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Segmenting the SME & Commercial Customer Banking Market


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A presentation by GBRW Consulting on the fundamentals of segmenting the small-, and medium-sized (SME) & commercial customer banking market, especially geared towards emerging market financial institutions. It shows how effective segmentation strategy leads to a clearly differentiated Customer Value Proposition (CVP) which builds customer loyalty and long-term, sustainable profitability. Segmentation also shows how banks can make the most of, and build upon, their current business and operating model.

Published in: Economy & Finance, Business

Segmenting the SME & Commercial Customer Banking Market

  1. 1. SME BANKING SEGMENTATION Playing the percentages to maximise Return on Capital & building a distinctive Customer Value Proposition for sustainable success
  2. 2. You are an SME Relationship Manager just finished attending a training course in a local hotel. On your way back to your room, you strike up a conversation with a stranger who, it turns out, is the Financial Controller of an SME which you knowfits a sector and profile of interest to your bank. In 2 minutes you are able to give him an ‘elevator pitch’ of your bank’s Customer Value Proposition, tailoredfor that market. Instead of directing you to set up an appointment with his assistant, he gives you his personal business card and asks that you call him the very next day..! HYPOTHETICAL SCENARIO: THE ‘ELEVATOR PITCH’ GOOD SEGMENTATION IS ABOUT MAKING REAL IMPROVEMENTS IN FRONT-LINE SALES
  3. 3. Capital is limited, so choosing which segments to address is sort of like choosing where to place chips on a roulette table It’s not a closed system though –effective segmentation also plays to your bank’s own competitive strengths Nor is it a zero-sum game –effective segmentation can improve outcomes for all players, both competitors and customers While roulette is a game of chance, strategic segmentation is a true game of skill and judgement Commercial strategic segmentation is about calculated exposure to clusters of the economy which represent a good bet from a risk-reward standpoint for your bank IS SEGMENTATION STRATEGYREALLY LIKE ROULETTE? DIVERSITY OF SMES NEED SEGMENTATION TO OPTIMISE CAPITAL ALLOCATION
  4. 4. Very large corporates are sometimes such big customers, they receive a tailored Customer Value Proposition (i.e. they are a segment of one) We cannot afford this approach with smaller commercial customers, and SMEs, so the business and operating model has to be built around segments Segmentation is particularly nuanced in banking because we need to consider the risk profile of the segment in combination with its purchasing characteristics This is a mixture of art and science –we can inform with data but you must also use your banking instincts WHY ARE SMES PARTICULARLY SUITABLE FOR SEGMENTATION? SEGMENTATION IN BANKING REQUIRES US TO BALANCE OPPORTUNITY WITH RISK
  5. 5. In many emerging markets, the limited large corporate banking market is hyper-competitive Banks need a way to expand their customer base into parts of the SME market in order to underpin a sustainable franchise This market is large and heterogeneous, and can only be approached through strategic segmentation Strategic segmentation will tell us what type of customers we should be looking for, what they look like, and what they want Only then can we set about building or refining a business and operating model designed to meet the needs of target customers profitably WHY ARE SMES & STRATEGIC SEGMENTATION SO IMPORTANT? GOOD SEGMENTATION SHOULD MEAN TARGET CUSTOMERS ‘CHOOSE’ YOUR BANK
  6. 6. SEGMENTATION & THESTRATEGY CASCADE What is Our Vision? Where will we compete? How will we win in our chosen markets? What capabilities must we have in place? What management systems do we need? Strategic segmentation answers these two questions Can you easily articulate your bank’s SME segmentation strategy by describing in some detail both the precise industry sectors and type of customers it is looking to target?
