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Home Retail and Marketing

4 Methods of Segmentation

July 6, 2016
Reading Time: 5 mins read

By Tony Rizzo

In order to match the right offer and product to the right customer—and to do it in an efficient, straightforward manner—you’ll need to employ some method of segmentation.

Simply put, segmentation is the clustering of customers (or prospects) into like groups. Some might think of segmentation as a recent development, but it was actually introduced in 1933. The discipline still holds merit, though, and has in fact advanced dramatically with today’s analytical tools.

Today, marketing teams have the ability to divide a client base into many micro-segments, based on a variety of data elements. Segments are derived from interpretations of marketing intelligence gleaned from both internal and external sources. From a practical perspective, a firm can deploy multiple segmentation methods, depending on the strategy to be executed. Here are four you should know.

1. Geographic Segmentation

Geographic segmentation is beneficial for a large-scale campaign execution when the product to be promoted is largely understood and needed by a wide and diverse group of consumers. Segmentation of this type generally focuses on locating a center point, such as a branch, and radiating from that center point in terms of miles, census tract, ZIP Code, or a predetermined radius. This approach is also beneficial when the socioeconomic status of the individuals within the geographic segment is similar. The negative aspect of geographic segmentation is the assumption that everyone with the geographic footprint is identical, displaying the same predictors of behavior. An exception to this rule are the banks which use geography as part of their SEO/SEM strategy and highly target based on radius plus the appropriate demographics. This strategy can focus on the collection of email addresses in exchange for email offers where the direct response can be tied specifically to the marketing channel. In one non-bank case study, a Granite Springs, New York restaurant called Traditions 118 earned a $75 return for every $1 invested by consistently executing this strategy.

2. Demographic Segmentation

Demographic and socioeconomic division is perhaps the most widely used form of marketing segmentation. Keep in mind, however, that this methodology focuses on the descriptive nature of an individual—as opposed to making a prediction with regard to desire to purchase a specific product. One of the largest benefits of demographic segmentation is its simplicity and cost. It can easily be explained to frontline staff and tends to be relatively inexpensive to acquire. Typical appended elements include income, family size, occupation, and homeownership status. Internal elements include age, presence and balance of product, service indicators, branch assignment, and tenure. The downside of this methodology is the assumption that everyone within the same demographic behaves identically. In other words, there is little understanding of customer differences if one views demographics only. Recognizing that demographic and socioeconomic segmentation play an important role in purchase patterns of financial assets, one must also recognize the importance of psychographic attributes to increase a firm’s knowledge of the consumer.

3. Psychographic Segmentation

Psychographics build a mental model of consumer buying patterns in the context of the consumer’s life cycle. Typically these models combine demographics, product behavior, and financial assets data to create clusters of consumers who demonstrate like-behavior and socio-economic status. Psychographics are an attitudinal layer variable. This form of segmentation allows the marketer to gain more insight into the desires of the consumer beyond just simple facts such as age or income. In other words, psychographic data defines why consumers do what they do. This is important—particularly from a financial marketing perspective—because the use of psychographics, combined with demographic data, provides the bank with the ability to develop the appropriate products and marketing strategies to gain consumer trust. If a bank is to adapt psychographics as part of its overall segmentation strategy, it must be aware that elements such as lifestyle, interests, attitudes, and personality are fluid over time and may not be practical for a small- to medium-size institution that lacks the in-house analytical power to constantly monitor and validate psychographic model assumptions.

4. Behavioral Segmentation

Banking is a mature market.  In part, there are only two ways to significantly increase market share.  One is to acquire a competitor. The second is to take business from one’s competitors through aggressive marketing strategies.

From a marketing perspective, the use of behavioral data is a superior tool both in its ability to increase sales as well as its ability to do so at far less cost than broad-based communication approaches. No longer can a financial institution simply target by socioeconomic factors, demographics, or psychographics. It must use behavioral cues in order to differentiate between consumers who would seemingly be classified in like-segments.

Practically speaking, behavioral segmentation for banks focuses on tactical analysis of credit data, propensity models, and data gleaned from ACH, online banking, or credit card transactions. Armed with this knowledge, a financial institution can create specific marketing communications based on recent transaction data. The most common examples of this type of data include:

  • Real-time analysis of credit applications at other financial institutions
  • ACH or online bill pay transactions wherein payments for loans are made from the home institution’s product to another financial institution
  • Large retail purchases indicating opportunities for short-term credit productsOnce the optimal segmentation strategy has been agreed to, and the expectations of performance have been defined, the bank marketer must turn attention to the next most critical piece in the communication equation: the message

The nature of behavioral segmentation provides the opportunity for real-time communication across a wide range of marketing channels including direct mail, email, point-of-sale devices, and mobile channels as well as personal contact at the branch or call center level. The downside of using behavioral data as a marketing driver is that it does require detailed, in-depth data sets, models and market testing. Additionally, the importance of action when using behavioral data is critical. In order for the use of behavioral data (and its considerable expense) to make financial sense, a bank must act immediately on the triggers that are produced with this type of analysis. This means near real-time marketing reaction to behavior events that will drive product purchase.

Once the optimal segmentation strategy has been agreed to, and the expectations of performance have been identified, the bank marketer must turn attention to the next most critical piece in the communication equation: the message.

Tony Rizzo is General Manager of Creative Services at Marquis, a Plano, Tex. data analytics company specializing in the financial services industry. A 26-year veteran of financial marketing, Tony has been published in every major financial industry publication as well as the Wall Street Journal and USA Today, and is a frequent national speaker on leveraging data to increase retention and profitability from a marketing perspective. Email: [email protected].

Hear more from Tony when he presents at the ABA Bank Marketing Conference, September 25-27, 2016.  We look forward to seeing you in Nashville!

Tags: Behavioral analysisCustomer segmentationDemographics
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