It’s all at a lower cost to the bank.  All of this is made more effective by understanding which customers would be most receptive to using multiple channels.

Segmentation by age demographic is another example of strategy. We know, for instance, that young adults just setting up their lifestyle are a lucrative opportunity for event-based marketing. These consumers are getting their first car loans and mortgages, then getting married and having children, setting up college savings accounts and their first retirement accounts. We also know these customers are more comfortable using self-service channels. By establishing a relationship with these young consumers early in the lifecycle, through offering targeted offers across multiple convenient channels, you can create a highly profitable customer that can be nurtured for the long-term.

Staying in control

Another important step in segmentation is to make sure you have created a control group. How effective were you at moving customers to another channel? And how was profitability affected relative to similar customers in other channels? The way to find this out is to make sure you have created a segmented control group for comparison. This creates a feedback loop to your overall strategy and lets you know if it’s working for profitability, rather than just effective in the context of the campaign. Knowing that you were successful at moving customers to another channel is great, for instance, but you want to make sure they are still profitable.

Let’s take an example of a specific strategy used by one of the largest banks, with over 200 billion in assets and five million customers. The bank wanted to improve retention of at-risk home mortgage customers by delivering value-based offers. The bank also wanted to improve the profitability of these customers by cross-selling home-equity lines, pre-approved loans and checking accounts. To do this, it needed to identify its mortgage customers, determine what was of value to them, what channels they were interacting with and then coordinate in-bound marketing offers across multiple channels – in the branch, on the web, call centres and through interactive voice response. This required segmentation by demographics and preferred banking channels.

Against the control group, the segmented population received dramatically higher acceptance rates. In the first seven months, the bank received over $450 million in new loan applications. The targeted web offers were eight times more likely to be accepted than non-targeted control group offers. In the first month, almost 10% of offers extended in the contact center led to new loan applications. The bank was able to accomplish these impressive returns through segmentation because they:

  • Set a specific quantifiable segmentation goal – improve mortgage retention and cross-sell relevant products.
  • Understood how its customer base was interacting with the bank and tailored offers to individuals based this activity plus demographic knowledge.
  • Employed a consistent multi-channel approach that employed an analytic engine that automatically generated the best offer available to those customers at each touch point.
  • Created a control group against which it could benchmark results.

Developing customer relationships, pinpointing emerging trends in financial planning decisions and finding untapped markets are pillars of any bank’s marketing strategy. But, in these tough economic times, using valuable resources for focus groups, surveys and other traditional market research strategies to segment customers is neither time nor cost-efficient. However, these same economic hardships make customer segmentation and the resulting marketing campaigns more important than ever.

CRM programs help make the segmentation process easier, leaving extra money in marketing budgets for campaigns, promotions and advertising. By providing a single view of the customer and the right analytical tools to segment that customer, CRM can lessen the time spent on surveys and money spent on outside research firms.  With the segment and demographic information provided by CRM software, bank marketing professionals can combine their institution’s products and services with the customers’ needs and wants.  This combination results in more customers, more services sold and higher profits.


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