  7. 7. DON’T CONFUSE CUSTOMER SETS WITH STRATEGIC SEGMENTS! Splitting customers into different ‘Customer Sets’ on the basis of qualification criteria for differing relationship and service offers is NOT segmentation. It is an element of the CVP, and must be sequenced followingthe segmentation strategy. BE CAREFUL TO DISTINGUISH CUSTOMER SEGMENTS FROM CUSTOMER ‘SETS’
  8. 8. End up spreading resources too thin –trying to be ‘all things to all people’ Marketing activity tends to be driven by following the competition You’re not clear exactly which customers you’re chasing, and tend to focus simply on the latest lead You find that it is difficult to differentiate your Customer Value Proposition from the competition You always seem to be in frenetic competition for customers you’re not sure you really want anyway WHAT HAPPENS IF WE DON’T SEGMENT THE MARKET FAILURE TO SEGMENT LEADS TO A COOKIE- CUTTER CUSTOMER VALUE PROPOSITION
  9. 9. Consider two key vectors –Industry Sector and ‘Customer Profile’ Industry Sector will always be one of the most critical characteristics of a firm from both the risk and marketing perspectives ‘Customer Profile’ allows a flexible vector which we can finesse to map customers of quite wildly varying characteristics, even within the same industry sector This approach also allows the much closer integration and harmonisation of market and risk segmentation POTENTIAL VECTORS FOR SEGMENTING SME BANKING MARKET VERY IMPORTANT TO ENSURE HARMONY BETWEEN RISK & MARKET SEGMENTATION
  10. 10. It may seem obvious, but let’s explore the key reasons why industry sector is such a ubiquitous segmentation dimension: Industry Sector is a key factor in the risk characteristics of customers It is also strongly linked to geographic competitive advantage It is also rich with statistical data on size, structure, growth, and trade relationships However it doesn’t tell us nearly enough about the purchasing behavior of customers, so we need another dimension… INDUSTRY SECTOR IS USUALLY A KEY SEGMENTATION VECTOR BE SPECIFIC ABOUT INDUSTRY SECTORS, E.G. ‘DAIRY’ NOT ‘AGRICULTURE’… ETC.
  11. 11. USING A TEMPLATE FORCUSTOMER PROFILE ANALYSIS Customer Profiles (sometimes called ‘personas’) are a useful way of distinguishing between firms with very different characteristics which operate within even quite a narrowly defined industry sector. Often quite closely correlated with firm size as a proxy for financial durability.
  12. 12. Strictly segmenting customers by quantitative criteria such as turnover, profitability, capital, or employees means missing some of the nuances which affect customer values and behaviours Values and behaviours include risk factors (e.g. corporate governance, management stability, operational risk, and process excellence, as well as financial durability) AND their purchasing attitudes in relation to financial services It is often also useful to consider additional factors such as ownership structure, longevity, and even aspects of social or business culture CUSTOMER PROFILES: SIZE IS USEFUL BUT NOT THE FULL STORY CUSTOMER PROFILES ALLOW US TO CAPTURE THE ‘NATURE’ OF THE CUSTOMER
  13. 13. Characteristics •Trading successfully for at least five years •Usually owned by management, and capitalised through private sources and retained earnings •Generate formal invoices and can demonstrate purchase orders from reputable firms •Have significant tangible assets which can be used to secure medium-long term lending •Have developed a clear plan for growth supported by financial projections •Have begun to recruit professional and specialist sales and marketing staff Values / Needs •Looking for long-term relationship with bankers underpinned by access to investment capital •Willing to consider consolidating banking arrangements with one provider for best value for money •Appreciate industry knowledge and expertise from Relationship Manager •Can be vulnerable to over-trading and lack of experience with cash-flow management for higher volume business •Often owners have propensity for wealth management and private banking services EXAMPLE PROFILE DEFINITION: ESTABLISHED, LOOKING TO GROW Case Study SergeyZaytsevhasbuiltupabakingbusinesswithagoodreputationandtrackrecord.Hehas12employees(includinghiswifeanddaughter),2vehicles,andawell-equippedbakery.Hiswifeisaqualifiedbook-keeperandactsasthefirm'sfinanceofficerkeepingexcellenttransactionrecords.Sergey‘sdaughterhasjustfinishedbusinesscollegeandhastakenaroleasthefirm'ssalesmanager-helpingSergeytowinsomenewclients. Asthefirm'sreputationgrowshewouldliketotenderforbiggercontractstoprovidebakedproductstobiggerclients– hospitals,schools,hotelsetc.Todosohewillneedtotakeonmorestaff,andinvestinvehicles,equipment,andIT.
  14. 14. RISK SEGMENTATION FORSME CUSTOMERS Risk scores for SME segments can calculated using two key vectors, the Industry Sector and the Commercial Profile, and visualized using a heat map.
