Customer Segmentation for CRM in Banking Using Data Mining

The banking industry is going through a rough patch across Europe and US. The effects of this are visible in the emerging economies as well. In this challenging time banks need smarter strategies and systems to survive and grow. Also with increasing competition, especially in the emerging markets, CRM systems can prove to be a great competitive advantage. Customer segmentation is the first step towards building an effective business development strategy. Data mining and analytics integrated with Banking CRM system plays an important role in this. Customer base comprises of variety of customers with distinct needs depending on demographic, economic and behavioural conditions. Banks need to identify common characteristics and form distinct groups to handle their differentiated needs. In order to provide personalised products, rewards and incentives a refined approach is needed that would segregate the customers in terms of life-stage, psychographics and profitability. Data mining techniques can be used by applying filters on various fields captured during transactions, account opening and running statistical models on the data collected. This will need to collate and analyse data from the core banking system and various supporting systems including CRM systems, credit card systems etc. The major objectives of segmentation are: Customised product offering Customised and priority service Improve relationship with profitable customers and cut resources spent on loss making customers Better offering to new customers based on the intelligence gained from the existing customer segment they belong to New product development and bundling as per the customer segment profile

Steps to segment the customers: 1. Segmentation based on contribution to profit The objective of segmentation should be to retain them as they have a major contribution to the banks profit. Their attrition will drastically decrease the banks profit. This is done based on the marginal revenue contribution. Customers can be segmented in 3-5 categories. Mostly paretos principle will hold true, i.e. 80% of the revenue will come from 20% of the customers. This can be labelled as Tier 1, Tier 2, Tier 3, Tier 4, Tier 5 and so on. 2. Further segmentation based on the customer assets with the bank and frequency of transactions This is done based on the average periodical balances maintained with the bank depending on the product holding. Customers with high balances and high loans can be categorised accordingly. Depending on the frequency of transactions and balances inactive customers are identified and targeted to increase their activity. 3. Further dividing the above segments based on product ownership, channel utilisations and type of transactions

This is more refined segmentation to design customised marketing techniques. Depending on the product ownership i.e. monthly average Balances with respect to product Number of transactions Value of the transactions Alternative channel usage

The types of transactions and products include Deposit transactions Withdrawal transactions Lending v/s Asset Balances Type of loans Type of investments

The above can be further divided depending on the life stage of the customer. This will result in multidimensional segmentation as below.
Tiers Profitability Tier Tier Tier Tier Tier 1 2 3 4 5 Other Factors Lending v/s Alternative Number of Asset Balances channel usage transactions (%) (%) (Monthly Avg.)

Age (Years)

Value of Transactions (Monthly Avg.)

The Marketing Process for the above segments The above segmentation gives information on behavioural aspects it does not give information on the qualitative aspects like wallet share, satisfaction level, attrition risk etc. This can only be gained through marketing research. This data will give a very intelligent insight on the strategy to target these segments. For instance customers with high deposit balances and higher age should be offered fixed income product, while those with healthy savings account deposit and age group between 25-40 should be offered mutual funds, equity and insurance products. Customers should be managed throughout their life cycle and helped to graduate to a healthy financial portfolio and in the process making them more profitable for the bank. A large part of young customers might have a new and single product relationship with the bank. They should be encouraged with loyalty programs and credit card or loans depending on their income levels. Segmentation with the help of data mining from various existing systems is a very important exercise and a must for effective business development. Making this intelligence available to the customer facing teams and marketing team in the Banking CRM system can prove to be a great tool to increase cross selling and up selling capability. A 360 degree view of the customer with effective segmentation can be a important competitive advantage for the banks.

Customer Segmentation
Why customer segmentation? People with similar attributes tend to display similar patterns in various ways. This fact is particularly important in customer relationship management, marketing, and risk management. For example, people with certain life-styles tend to buy certain-types of products. Promoting products particularly targeted towards the demographic group can lead to successful marketing. In credit and insurance industry, good customer segmentation can lead to minimum exposure to risk involved in credits and insurances. Similarly, in catalog sales, customers can be selectively targeted to reduce marketing cost. Customer segmentation can be used in various ways. Note that customer segmentation is a very important tool for customer lifecycle management - CLM. Handbook of Database Marketing If you are interested in methods described in this page, please register from here. We will send you free "Handbook of Database Marketing", currently in writing, as soon as it becomes available. It describes the procedures described here such as customer profiling, customer segmentation, targeted marketing customer selection, RFM segmentation marketing, cross-sell marketing, customer churn detection modeling, gains and profit analysis, data preparation, and more. If you are interested, please register from here. Technically speaking, customer segmentation is a process that divides customers into smaller groups called segments. Segments are to be homogeneous within and desirably heterogeneous in between. In another words, customers of the same segments possess the same or similar set of attributes. But customers of different segments have differing sets of attributes. Segmentation process can be very complicated. Therefore, it's best to use advanced analytic tools.

