THOMAS RICHARDS
‘Natural clusters’ of customers

In an effort to boost revenue and core deposits, industry advisors are suggesting that banks start segmenting their customers and identifying what drives customer behaviors in order to successfully advertise products and services that are similar to the competition.

By exploring who the customer is, what drives customer behaviors and how best to communicate with customers, analysts at Financial Insights, a Framingham-based independent research services firm focusing on challenges facing the financial services industry, said banks can effectively build profitability and loyalty among bank customers.

“Financial services and banking is a very mature and undifferentiated market. There isn’t an enormous difference between products, and there are a lot of parts and pieces and products and services that look alike,” said Thomas Richards, analyst at Financial Insights. “To survive in that environment, you have to segment customers. The notion of mailing out a free-checking brochure to 10 million customers is not really [effective]. If you have a unique product, don’t segment and people will beat the path to your door. But, if you’re working with the same product, know your customer.”

Brian Arsenault, senior vice president of corporate communications at Portland-based Bank-north, said most banking products are not unique, so the bank must position itself on differentiating services.

“You have what you consider to be good products – for instance, a truly free checking product – but I don’t know that anyone in banking has anything that is truly unique,” said Arsenault. “So, you focus on services like having good locations and then you have to tell people that you are there and what you offer. [Banks] have to compete on service as much as product.”

Richards, the author of Financial Insights’ study, “Who is the Customer: Segmenting Customer Behavior,” said knowing the customer determines strategy and opportunities for building profitability.

By analyzing customer segmentation data, which is usually complied through six to eight survey questions, Richards said banks understand how customers approach financial services and find natural “clusters” of consumers who help the bank make a profit.

The process of segmenting customers starts with a hypothesis of what makes one bank’s customers differ in a meaningful way, according to Richards’ Financial Insights study. Then, identifying those segments that promise the highest profit potential in the context of the bank’s skills, culture, resources, delivery options and competition is analyzed, followed by questioning whether the customer base can support the bank’s business plan for the next year.

“When you survey people you’ll find natural clusters of those with age, income, family status and so on. The idea is to use statistics to figure out if there are natural clusters here,” said Richards. “We marry this information with customer demographics and we find natural clusters [of bank customers]. Banks find these natural clusters and then figure out who is contributing to the profitability of the bank. We want to understand who in these clusters are profitable customers.”

Successful segmentation and customer analysis tests are developed at Citizens Bank, according to Theresa McLaughlin, executive vice president of marketing at Citizens.

“We do a lot of customer research, and all of our products’ development work and communications work is based on knowing what our customers want and making sure that our products and services are designed to meet our clients’ needs,” said McLaughlin. “You look at sales trends and who you’re bringing in and the balances that they are bringing to the table, and we look at all demographics when we develop that communication platform.”

According to Richards, customer segments are largely based on behaviors, attitudes and preferences of the consumer and, in many cases, a bank may discover that one segment as a whole is not profitable and the bank can reduce costs. In other cases, the bank may discover that a certain segment is profitable and then do more research to find out why and build a new strategy at reaching those consumers.

‘All Demographics’

McLaughlin said analyzing customer information is necessary in determining profitability and potential opportunities for the bank. Asking questions such as how many customers in the market fit in a certain demographic scheme are necessary when marketing bank services and products, she said.

“We map out the information and we make sure that we’re in line with what the customer wants. Convenience is still the No. 1 reason people choose a bank,” said McLaughlin, who said it is absolutely necessary for banks to act on customer demographics when advertising or marketing the bank’s products and services. “Brands are unique and what your brand stands for is unique. When people think of marketing of a company, they tend to think of advertising, but this really is a science and you do have to do your homework. We need great segmentation and analytical work to successfully market our product.”

Richards acknowledged that some institutions are weary about pointing fingers at a specific type of customer, in fear of fending off other consumers. But, he added, it is necessary for banks to identify their core customer in order to understand what a customer wants from the bank.

“We’ve done business throughout New England for some time now, and the small cities don’t seem to us to be very different than the large cities. We are focused on middle-market institutions and our core customers are broad, middle-income customers in New England,” said Arsenault. “We really don’t do customer segmentation and we try to give the customer the widest array of choices. We try to present diversity in our ads and we are sending the message that we are really there for the widest range of customers possible.”

Richards said, however, that identifying a bank’s core customer by using segmentation methods could help the bank distinguish itself from competitors.

“Some institutions are a little worried about what it takes to describe these customers. I am constantly surprised at banks’ unwillingness to talk to their customers and ask what matters. Some banks get stuck because they are product- and production-focused,” said Richards. “You have to create a few hypotheses about these customer segments – what characterizes [a customer’s] belief system and how do I treat and communicate to them.

“Segmentation is a key here – it’s the opportunity to differentiating one institution from another.”