How Do You Segment Your Market?

The ability to reach current customers is often cluttered and complicated from a marketing perspective. In order to match the right offer and product to the right customer, various segmentation methods can be deployed. Interestingly, the process of segmentation is decades old, but this discipline still holds merit and has advanced dramatically with today’s analytical tools. These tools give marketing teams the ability to divide a client base into many micro-segments based on a variety of data elements. From a practical perspective, a firm can deploy multiple segmentation methods (geographic, demographic, psychographic or behavioral) depending on the strategy to be executed.

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, for example 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. Exceptions 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.

Demographic Segmentation

Demographic and socioeconomic division are perhaps the most widely used forms of marketing segmentation; however, these methodologies focus on the descriptive nature of an individual as opposed to making a prediction regarding the 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. 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.

Psychographic Segmentation

Psychographics build a mental model of consumer buying patterns in the context of the consumer’s life cycle. This form of segmentation allows marketers to gain deeper insight into the desires of the consumer beyond 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 as the use of psychographics, combined with demographic data, provide the organization with the ability to develop the appropriate products and marketing strategies to gain trust with the customer. If an organization is to adapt psychographics as part of their overall segmentation strategy, they must be aware that elements such as lifestyle, interest, attitudes and personality are fluid over time and may not be practical for a small- to medium-size institution lacking the in-house analytical power to constantly monitor and validate psychographic model assumptions.

Behavior Segmentation

Banking is a mature market. In large part, there are only two ways to significantly increase market share. One, acquire a competitor, or, two, 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 to further differentiate between consumers within a demographic. 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, financial institutions can create specific marketing communications based on recent transaction data. 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. 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, an organization 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 defined, the marketer must turn attention to the next most critical piece in the communication equation: the message.