Market segmentation: overcoming the problems to capitalize on the promises.

Before looking at the four most common problems constraining the usefulness of the concept in practice, it is worthwhile to remember the following points about the practice of market segmentation in banking.

First, market segmentation is not a crisis activity. It delivers competitive

Second, market segmentation helps bank officers to act, rather than react. Thinking about how to better satisfy the needs of each customer segment is a proactive activity. Rather than waiting for the competition to segment the market, the focus is on doing things for the customer segments in your bank that are beneficial for them and the bank.

Segmentation requires a long-term commitment. It is not a quick fix, but a strategy that must be worked out consistently to have a dramatic positive effect on a bank's performance.

For those banking organizations that work hard at market segmentation on a consistent basis, the banking industry is on the threshold of major advances associated with market segmentation. Similarly, those banks and bank marketing officers skillfully using market segmentation will realize a major competitive advantage. Finally, segmentation helps bank marketing officers to think and argue in terms of return on marketing investment.

With all the positives, why then isn't market segmentation fully implemented in banks everywhere? The answer is tied to the four major problems that reduce the power of market segmentation in practice.

Problem One: Inadequate Market Size

The development of banking has resulted in a highly fragmented system with a large number of institutions, many of which serve a relatively small market. One important reality check for any proposed market segmentation strategy is that the segment must be large enough to be profitable for the bank. The issue of market size is particularly challenging for community banks that have a limited pool of prospective customers.

In other major sectors of the financial services industry, strong firms are doing business on a national basis. Each of these businesses has the ability to identify and target customers across several states or the entire nation. Examples include insurance, real estate and brokerage firms.

Being able to view your market from a regional or national perspective increases the probability that segmentation will work. A sizable pool of individuals or households which share a similar profile makes it easier to effectively use approaches based on such information as lifestyle and interests. A broader base is more likely to result in segments of sufficient size to make the effort profitable.

While market size is important, it is possible to use market segmentation in banking without operating at a statewide, regional or national level. Simply embracing the concept, however, is not enough. Bankers must be willing to invest the time and effort necessary to identify meaningful segments, regardless of the size a particular market. Thus, while the promise of segmentation is great, marketers must be creative and diligent in their efforts to use effectively market segmentation in small market situations.

Problem Two: Availability of Information

Information is required for effective market segmentation, information that is substantially beyond that which is available from the typical bank customer information system. Specifically, banks must be committed to acquiring and using available information about customers and prospective customers to develop the multiple service relationships that are critical to improved profitability and retention.

Having adequate information for segmentation is less and less of a problem. Both the quality and quantity of information available to banks of all sizes will continue to increase. The challenge for bankers will not be having access to information, but knowing what information to seek in developing workable segmentation strategies.

Problem Three: Limited Delivery and Promotional Options

In some banks, the markets are large enough to support market segmentation and the necessary information is readily available. The challenge comes in developing delivery systems and promotional programs that work for the bank and make sense for customers.

Having promotional access to the customers and prospects is particularly important for success. Also crucial is having a system that delivers the services that are important to the individuals and households in the segment. If the bank can't realistically implement the segmentation strategy in terms of both promotion and delivery, then the segmentation strategy does not deliver its promise.

Problem Four: Egalitarianism or Lack of Top Management Commitment

The first three problems associated with successful segmentation involve market size, information and implementation issues. The final problem, however, eclipses the first three in its severity and in the challenge it presents to marketers in banks.

The single most important reason why market segmentation has not become more important or successful is the ingrained sentiment among bankers that all customers should receive equal treatment. This idea is the essential argument of egalitarianism, and some bankers add that "surely this is the essence of the marketing concept -- that all customers are important."

Bankers in this camp argue that all customers are entitled to receive quality service, confidentiality and recognition. Not surprisingly, it is frequently a challenge for marketers to find a way to argue against this position without undercutting their own credibility. It is easy to agree that every customer is important and is entitled to some basic level of service.

However, what is missing from that viewpoint is the recognition that certain identifiable segments want different levels of service, different payment alternatives and different distribution alternatives. Further, banks which ignore these customer preferences for specific levels of service do so at their own risk.

Bankers who assert the argument of equal service for everyone frequently extend the argument beyond its reasonable limit. The logical extension is that all customers will not only be satisfied with the same quality of service, but that they can all be satisfied with one set of products and one marketing strategy. It is a short step for bankers who hold this assumption to argue that one marketing mix and one marketing strategy is surely appropriate for all customers.

At this point that the argument of similarity breaks down. Far from being homogeneous, today's market for banking and financial services demonstrates increasing diversity, not commonality, in terms of product interests, rate sensitivity, delivery preferences, communication media and frequency preferences.

While it is true that all customers are entitled to a basic level of service, it is incorrect to extend this logic to the design of marketing strategies that are intended to attract and serve the needs of different groups of bank customers.

For purposes of both attracting and keeping customers, the bank must recognize differences in custome4r wants, needs and interest and develop products and programs that capitalize on a clear understanding of those differences.

Conclusion

Bank marketers must recognize their internal marketing challkenges, as well as the external ones. They must market their ideas internally to reflect the realities of their institutions' organizational structures. In failing to recognize the emotional arguments, marketers run the risk of having sound strategies rejected, not because of operational or economic reasons, but for lack of senior management commitment to the concept of market segmentation. Bank marketers must continually work to overcome the problems associated with market segmentation in order to realize the promises of this cornerstone marketing concept.