What information is used in customer segmentation?

Segmentation is normally performed along with the following demographic, geographic, psychographic, and behavioral variables;

Demographic segmentation variables describe characteristics of customers and include age, gender, race, education, occupation, income, religion, marital status, family size, children, home ownership, socioeconomic status, and so on. Note that demographic segmentation normally refers to segmentation with these demographic variables. Geographic variables include various classification of geographic areas, for example, zip code, state, country, region, climate, population, and other geographical census data. Note that this information can come from national census data. For more, see geographic segmentation. Psychographic segmentation variables describe life style, personality, values, attitudes, and so on. Note that psychographic segmentation normally refers to segmentation with these psychographic variables. Behavioral segmentation variables include product usage rate and end, brand royalty, benefit sought, decision making units, ready-to-buy stage, and so on. Past business history, Customers' past business track records can be extremely useful for segmentation. This may include total amounts purchased, purchasing frequency, (credit) default records, (insurance) claims, responsiveness for marketing campaigns, and so on.

What is your motivation for Customer Segmentation?

This is very important since there are many ways you can segment customers. Without clearly defined motivation, no clear segmentation objectives. Segmentation is meaningless. You need to have clearly defined motivation and objectives to achieve. For example, to optimize profits for campaign marketing, or to monitor customer or market trends, or to manage customer loyalty programs, or to use for customer lifecycle management, and so on. Depending on your motivation, different segmentation techniques are employed. Note that CMSR provides several segmentation and segment monitoring tools such as decision tree, neural clustering, etc.

Customer segmentation driven by Business strategies

By far the most intelligent customer segmentation is driven by business strategies. Various business strategies are developed. Customers are segmented along the business strategies. Powerful predictive business knowledge is used to assign customers into business strategies. For more, read predictive customer lifecycle management.

Customer Segmentation for Trend Monitoring and Forecasting

Timely identification of newly emerging trends is very important to businesses. For example, sales patterns of various customer segments indicate market trends. Upward and downward trends in sales signify new market trends. The same can be applied to loans, mortgages, credits, and so on. Trend analysis and forecasting over well-designed customer segmentation is a powerful tool for monitoring and detecting newly emerging trends. For more, please read Trend Analysis and Forecasting.

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Segmenting the Banking Customer

May 1st, 2012 by Laura

Banks like to segment their customers. They receive only 46% of their customers total deposit balances and 10% of their total loan balances and segmentation strategies allow financial institutions to gain a larger share of wallet. But pre-recession segmentation strategies may no longer be on the money. And in just the past few years, newer technologies have brought more services to customers fingertips. So, banking intelligence firm BAI Research provides five updated segments based on attitudes and age, as well as other demographics. These core segment profiles allow for targeting based on preference, as well as identifying opportunities for cross-segmentation. The customer segments identified in the study:

Marginalized Middles (36% of total) This is the largest and least satisfied group of bank customers. They have the second highest household income, and high checking account potential. Personalized banking assistance with easy-to-understand products would help this group. Struggling Techies (21% of total) This youngest and lowest income group feels very comfortable with digital forms of banking and are the heaviest users of online, mobile, P2P services. While they have the lowest deposit revenue and are most averse to additional fees, they are open to consolidating products and balances for rewards, and could broadcast newer banking technologies through social media. Disengaged Skeptics (18% of total) The second oldest segment has the lowest customer service satisfaction levels. They are heavy users of other

financial services such as brokerage firms and may be more receptive to less risky products as they head toward retirement. Satisfied Traditionalists (18% of total) While this oldest segment is the least likely to use technological services and are not receptive to product consolidation, they have the highest deposit revenue and investment balances. Products that manage cash flow with low risk might be attractive. Sophisticated Opportunists (7% of total) This group with the highest income is very knowledgeable about banking and is at ease when it comes to making decisions about their money. They need the right online tools to be able to manage their finances and investments properly. As the segment that uses reward services the most, they might be receptive to product consolidation for the right incentive.

Download the The New Dynamics of Customer Banking Relationships study here (04/12, 15 pages, pdf, 668k).

