Segmenting for Success, Increase ROI and cut costs with better segmentation

At the close of a rollercoaster year, financial services firms can be forgiven for feeling a little dizzy. But the firms that emerge triumphant from the challenges of 2008 will be those that take decisive steps forward rather than taking a wait-and-see approach. And financial services firms have their work cut out for them, with the need to regain client confidence, streamline operations to reduce costs, and in many cases, merge, restructure, rebrand, or rebuild – and all this in a time of cost-cutting and restraint. Success in this environment is all about cutting through the distractions and finding focus. One winning strategy firms can use to focus their efforts more profitably and cost-effectively is segmentation.

Although financial services firms have been using segmentation approaches for some years, for most, segmentation remains a rudimentary and underexplored strategy. As demographics have shifted and groups such as baby-boomers and millennials have gained financial importance, firms have begun to take notice of the very different attributes of attractive current and potential client bases. Furthermore, as competition has sharpened and various areas of financial services have reached virtual saturation points, the need to find and target niche markets with unique selling propositions has intensified. Nonetheless, many firms’ segmentation strategies are limited to very basic demographic segmentation by age group or income.

A basic principle of segmentation is that to define meaningful segments, you must identify groups that are internally homogenous but heterogeneous from other groups. This is a common pitfall of basic segmentation: the assumption that just because you can group a population of people a certain way, that it makes sense to do so. For example, some of the simple demographic groupings often used by financial services firms – age group, income, or net worth, for example – may or may not have a direct correlation with these customers’ preferences, product needs, or value to the firm, or may not mean what firms assume. For example, millennials tend to be highly tech-savvy, but does this mean they want tech widgets and online self-service when it comes to investment management? Millennials may be confident in their technology proficiency, but far less confident in their investor proficiency, and may value face-to-face service in this area just as much as retirees. If firms base their segmentation approach on age alone – not to mention on presumptuous notions of age-based behaviors – they may miss the mark and waste money developing poorly targeted products and services.

To create truly meaningful segments, financial services firms need to perform multi-factorial segmentation based not just on superficial factors, but also on a combination of stated preferences, demonstrated behaviors, and actual value. For example, a firm should always solicit a customer’s preferred mode, frequency, and type of communication and interaction, but it should also examine the customer’s actual behaviors – does she say she values online banking, but visit a branch weekly? Does she say she prefers e-mail, but then never opens them?

A major factor holding many firms back from engaging in more sophisticated, multi-dimensional segmentation is IT and data infrastructure. When prospect and customer data is housed across numerous databases and “owned” by countless departments, it can be exceedingly complex to get the holistic view required to perform meaningful segmentation. Firms can rectify this by making a single, consolidated view of the customer a priority and implementing a robust and flexible customer relationship management (CRM) system that can be tailored to collect and apply any of a firm’s desired customer and prospect information. This is just the first step, however, as many firms focus exclusively on data collection without adequately considering the tools they’ll need to apply this data. While most CRM systems include marketing tools, few offer the advanced tools needed to apply data segmentation strategies successfully. More specialized systems or robust CRM systems will make it easy for firms to perform multi-factorial segmentation according to any desired criteria, as well as easily implement variable content for each segment, create A/B split tests, and launch adaptive campaigns that respond to behavior-helping firms test and prove segment distinctions and roll out more successful, relevant, and targeted communications, products, and services.

After a volatile and punishing year for the financial services industry, no firm can afford to use a scattershot approach to winning new customers and retaining existing ones. Making segmentation a priority can help firms identify their most promising and valuable segments and focus their efforts for greater success at a lower cost.

Ehab Samy is a senior product manager at CDC Software responsible for Pivotal CRM for Financial Services, a leading customer relationship management product line.
To learn more, visit www.pivotal.com/financialservices