Using Segmentation in a Small Business Environment

Using Segmentation in

a Small Business

Environment

Western Independent Bankers Annual Marketing Conference

Bill Alt, VP, Small Business Segment Manager Hibernia National Bank, New Orleans, LA

What Will We Cover Today?

hFirst, let’s define terms

hSecond, tell you a little bit about my bank to set some perspective; create a point of comparison hThird, walk through my bank’s experience in

implementing a customer segmentation system hFinally, wrap it up with some Next Steps,

What is Customer Segmentation?

The act of dividing a market into distinct

groups of buyers who might require

separate products and/or marketing

mixes

.

These segments must be:

hMeasurable hSubstantial hAccessible hActionable

How Can Markets Be Segmented?

hProfitability - e.g., high profit, medium profit,

low profit

hDemographics - e.g., age of business, # of employees, industry type, women-owned, etc. hBehavioral - e.g., Online Banking users,

branch transactors,

hPsychographic - e.g., Calm Retireds, Overbooked Moms, Live Wires,

Hibernia National Bank

Small Business Banking

h$16B company serving 80,000 small business

households in Louisiana and East Texas

hFull line of financial services products for

small businesses and small business owners:

– Cash Management - Trust Services

– Brokerage - Loans & Deposits – Insurance (P&C and Life) - Wealth Management

HNB SBB Distribution Network

hInternet (loan applications and deposit accounts) hDirect Bank Center (direct mail and call center)

hBranch personnel operating out of 265 physical locations h105 dedicated Small Business Bankers

hTreasury Management sales staff hInsurance sales staff

hBrokerage sales staff hTrust sales staff

HNB Small Business History

hTargeted the Small Business market in 1992

hInitial focus was on the operational side in order

to make small business lending profitable: – Centralized Loan Underwriting

– Credit Scoring

– Standardized Small Business Loan Products – Quick turnaround; streamlined loan decisions

Initial Small Business Focus:

hLoans, Loans, and Loans!

hOffloading administrative, documentation, and

underwriting duties from the Business Bankers

hTo give them more time to find loans!

hProduction goals were loan focused

hIncentive plan was loan focused

Small Business Loan Balances:

(in 000’s) $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 S B B L oa ns

Not that Deposits or the

Business Owner were ignored…

✔OnePrice/Completely Free Small Business

Checking Account

✔Treasury Management Services

✔Tower Gold Services consumer package

But these products and services were typically sold by someone other than the Business Banker

Small Business Loan & Deposit

Balances:

(in 000’s) $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 S B B L oa ns S B B De p osits

The Starting Point:

Customer Profitability

hImplemented a customer profitability tool called

the Customer Relative Valuation Model (CRVM)

hCRVM has become a guide for Business and

Retail Bankers

hCustomer profitability forms the basis of our

Small Business Profitability Decile Ranking:

Total Value By Decile

-$1,000,000 $9,000,000 $19,000,000 $29,000,000 $39,000,000 $49,000,000 $59,000,000 $69,000,000 T ota l V alu e 1 2 3 4 5 6 7 8 9 10 De c ile R a n k

Note: Reported Value = Economic Value Added (EVA)

Top 20% generate 79% of Profits

Bank Customer Profitability

Notes:

hThe 80/20 rule is right, in fact it may understate

the problem; some banks report 130/20

hThis is not an easy calculation, but profitability

software is getting better and cheaper

hYou will be surprised by who is profitable and

“

Many companies have profitability

systems that identify high - value

customers. However, only a handful

of organizations have powerful

segmentation schemes that enable

segment - specific treatments.”

Profitability Based

Segmentation

Profit Tier % of Customers % of Profits

High 20% 79% Medium 34% 18% Low 46% 3%

“CRVM Calling”

1st Step Towards Segment-Based Marketing

hEach branch is assigned a list of high value

customers

hBranch bankers are directed to call each of

those customers once per quarter or no incentives

hThe goal of these calls is to retain the customer

But CRVM Calling Has Problems

hNot all high value customers are alike:

hWealthy customers with few accounts

hModerate worth customers with many accounts

hNSF customers are high value too

hProfitability based segmentation is not actionable

& says nothing about customer needs.