CUSTOMER SEGMENTATION IMPLEMENTATION WITHIN A RETAIL BANK

A retail bank, positioned on wealthy customers wanted to devise a more efficient marketing and commercial approach towards its customers and future prospects. This implicated a segmentation of its existing customer base and the identification of high-priority targets on which to concentrate commercial efforts Courcelles stepped in to address both aspects of the project:

Detailed analysis of the existing customer portfolio and definition of customer segmentation along the banks key strategic lines (customer loyalty, cross selling, age structure) Identification of high-priority customer targets, presenting an interest for the bank and giving it the possibility to exploit a real competitive advantage based on its assets (brand image, products, commercial advisors profiles)

During this project, Courcelles strongly implicated the different headquarters management teams as well as contributors from the commercial network This involvement took the form of individual interviews as well as numerous group work sessions. Indeed, beyond the quality of recommendations, the success of the project relied on the understanding and the appropriation of the new customer segmentation and its processes by all contributors at different levels of the organization

The 5 Types of Customers

Increase Your Loyal Customers to Increase Your Sales
In the retail industry, it seems as though we are constantly faced with the issue of trying to find new customers. Most of us are obsessed with making sure our advertising, displays, and pricing all scream out to attract new customers. This focus on pursuing new customers is certainly prudent and necessary, but, at the same time, it can wind up hurting us. Therefore, our focus really should be on the 20 percent of our clients who currently are our best customers. In retail, this idea of focusing on the best current customers should be seen as an on-going opportunity. To better understand the rationale behind this theory and to face the challenge of building customer loyalty, we need to break down shoppers into five main types:

Loyal Customers: They represent no more than 20 percent of our customer base, but make up more than 50 percent of our sales. Discount Customers: They shop our stores frequently, but make their decisions based on the size of our markdowns. Impulse Customers: They do not have buying a particular item at the top of their To Do list, but come into the store on a whim. They will purchase what seems good at the time. Need-Based Customers: They have a specific intention to buy a particular type of item. Wandering Customers: They have no specific need or desire in mind when they come into the store. Rather, they want a sense of experience and/or community. If we are serious about growing our business, we need to focus our effort on the loyal customers, and merchandise our store to leverage the impulse shoppers. The other three types of customers do represent a segment of our business, but they can also cause us to misdirect our resources if we put too much emphasis on them. Let me further explain the five types of customers and elaborate on what we should be doing with them. Loyal Customers Naturally, we need to be communicating with these customers on a regular basis by telephone, mail, email, etc. These people are the ones who can and should influence our buying and merchandising decisions. Nothing will make a Loyal Customer feel better than soliciting their input and showing them how much you value it. In my mind, you can never do enough for them. Many times, the more you do for them, the more they will recommend you to others. Discount Customers This category helps ensure your inventory is turning over and, as a result, it is a key contributor to cash flow. This same group, however, can often wind up costing you money because they are more inclined to return product.

Impulse Customers Clearly, this is the segment of our clientele that we all like to serve. There is nothing more exciting than assisting an Impulse shopper and having them respond favorably to our recommendations. We want to target our displays towards this group because they will provide us with a significant amount of customer insight and knowledge. Need-Based Customers People in this category are driven by a specific need. When they enter the store, they will look to see if they can have that need filled quickly. If not, they will leave right away. They buy for a variety of reasons such as a specific occasion, a specific need, or an absolute price point. As difficult as it can be to satisfy these people, they can also become Loyal Customers if they are well taken care of. Salespeople may not find them to be a lot of fun to serve, but, in the end, they can often represent your greatest source of long-term growth. It is important to remember that Need-Based Customers can easily be lost to Internet sales or a different retailer. To overcome this threat, positive personal interaction is required, usually from one of your top salespeople. If they are treated to a level of service not available from the Web or another retail location, there is a very strong chance of making them Loyal Customers. For this reason, NeedBased Customers offer the greatest long-term potential, surpassing even the Impulse segment. Wandering Customers For many stores, this is the largest segment in terms of traffic, while, at the same time, they make up the smallest percentage of sales. There is not a whole lot you can do about this group because the number of Wanderers you have is driven more by your store location than anything else. Keep in mind, however, that although they may not represent a large percentage of your immediate sales, they are a real voice for you in the community. Many Wanderers shop merely for the interaction and experience it provides them. Shopping is no different to them than it is for another person to go to the gym on a regular basis. Since they are merely looking for interaction, they are also very likely to communicate to others the experience they had in the store. Therefore, although Wandering Customers cannot be ignored, the time spent with them needs to be minimized. Retail is an art, backed up by science. The science is the information we have from financials to research data (the "backroom stuff"). The art is in how we operate on the floor: our merchandising, our people, and, ultimately, our customers. For all of us, the competitive pressure has never been greater and it is only going to become more difficult. To be successful, it will require patience and understanding in knowing our customers and the behavior patterns that drive their decision-making process. Using this understanding to help turn Discount, Impulse, Need-Based, and even Wandering Customers into Loyal ones will help grow our business. At the same time, ensuring that our Loyal Customers have a positive experience each time they enter our store will only serve to increase our bottom-line profits.

