Customer Segmentation in the Banking IndustryDr. Robert L. UnderwoodAssociate ProfessorDepartment of Business & AccountingFurman University

July 21, 2015

Overview of Customer Segmentation in the Banking Industry2

• Fundamentals of segmentation

• Class exercise addressing the challenges and opportunities in developing an effective market segmentation strategy for your bank

• Segue into our discussion of functional marketing decisions

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Issues/Concerns with Banking & Segmentation

• Cutting edge changes in the varying types of customers, marketplace trends and behaviors.

• What is this going to meanto banks in the near term? Big focus on the millennialgeneration and their behaviors

• How clearly defined and delineated are the customer segments? Do banks have a solid understanding of the differing behaviors, needs & desires?

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Issues/Concerns Regarding Banking and Segmentation

• Can your financialinstitution adapt themarketing mix to clearly meet the need and wants of differing segments?

• What changes in products, prices, distribution, and/or promotion are necessary in order to effectively deliver value to these segments?

• How does this mesh with your firm’s core strategy?

What is Segmentation?

► “The subdividing of a market into distinct subsets of customers, where any subset may conceivably be selected as a target market to be reached with a distinct marketing mix”

Philip Kotler, Northwestern University

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Why Segment?• Enables the firm to design a marketing plan that

more precisely meets the needs of the customer in a specific market segment

• Enhances a firm’s focus, competitiveness, communication, retention and profitability.

STP: Steps in the Target Marketing Process

Typical Segmentation Variables for Consumer Markets

Requirements for Effective Segmentation

To be useful, market segments must be:

Measurable Accessible Substantial

Differentiable Actionable

Luxury

Lifestyle Collection

Signature

Select Service

Extended Stay

Destination

• Ritz Carlton; Bvlgari; J.W. Marriott

• Edition; Autograph Collection; Renaissance; AC Hotels; Moxy Hotels

• Marriott; Delta Hotels & Resorts

• Courtyard; Springhill Suites; Fairfield Inn & Suites; Protea Hotels

• Extended Stay: Residence Inn; TownePlace Suites; Marriott Executive Apartments

• Destination: Gaylord Hotels

Effective Segmentation - Marriott

Classification of Four General Targeting Characteristics

Geodemographic Segmentation

• Geodemographic:o “Birds of a feather, flock together”oPotential Rating Index for Zip Markets (PRIZM)oBased on U.S. Census dataoProfiles on over 260,000 U.S. neighborhoods

Geodemographic Segmentation

• #34 Online Living: Upscale Younger Family Mix

No segment scores higher for using Internet banking than Online Living. This group of mostly 25- to 44-year-old singles, couples, and families ranks near the top for online stock trading and bill paying, as well as buying at retail websites. Many of these web-surfers live in suburban sprawl areas, own their homes, and have upscale incomes, but they have only modest levels of income-producing assets and are still paying off student and personal loans. They also have begun buying their first insurance policies--term life, disability, auto, and medical coverage--typically from online websites. When they go offline, the members of Online Living prove to be fitness, music, and travel buffs. Their favorite media outlets are alternative rock radio, VH1, and fitness and health magazines.

• US Households: 1,697,184 (1.40%)• Median HH Income: $79,942 

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Class Exercise: Evaluate your Current Bank Segmentation Strategy

Reflecting on your current bank, address the following questions:

1. How clearly defined and delineated are your bank’s customer segments? On what variables are the bank’s customers generally segmented (e.g., demographically, behaviorally)? What are the major segments?

2. Do you believe your bank is consciously evaluating data/trends to identify existing and/or growing segments? Is the bank missing out on some segment opportunities? Is there a solid understanding of the differing behaviors, needs & desires of these segments by bank management?

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Evaluate your Current Bank Segmentation Strategy

3. How relevant is the growing millennial population to your bank’s customer base? Is there a significant variance in the bank’s customer base in terms of consumer digital banking usage at this time? Is your bank effectively adapting their market offering to deliver value to both heavy and light digital banking segments?

4. How do the changing demographics and behavioral trends (e.g., increased digital banking) mesh with your bank’s core strategy? Is there a significant need to reevaluate the bank’s core strategy?

Let’s Discuss!

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Marketing Functional Decisions

• Apply this newfound understanding of segmentation to Marketing functional decisions.

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