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In a market where new customer acquisition has become a major challenge, when investors' interest in financial markets is at a new low, how can any financial intermediary ignore leads and prospects? How can he think of politely turning away business opportunities, if he is desperate to grow his business? And, how can saying no to a prospect help him drive business growth? The answer to this lies in implementing a clear customer segmentation strategy.
What is customer segmentation?
Customer segmentation is a process where you slot all customers / prospects / targets into different segments based on certain common traits or characteristics. This slotting into reasonably homogeneous groups enables you to think of how each segment needs to be served, as each segment may have very different needs from their advisor. When this segmentation is completed and the needs of each segment are defined, you would then ideally map your own strengths and competencies, your abilities to serve each segment and on that basis arrive at what you consider your target customer segment. Your target customer segment is therefore the one which you believe holds the maximum potential for successful conversions for your particular business model. It need not be the biggest customer segment - it could be a small niche, but one where you think you have unique skills or strengths to make significant inroads into, and which is large enough for you to run a viable business with a reasonable market share.
Not all types of customers may find value in your offerings. That doesn't mean your offerings are worthless - it just means that you have to focus your attention on the segment that does find your services valuable. It may for example be very tempting to run after the lead of an HNI prospect that you have received. But, if you know that yours is a pure goal based financial planning service and this investor is known to look for ideas to make quick money in the market, would you still try and seek his business or politely turn it away?
Maintaining a focus on your target customer segment, even if it is at the expense of letting go of opportunities in other segments may help you focus your energies where they ought to be focused and thus help you acquire clients who add value to your firm, and for whom your services add value.
How should you segment investors?
The traditional form of segmentation followed widely in the industry is by size of portfolio - ie Ultra HNI, HNI, Mass-affluent and retail. Each distribution firm will have its own thresholds or cut-offs to slot different customers or prospects into these 4 slots. Large organizations create different propositions to cater to each segment - thus you have a Private Clients business that focuses on ultra HNIs, you have a wealth management business that focuses on HNIs and mass-affluent clients and you have a retail distribution business that focuses on retail clients. Some IFAs cater to all these segments, some specialize in one or more of these segments.
We would argue that a portfolio-size based segmentation may not really help you in arriving at a tightly focused target segment that can best utilize your unique skills and offerings. If you decide to focus for example on the HNI segment, you will find quite a large variety of clients. We are not talking about their professions (doctors, lawyers, businesspersons, executives etc), but we are talking about their expectations from their advisors. Some may be just looking for information to support their own analysis and may then go direct, some may be looking to you to deliver alpha in their portfolios while others may be looking for goal based financial planning and regular execution and monitoring of the plans. Some may be retired (we call them wealth preservers) while others may still be generating annual surpluses from their jobs/businesses/professions which needs to be invested (we call them wealth creators). Needs of wealth preservers may be very different from wealth creators, though both may be clubbed within the broad HNI category.
For the purpose of a more relevant segmentation, based on client expectations from an advisor, you can consider this matrix for wealth creators :
The first level of segmentation here is Wealth Creators vs Wealth Preservers. At the next level, we are attempting to create 4 sub-segments within the Wealth Creators segment.
