I want to talk to you today about a subject that is absolutely critical if you want to really make your business one of the top performers in this industry–client segmentation. It seems to be an area that is poorly understood by advisors generally, and even when they do claim to understand it, they struggle to implement the concept effectively into their business.

Put your hand up if you think client segmentation is a good idea. Keep you hand up if you have segmented your client base? Keep your hand up if you have used the knowledge gained from your segmentation work to differentiate the services you offer to your clients?

Let me start with something that I hope will get your attention. The data I am about to show you is from the FP Advance Business Fitness Report, which is UK specific. However, the people that I partner with who created this piece of kit, Business Health (an Australian company) do this across the world, including in the U.S., and their data will support my assertions here, so stick with me. Forget the specific numbers and look at the trend or the concept they convey.

KEY VALUE DRIVER

PROFIT PER PRINCIPAL

INCREASE IN PROFIT

CLIENT SEGMENTATION

No

Yes

Effective

(Segment, differentiate services, review regularly, allocate in consultation & most staff aware of key clients)

?53,901

?136,716

?331,478

-

154%

515%

Source: FP Advance Business Fitness Report

Actually, segmenting your client base increases profitability by 154%. That’s pretty good. But segmenting your clients effectively increases profitability by 515%. So what do we mean by effectively?

Segmentation, Targeting, and Positioning

In any business, in any industry, marketers will tell you this is Business 101–segmentation, targeting, and positioning, or STP.

Market segmentation looks at how a potential market can be divided up into smaller segments that are more efficient to serve. That is, understanding the different segments that are sitting within our client base or out in the broader marketplace.

Market targeting then says we will select the segments we can work best with and aim for those. This implies a conscious choice. Only once we know whom we are going after can we position the business to speak the language of our target clients. We’ve all done this haven’t we? Let me ask it another way. Can you be all things to all people? No. Why not?

There are several reasons:

1. Your business aims I assume you have some personal and business objectives that you are trying to hit–financial goals, lifestyle goals. If you are a smaller company with limited time and financial resources, you are going to have to choose the right people to work with. Otherwise you may not achieve your objectives. In fact, you’ll have to do that if you are a larger company as well.

2. Industry regulations There are rules and regulations in place that effectively put a minimum cost on your advice. You can’t just walk around dispensing advice, can you? It usually has to be in writing and you have to follow some steps in a process, which all incurs a cost.

3. Customer age

4. Cultural issues

5. Personality types

All of these things could be used to segment your clients and make better choices about whom to serve and in what way. Other factors, such as a client’s education or the complexity of his or her financial affairs, might also be useful. Who do you generally work best with–clients with less complexity or more complexity in their affairs? Generally, I think you will find it is people with a little more complexity in their financial affairs.

Let’s look at how to think about your segmentation.

Client Segmentation

Example

Definition

Service Standard

A

Top Value to the Business

(Top 5% of clients)

First-class service

B

Next Most Valuable

(Next 20%)

Business-class service

C

The Rest

(That meet minimum criteria)

Coach-class service

D

Anyone Else

(That can’t be turned away)

Reactive service only

(Clients are managed not serviced)

I want you to try this method with your clients. Make a list of your clients by financial value to you on an annual basis. Ideally this will be based on annual recurring income they generate, but if you still work on an up-front commission model, then work out what they generate for you on average each year.

The top 5% of your clients I am going to call “A.” The next 20%, “B,” and the remaining 75% that meet some form of minimum earning criteria are “C.” Note that C clients still have to meet some form of minimum criteria.

There is a fourth category called “D,” and this is for clients who don’t meet any of the A, B, or C criteria, but you cannot turn them away. They might be the son or daughter of an A class client, for example, or an old widow who has been with you for 30 years. You can remain available for these people.

Let me explain this concept using an example. Let’s say I want to fly home to visit my family in Australia (I’m Australian) with an airline. I have three choices of service: first class, business class, or coach.

If I fly first class back to Sydney, what is the service standard I will receive?

o I’ll get a bigger seat.

o It will fold into a flat bed.

o I get to eat when I’m hungry, not at feeding time for the masses.

o My food might be prepared by a chef.

o I’ll get proper cutlery.

o There will be a choice of fine wine.

o At the airport I can check in at the first-class counter (no queues).

o I can use the lounge before we depart.

o If I call for service, they will come over and say, “Mr Davidson, what can I get you?”–they know my name.