Mark Hunter, "The Sales Hunter", is a sales expert who speaks to thousands each year on how to increase their sales profitability. For more information or to receive a free weekly sales tip via email, contact The Sales Hunter at http://www.TheSalesHunter.com.

The art of customer segmentation

Not all customers are the same. So stop taking a one-size-fits-all approach to your marketing and start segmenting your customers into smaller groups, says Andrew Gerrard of InTouch Marketing Segmenting a market is sound practice. It enables you to develop a deeper understanding of your customers and discover what makes them tick. When you are communicating a message, it will be more effective if the recipient of the message finds it relevant. Segmentation is simply a way of arranging your customers into smaller groups according to type. These distinct subgroups or segments should be characterised by particular attributes. Now you can target specific, relevant marketing messages at each group. And it's not just about what you say. How you communicate is also vital, and segmentation often requires a carefully structured marketing mix. That's because some customers may prefer the direct approach, such as telephone marketing, while others respond better to a local advertising campaign.

First steps to customer segmentation

Segmentation does not have to be complex. For a small company, it could be about recognising that you have two or three distinct customer types with different needs. My philosophy is to always start with the simple question: Who do we want to talk to? The answer could be simple - customers. Segmentation principles can then add several layers of intelligence, based on key differentials, such as:

Spending patterns Gender Where they live Age Socio-economic group.

What is important is not surface differences, but those differences that actually affect buying behaviour. What triggers each person to buy? If you run a hairdressing salon, for example, the type of offers you might make to customer groups would certainly differ on gender and age lines. If you own a mail order business, you might be better off analysing buying patterns and split customers into groups according to how much they spend, how often they buy or what products they are most interested in.

Targeted selling
By increasing your understanding about what your customers are buying, you can also maximise opportunities for cross-selling or up-selling. I'm reminded of the builders merchant who sells a tonne of bricks but doesn't cross-sell by selling the sand and cement. By grouping together all the customers who regularly buy certain products, you can target them with relevant offers encouraging them to increase their spend. Not only is a relevant marketing message more effective as a sales tool, it is also about good customer service. A piece of communication that acknowledges what you bought and when is much more impactful than a bland message. What's more, if you are a regular customer, a targeted message shows that you are appreciated and valued. Conversely, a general message, which doesn't acknowledge previous purchases, could well make you feel unloved and taken for granted.

Segmenting new prospects

Communication with existing customers is one thing. But how do we go about identifying new prospects and segmenting them? When it comes to finding new business, it is vital to establish whether there is a market for your products and services and to identify the type of people that would make the ideal customers. This could be based on your existing customer profile. Or you may be branching out into a new area and need to identify clearly who you are targeting. The key is to draw a picture of an individual that represents the type of person you are aiming at. If you take two very different types of prospect, you can see that they will have very different needs, wants, values and opinions. And they will respond quite differently depending on the marketing method you use. Males

With time on their hands Having a disposable income Who have retired or are in semi retirement Live in a rural environment.

Teenage girls

Living in cities With low disposable income But aspirations to enjoy life to the full.

These are certainly extreme examples, but they illustrate how different your segments could be and why it is essential to target messages precisely and not send the same messages to your entire customer base. As you analyse your own customer base, it soon becomes clear that there are some distinct groups with specific requirements. It's time to divide that customer base up and target each group accordingly. The results could surprise and delight you.

Customer Segmentation

December 13, 2010 Bain & Company guide Print

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Customer Segmentation is the subdivision of a market into discrete customer groups that share similar characteristics. Customer Segmentation can be a powerful means to identify unmet customer needs. Companies that identify underserved segments can then outperform the competition by developing uniquely appealing products and services. Customer Segmentation is most effective when a company tailors offerings to segments that are the most profitable and serves them with distinct competitive advantages. This prioritization can help companies develop marketing campaigns and pricing strategies to extract maximum value from both high- and lowprofit customers. A company can use Customer Segmentation as the principal basis for allocating resources to product development, marketing, service and delivery programs.

Related topics Customer Surveys Market Segmentation One-to-One Marketing

Methodology Customer Segmentation requires managers to: Divide the market into meaningful and measurable segments according to customers' needs, their past behaviors or their demographic profiles;

 Determine the profit potential of each segment by analyzing the revenue and cost impacts of serving each segment; Target segments according to their profit potential and the company's ability to serve them in a proprietary way; Invest resources to tailor product, service, marketing and distribution programs to match the needs of each target segment; Measure performance of each segment and adjust the segmentation approach over time as market conditions change decision making throughout the organization. Common uses Companies can use Customer Segmentation to: Prioritize new product development efforts; Develop customized marketing programs; Choose specific product features; Establish appropriate service options; Design an optimal distribution strategy; Determine appropriate product pricing.