Price sensitive, alpha driven : These are clients who expect alpha from their advisors on an annual basis, as opposed to long term financial plans. They are price sensitive - they are aware of "cheaper" alternatives like direct plans in mutual funds, online plans in insurance etc and expect you to give them a good deal in this context. If you are equipped to take on a mandate of alpha generation through your own calls (like many advisors who practice active advisory do), then one part of the requirements can be met. If you think that for a certain portfolio threshold size and above, you are happy to recommend execution through direct plans with a fee that comes to you, then you are geared to meet the requirements of this category, and may want to focus your attention on this category. Now, it does not matter whether these clients are doctors, lawyers or executives - what matters is they have a common set of expectations from their advisor. It is your call whether you think these requirements fit into your service proposition or not. If not, its best to turn away a prospect and channelize your efforts in the direction that best suits you. Price sensitive, goals driven : These clients are price sensitive like option 1, but their expectations on outcome from their portfolios is not annual alpha but a well managed, well executed and regularly monitored financial plan that is designed to help them achieve their long term financial objectives. If the outcome is exactly what you are geared to offer and price sensitivity is something you are willing to tackle as discussed above, here is a segment for you. Value focused, alpha driven : The alpha expectation is similar to option 1. But in terms of the commercials, these clients are not that much bothered about marginal price differentials or don't even know that differentials exist - but they are more concerned about whether they are getting good value from you in terms of good advice and excellent service. If you are delivering the value they are looking for, cost is a much lesser concern or a decision making factor for these clients. Value focused, goals driven : This is a combination of the goal based approach in option 2 coupled with the price vs value equation of option 3. Most financial planners would love to have clients from this segment.
A similar set of sub-segments can be created for wealth preservers, based on homogeneous client expectations, rather than portfolio sizes alone. The four options discussed above are just one example of how you can slice and dice the wealth creators segment. This is not to say there is no other way - any segmentation that helps you club clients into homogeneous groups with similar expectations from their advisor, is the right one for you.
Client expectations are not wrong - they just don't fit your model
The important thing to note is that there is obviously nothing right or wrong about client expectations. It's the client's money, he has a right to have his expectations. Its your job as an advisor to clearly define which expectations at what price are you geared to deliver, identify the segment that best suits your capabilities and beliefs and then go all out to be the best in the business in your chosen segment.
Define your segments and then slot every prospect in the first meeting
Once you have this segmentation in place, in your first meeting with a prospect, you will attempt to understand exactly which sub-segment out of the 4 above he ideally fits into. If your preference is to work with any client in option 3 (wealth creator - goals based - value driven) and HNIs above Rs.1 crore in option 2 (wealth creator - goals based - price sensitive), and it turns out that this prospect fits best into option 1, would you still take on this business or say no even if there were a couple of crores that could be added to your AuM?
By choosing to work exclusively with clients who are a best fit between their expectations and your proposition, you will maximize the value of your time, you will find client acquisition a lot easier, you will find client retention a lot simpler and referrals too would usually come in for clients with a similar profile, thus making conversions a lot easier.
Being everything for everybody is an idea of the past
There was a time in the distribution business where distributors could set up their practice and attempt to be everything to everybody. But, as client expectations are getting more sharply defined and options for clients are increasing, you need to be very sharply focused on exactly who constitutes your target client base. Internationally, advisors are increasingly opting for a super specialist role. Its no longer enough to say you are a financial planner - you now have retirement specialists in UK and USA, who cater exclusively to clients who are either retiring or are retired. They build their expertise on just this one segment, which gives prospects a lot more confidence that they are dealing with an advisor who truly understands their world, their needs and their circumstances. We are perhaps not quite there yet in India. But, we certainly are in an environment where being everything to everybody is not going to be a viable proposition. Can you actually be a great discount warrior for big ticket transactions, a super alpha generator for alpha seeking clients and a caring and meticulous financial planner - all rolled in one? If you can't, and you know who you are and what you do best, do attempt a customer segmentation exercise to define which client segment you ought to focus on, and be ruthless about saying no to others. The key here is to understand that there are many investors out there in each segment - choose your segment carefully and you will find building your business in your chosen niche a lot easier than shooting everywhere hoping to strike with some shots.
All content in Marketing Wiz is created by Wealth Forum and should not be construed as views of Kotak MF.
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Marketing Wiz is a joint initiative between Kotak Mutual Fund and Wealth Forum, where we share insights on how distributors and advisors can accelerate their business growth by understanding and applying essential marketing concepts and practices. Marketing is often seen as a relatively weak link in an IFA's practice, and therefore offers high potential to deliver growth, if leveraged intelligently. It will be the endeavour of Marketing Wiz to help you strengthen your marketing capabilities, connect better with clients and prospects, serve clients better and thus enhance your own business growth.