We all know what it is and what you get even if you have never flown first class. It’s a fabulous service experience.

What do I get if I fly business class back to Sydney? It’s sort of like first class but a bit less. The seats are not as big, the wine is not quite as good, but it is still pretty good service and better than coach.

What do I get if I fly coach back to Sydney? Basically, I get a seat, food, and drink. I eat when they serve food to everyone, and it is standard fare. We make jokes about airline food but on long haul flights today, it’s not too bad even in coach. The drinks are free, so you can still have a good old time all the way to Australia. But, if I don’t like the red wine in coach, what will they say to me? “Try the white, or have a beer.” If I don’t like one of the red wines in first class, they will probably have a choice of two others–and all of excellent quality.

What is the price difference between coach-class and first-class airfare back to Sydney? It could be somewhere between 500% and 1,000% more expensive. But you get a fantastic package of services don’t you?

What about for business-class airfare? It could be between 300% and 500% more expensive. But it is also significantly better. Or is it?

Do the first-class passengers arrive in Sydney any faster than the coach class travellers? No. Do they service the engines any better for the first-class people? No. If I do fly coach, do I get the work experience pilot? No.

I would put it to you that wherever I sit on the plane, I get the same service. It’s called a seat, food, and drink. Yes, they package it up nicely in first and business class, but it is exactly the same service. Is this fair? Up to 1,000% more for exactly the same service? How do airline executives sleep at night?

Could you do this in your business and sleep at night? I know some people might be prepared to pay on this basis, but is it right? Of course it is, but not just because some people will pay. There is more to it than that. The airlines know their target markets inside out.

Who fly’s first class? What types of people? Wealthy ones–sports stars, celebrities, and senior business executives. But if they are uber-wealthy or very senior, to be honest, they’ll have their own private jet. So it is actually a defined target market of wealth above a certain level but with some sort of ceiling. If I am uber-wealthy, I’m not going to go and slum it in first class.

For these people the price isn’t the issue; it’s the service. If I am a CEO and I am being sent to Hong Kong to do a deal, I need to arrive in shape to hold my 17 meetings in three days and be back at work here on Friday, ready to do business again. The deal might be worth $100 million, so it is worth spending the money on the airfare to get me there and back. For the wealthy traveller, the cost of first-class airfare might be like you and I pulling out a $20 note (in relative terms), so why not?

Who mostly travels business class? Mostly business travellers. I know there are some higher income earners there too, but it is still largely driven by middle managers getting to meetings.

The point is that you don’t accidentally book yourself into first or business class. They are priced so aggressively to prevent that confusion and also because the users of first and business can justify a higher price and still see value in it. Ordinary families and student travellers would not be inclined to pay for the bells and whistles. They are after a good service that gets them to their destination and that’s it.

The airline itself delivers only one service–transport from A to B. However, the way it packages and markets its top line services allows it to generate a much higher margin at the front of the plane. The same will be true when you look at your segmentation. The top 25 percent of your client base will generate somewhere between 60 percent and 90 percent of your income. If it doesn’t do that already, you can make it do that by finding out what your top clients really want and packaging what you do to better meet their needs.

Your business does only one thing–provides top quality financial advice to your clients. However, if you can identify the type of service your clients want, you can do it more profitably and increase client satisfaction in the process.

Let’s look at an example. I am working as the steward on an international airline flying long haul to Australia. Unbeknownst to the travellers, I am on a commission-based remuneration package. Donald Trump walks down the airbridge toward my flight (his private jet is in for a service) and I greet him, checking his ticket. He must have a new personal assistant because he has a coach-class ticket. Will he be a happy customer if I let him fly coach? Unlikely. So I say, “Mr Trump, this is where you have paid to sit and this is what you get, but I have something else I think you will like.” And I take him into first class and show him what he could have. Donald will probably say, “I’ll have a first-class seat please,” and I will say, “No problem at all, sir. Sit down. I’ll bring you a champagne, and I just need your credit card because this seat costs an extra $10,000.” What will he say now? Probably nothing and he’ll provide his credit card because, for Donald Trump, this is how he lives.

He is happy because he gets a service he’s used to and I’m happy because I have just made a big fat commission. Great job.

