Segmenting by goodness and badness


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A constant theme of CRM in any market is empowering customers. Many readers of this blog will remember working in offices where the walls were lined with posters with slogans like “The Customer is King”, “The Customer Pays Your Wages” or “The Customer is Always Right.” These posters expressed a rather simplistic approach to customer management, though fortunately not in most financial services companies. However, a related assumption, “All customers are good” caused a lot of damage to those financial services companies who fell into the trap of driving for volume.

Most financial services companies are exposed to any pattern of bad customer behaviour that they have not factored into their pricing, such as an abnormally high insurance claim propensity or serious imprudence when it comes to borrowing. The two can be related – customers who are imprudent usually need to find more money, and one way to do it is to exaggerate claims. Some time ago, one of our clients found a strong correlation between customer imprudence/oversight (in the form of unauthorised overdrafts) and abnormally high claims.

The term “imprudence” covers a range of unwise behaviours, from sheer lack of ability to keep expenditure under control, to over-confidence or over-estimated expertise in investment management. The last few years have shown how many customers have fallen into that trap, whether in relation to financial assets or housing. And their imprudence has been damaging to financial services companies, whether to reputations or balance sheets, particularly if the company accepted it rather than warning against it. After all, in many areas of financial services, the easiest customer to sell to is the unwise customer. It’s not wrong to do so, but the sale must be a more careful sale, with appropriate safeguards.

Today, we know much more about customers than we used to. Yet I’m still surprised at how many financial services companies use only one definition of risk when segmenting their customers. Exploring the many types of good or bad customers is an essential element of segmentation in financial services. I’d like to see a lot more of it.

Republished with author's permission from original post.

Merlin Stone
Professor Merlin Stone is Research Director at The Customer Framework. He is a leading expert in customer management, including customer recruitment, retention and development. His work focuses on improving customer experience, satisfaction, loyalty and trust, and also customer research, data analysis, systems decisions and supplier management needed to support improved management of customers. He is well known for conference speaking and thought leadership research.


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