  15. 15. ADDITIONAL HEAT MAP CRITERIA: OPPORTUNITY (REWARD) Bank are often quite accomplished at risk segmentation, but less so at completing the picture with assessing the potential opportunity of a segment Helpful to overlay risk segmentation with additional criteria Consider whether segment has: Higher than average long-term growth prospects Strong profitability characteristics A critical mass in terms of size Low barriers to entry/ good market traction for the bank CONSIDER THE ‘REWARD’ AS WELL AS THE RISK IN SEGMENTATION STRATEGY
  16. 16. The strategic segmentation process is dynamic and cyclical, so make sure you understand the currentsegmentation strategy, the operating and business model, and the key drivers of revenue and cost Impetus behind a robust re-segmentation exercise (whether minor tinkering or major re-engineering) is best underpinned by the identification of a problem or an opportunity (or both) Strong banks continually strive to develop a good understanding of what is working and what is NOT working vis-à-vis segmentation strategy or key elements of the business and/ or operating model It helps to make an effort to establish some ‘ground rules’ for projections and forecasts would build confidence in the modelling process and support the crystallization of the decision-making process REVIEW CURRENTSEGMENTATION STRATEGY BUILD A FINANCIAL MODEL TO CORRELATE AND TARGET KEY BUSINESS DRIVERS
  17. 17. SIMPLIFIED SME SEGMENT ANALYSIS Average Assets per Customer $ 2,800,000 Average Liabilities per Customer $ 760,000 Average NII per Customer $ 63,900 Average NFI per Customers $ 5,112 Average Return on Economic Capital $ 15,691 Average Expected Loss per Customer $ 32,660 Average Overheads per Customer $ 21,500 Average Operating Profit per Customers $ 30,543 Average Capital Allocation per Customer $ 241,400 Average RAROC per Customer 13% This is a typical example of a simple revenue and cost breakdown we might see for this type of segment. More sophisticated models can be developed depending of the reliability and granularity of data. This is a critical number. What is the bank looking to achieve? It varies from country to country, market to market, and bank to bank. The rational comparison of different types of banking business is underpinned by an effective economic capital allocation methodology.
  18. 18. From our external analysis we have a good impression of the dimensions of the market for both retail and corporate banking; Therefore we have a reasonable guide as to which strategic segments are attractive based on the following criteria: Critical mass Growth rate Potential for profitability Riskiness and sensitivity However we DO NOT yet understand the following: How our current customers map against these segments and what our market share is; Who are the competitors in these segments; What these customers need in terms of a product and service proposition; How these customers behave in terms of financial services procurement; What opportunities or threats we have to win and/ or lose market share. PURPOSE OF MARKET RESEARCH
  19. 19. What is your value discipline? i.e. customer intimacy, operational excellence, or product leadership? What is your positional marketing strategy? i.e. market leader, market follower, or niche player? What is your Customer Value Proposition? What are the key elements of the business and operating model which you will require to deliver the CVP? What are the specific metrics you will use to measure success? DEFINING A DIFFERENTIATED CUSTOMER VALUE PROPOSITION IS YOUR CVP CLEAR, COMPELLING AND BELIEVEABLE TO CUSTOMERS AND STAFF?
  20. 20. Do we need to redefine our customer sets? If so, does that imply any organization changes? Will different customer sets require customized processes or technology, or to what extent can they share processing and technology? What products and services will we need to offer? How will customers find us and perceive us, and does this entail any differences between brand management, PR, and advertising between customer sets? How will the relationship management model vary between customer sets? How will the risk management culture vary between customer sets? How will the HR culture vary between different customer sets? What changes will we need to make to the business and operating model in order to achieve this? IDENTIFYING CHANGES TO BUSINESS AND OPERATING MODEL
  21. 21. Helps us understand our market, our position in the market, and the position of competitors Helps us understand our key strengths and weaknesses and those of competitors Helps us to define our market and our ambitions for that market (market positioning) Helps us to understand the customers in our chosen market, and the different values and behaviours of those customers Helps us to design a Customer Value Proposition (CVP) which responds to customer needs Helps us to design a business and operating model which delivers the CVP CONCLUSION: SEGMENTATIONOF SME MARKET SEGMENTATION STRATEGY IS THE KEYSTONEIN A SUCCESSFUL MARKETING STRATEGY
  22. 22. Target marketing (also known as tactical segmentation)is used for a much more specific purpose than strategic segmentation, such as new customer acquisition, an up-selling campaign, or channel migration; The aim is to divide the customer base into groups with similar characteristics so as to develop highly customized financial services solutions and marketing campaigns which will underpin the achievement of strategic segmentation goals; These include: Profit/Loss optimization for target markets Graduating clients to the optimal CVP, and the right strategic segment Cherry-picking clients from other banks Increasing customer loyalty NEXT STEPS: TARGET MARKETING THE DAY-TO-DAY BATTLE TO WIN AND RETAIN PROFITABLE CUSTOMERS
  23. 23. CONTACT DETAILS & FURTHER INFORMATION Mike Coates, Director You can find out more about GBRW Consulting by visiting our website on Visit my LinkedIn profile at and feel free to connect Email us at