2nd Step: Combining Customer

Profitability with Product Ownership

High Profit Tier

Segment 1 Segment 2 Segment 3

Description Business DDA & Owner’s Accts Business DDA, but No Owners Accts No Business DDA Objective Retain, Retain, & Retain Retain and Get Personal Accts of Owner Retain and Get Business DDA

Putting Segmentation To Work

Profit Tier Service Level

Primary Goal

Primary Contact

High Proactive Retention

Business Bankers Medium Active Growth

Branch or Call Center Low Reactive Migrate or Control Costs Call Center & Mass Advertising

High Value SB Customer Program:

“Targeted Selling”

"Assign high value customers to specific “Relationship Managers”

"Use CRVM reports to study each assigned

relationship to identify profit drivers & opportunities

"Craft a financial services strategy for each assigned high value household

"These individual customer strategies will be stored and shared via HNB’s bank-wide “Universal

Universal Workstation

hBankwide, Hibernia uses a common customer

information/sales platform called the Universal Workstation.

hWhen a customer is pulled up on the Universal

Workstation, an icon appears indicating the customer’s segment

hAll high value customer “profiles” are stored in

But Targeted Selling Has Issues

h

Data Issues

. Householding problems

mostly; can be a very big distraction

h

Technology.

Not all of our 105 Business

Bankers are on equal footing; slow system

h

Incentives.

We incented for loans, not

relationships

h

Cultural.

Over 50% of high value customers

were with Branch Managers

3rd Step: Address Each Problem

Individually

hData Issues. Adjusted householding algorithms;

invented Customer Link feature; constant cleanup

hTechnology. Memory upgrades; practice makes

perfect; using computers is not an option

hIncentives. Revamped SBB incentives include

customer profitability, retention, and all deposits

4th Step: In-depth Reporting

(a/k/a “Nowhere to Run, Nowhere to Hide”)

hBankwide Pipeline Report. All pipelines now

rollup to a master pipeline report reviewed by CEO

hDashboard Reports. Implementing reports by

trade area targeting specific measures (eg., % without personal DDA), setting goals and

providing leads

hSales Leadership Reports. Real-time sales

reporting by banker, trade area, region, and bank-wide on # of contacts, profiles, referrals

Dashboard Reports

R egion T r ade Ar ea T otal R E L s (6/01) T otal R E L s w / H IS I (6/01) P en etr ation as of J u n e 2001 Goals New H IS I J u ly 2001 New H IS I Au g 2001 T otal New H IS I P er cen t Goal Attain ed R iver R egion 4 5 2 5 3 1 1 .7 3 % 6 0 1 1 1 6 .6 7 % T er r ebon n e 1 ,0 4 7 1 2 8 1 2 .2 3 % 8 1 2 3 3 7 .5 0 % B ayou T otal 1,499 181 12.07% 14 1 3 4 28.57% CB D /U ptown 9 4 1 1 5 0 1 5 .9 4 % 5 0 2 2 4 0 .0 0 % E as t J effer s on 1 ,5 4 8 2 0 5 1 3 .2 4 % 1 2 1 2 3 2 5 .0 0 % E O r l ean s 1 ,0 0 8 1 4 1 1 3 .9 9 % 1 0 1 4 5 5 0 .0 0 % N or th s h or e 9 4 7 1 0 3 1 0 .8 8 % 1 1 0 0 0 0 .0 0 % W es tban k 6 8 9 5 9 8 .5 6 % 1 0 0 0 0 0 .0 0 % GNO T otal 5,133 658 12.82% 48 2 8 10 20.83%

Some Next Steps

"Continuously improve and refine segmentation schemes considering the implementation of:

➔ Attrition risk models

➔ Propensity to purchase models

➔ Next Most Likely Product model

"Segment prospect base using customer value propensity models

"Constant communication and sales force involvement

Conclusions

"Individual customer profitability is a must

"The segmentation system must be actionable; profitability alone is not enough

"Fancy CRM systems are not necessary to get started - identify your high value customers and treat them well

"This is not a short term project; it requires upper management support and sales force commitment