CHAPTER VII

SEGMENTATION

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Learning outcome
➢Analyse the process and use of market segmentation
Learning objectives
➢Explain the concept of segmenting the market
➢Distinguish between segmentation in financial
services business and other businesses
➢Examine the process by which segmentation is
driven
➢Explain predictive techniques

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1. Introduction
➢Segmentation is the process of dividing the overall market
into sub-groups of people having similar needs.
➢Within financial services, successful segmentation will
enable the marketer to determine which products and
services to market to which consumers.
➢Segmentation is a highly scientific, data-driven process,
using either existing client data or externally purchased
data.

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 2. What is segmentation?
Segmentation is the process of splitting customers into different
groups, or segments, within which customers with similar
characteristics have similar needs. By doing this, each one can be
targeted and reached with a distinct marketing mix style.
Ex: What specific current account features would you target for the
following account types?
•

Premium, Student Basic/standard, Private banking, Ex-pat

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 3. Role and function of segmentation
-The primary function of segmentation within the financial
services market is to enable marketers to target specific
products towards specific customers, that is to target the
particular segment who are most likely to be receptive to
the product being offered.
-Segmentation has an even greater role in the financial
services market than in other markets because of the
inherent supply of data available to financial services
institutions, in many cases enabling a company to target
individual customers based on their profile.
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A bank will normally have a detailed history in
relation to its customers including information
regarding:
•Regular incomes and transactions
•Address
•Credit history
•Credit reference information
•Lifestyle choices, etc.
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4. Reasons for segmenting markets in financial services
There are numerous advantages to segmentation in the
financial services market. Some of these are discussed
below
- Better satisfaction of customer needs
- Growth in revenue and profits
- Customer retention
- Targeted communications
- Innovation
- Segment share

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5. The segmentation process
The scientific process behind market segmentation
can be split into three distinct stages.
• Step 1 Collect data
• Step 2 Apply segmentation software
• Step 3 Use segment information to target specific
types of customer

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➢Data collection :The type of data typically used as input for the
segmentation process may fall into a number of different categories.
➢Data sources : As we discussed in the preceding section, data can be
sourced either internally, or purchased from external sources.
➢Internal data: Most financial services institutions will already have a
wealth of internal data available relating to their existing clients that can
be readily used in the market segmentation process.

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Most financial services institutions will already have a
wealth of internal data available relating to their
existing clients that can be readily used in the market
segmentation process.
➢External data: Financial institutions may also find it
beneficial to obtain external data from external
sources (this is known as secondary data). This will
typically be purchased from companies who specialise
in providing such data.

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➢ Types of data: Segments are typically defined
by demographic factors (age, wealth, family life
stage and so on), by geographical factors
(climate, terrain, country/area of residence), by
behavioral factors (the way people use the
product and purchase behavior) or by
psychographic factors (attitudes to the company
and product category, specific fears or desires,
attitude to risk, personal motivations).

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➢ Demographic: Demographic factors include personal
data such as age and gender; income and wealth related
factors such as current account balance and assets; and
also life stage related factors.

❖Life stage refers to the current stage of life that a

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The basic family lifecycle has five stages:
▪Youth
▪Independent
▪Family
▪Empty nester
▪Retirement

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▪Youth: This is an increasingly important market for
banks, as they give a bank the opportunity to
establish what could be a long-term relationship.
Internet banking, especially that accessed through
mobile technology, can prove popular with this
group.
▪Independent: This group are at the transitional stage
between youth and family. This group are likely to
haveshort-term savings objectives – such as saving
for a car, holidays, or the deposit for a house.

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▪Family: It is unlikely that many in this group are able to
put aside money for the future, apart from very short-
term savings, perhaps for a holiday. However, the
arrival of children will give the opportunity for
children's accounts to be opened, along with the
possibility of saving for education provision. The
provision of house purchase loans is suitable for this
group, as are protection products – such as life
assurance.

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▪Empty nester: At this stage, children have left the
family home and empty nesters are able to
recommence savings activity. This can be an attractive
option, as outgoings have decreased and the
motivation to provide for retirement is high as that
event comes closer.
▪Retirement: This is the final stage in the life cycle and
at this point, people are using their savings to provide
income.

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➢Geographic segmentation defines customers
according to their location. For instance, the market
can be divided into regions, countries, counties,
cities or neighborhoods, or similarly into rural and
urban areas.
➢Psychographic segmentation is also known as
'lifestyle segmentation'. It is concerned with people's
opinions, attitudes, beliefs and aspirations and
therefore provides much deeper and richer insights
into the consumer than the methods discussed thus
far.
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➢Credit ratings: A method of segmentation particularly applicable
to financial services marketing is the use of credit ratings. These
can be used to eliminate customers who present a higher credit
risk and therefore target customers who are less likely to default
on payments, and additionally who are likely to provide the most
income.
Credit ratings and credit score calculations differ by country,
and can be purchased or obtained from the appropriate agency or
bureau in that country.

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6. Cluster analysis
-In addition to applying segmentation purely by splitting
consumers by one of the data types described above, several
formal analytical techniques with origins in applied statistics
are available to achieve more scientific results.
-This section gives an overview of the most popular technique
used in segmentation of financial services marketing, which is
the multivariate statistical technique of cluster analysis.
-Cluster analysis is a statistical technique which identifies
similar groups of observations.

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7. Segment validity
❑ Can the segment be measured?
❑ Is the segment large enough?
❑ Can the segment be reached?
❑ Do segments respond differently?
❑ Can the segment be reached profitably?

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8. Segment targeting through predictive models
-Predictive models are models which can be used
to predict the profitability of particular types of
customer.
-Clearly, financial services businesses will benefit
if they target a segment of customers or prospects
that will provide a high profit.

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