Mike the motor mechanic from Detroit gets on the plane next with his wife and three screaming children. I think I’ve just made a nice commission upgrading that bloke with the funny hair, why don’t I try the same thing here with this guy. So I show Mike and his family first class. What will they say? Something like, “Looks great but how much is it?” I’ll say, “Sir, it’s only an extra $10,000 each.” Mike will then explain in a polite Detroit way that his personal economic circumstances don’t allow him to partake of my fine service–if he doesn’t hit me first.

Was I doing the right thing by trying to upsell Mike to first class? No, I was thinking of my pocket.

Would I have been doing the right thing if I let Donald Trump fly standard class to Australia? No, I might have been imposing my own choices onto him.

I need to understand the needs of my clients and offer them the right service for them.

The Marketing Loop

Starting with a simple A, B, C segmentation model is a good start, but it’s not enough. I recommend running a focus group with half a dozen of your best clients and asking them to explain what they love about you and what they wish you did differently. Here is what we found in one business we did this with:

Research Revealed Some Issues

Some of the A clients were telling us we were providing too much information and too much contact, and they didn’t really need it or like it. They were some of the top clients in the business paying a lot of money each year for advice, so the business threw the kitchen sink at them with lots of meetings, phone calls, reports, valuations, and corporate hospitality. The clients explained, “I am retired with enough money to do the things I want and so I want to play golf and go sailing. I don’t want to be spending all my time managing my money with you. I like you and I trust you. All I need is an annual review to check that everything is okay, and if it is not okay, I need to know you would just pick up the phone and call me.” Too easy.

However, another group of A class clients in this focus group said, “I’m exactly the opposite of that. I am working and very busy. You are my eyes and ears out there in the market. I want regular contact but it needs to be short and sharp and focused on issues affecting me. I don’t have the time to keep up with all of this.”

There was a third group (yes, three distinct groups in a group of half a dozen clients) that were very sophisticated and just understood their financial issues at a deeper level than everyone else. They wanted the full service and rang the business once per week with difficult questions.

In subsequent research there was a group of younger executive types earning big salaries who wanted more information than they were getting. However, despite the big salaries, these younger accumulators had no money. After they paid tax, sent the kids to private school, paid off the big mortgage every month, and took a European holiday, there wasn’t much left. The old approach to these clients was to try and sell them a mortgage or some life insurance to get paid a commission to cover the costs of servicing. But they didn’t want this.

We split all of these clients into three categories based on their needs:

1. Low Involvement Those happy to delegate management of their financial affairs as long as they were kept informed

2. Involved and Direct Those seeking active participation in management of their financial affairs (or at least the feeling of actively participating)

3. Sophisticated Those seeking full-service financial planning and high-level strategic advice

We then created a two-factor segmentation model shown below:

1

Low Involvement

2

Involved and Direct

3

Sophisticated

A

Annual Review

Midyear Review

Seminar Generic

Boardroom Lunch

Annual Review

Midyear Review

Seminar Generic

Seminar Specific

Boardroom Lunch

Monthly Research E-mail

Proactive Offers

Four-Monthly Reviews

Seminar Generic

Seminar Specific

Boardroom Lunch

Monthly Research E-mail

Specialist Investments

Proactive Offers

B

Annual Review

Midyear Review

Seminar Generic

Annual Review

Midyear Review

Seminar Generic

Seminar Specific

Boardroom Lunch

Monthly Research E-mail

Proactive Offers

C

Annual Review

Seminar Generic

D

Reactive service only

You can see we differentiated the level of contact between the segments based on what they told us they wanted. None of the Low Involvement clients asked for a fee reduction even though we now did less. In fact, their satisfaction went back up and referrals increased from this sector.

The young high earning accumulation clients now received a service they had always wanted, which was what we already delivered to the A2 (Involved and Direct) segment.

As you can imagine, the A1 segment was our most profitable. They had lots of money and didn’t want us to do very much. So why didn’t we just work with clients like that? We could have and, if we were just focused on maximizing profit, we should have, but we didn’t. Why?

The truth is that the A2 segment was full of small business owners just like us. We really understood this segment, had loads in common and, most importantly, enjoyed working with them. But it was only when we nailed the service offering that we could charge enough to make them profitable.

What Happened?

1. Information groups were created, which gave us economies of scale in getting the right style of communication to the right segments at the right time. The Involved and Direct groups and the Sophisticated group all wanted frequent communication aimed at business, tax, and investment issues. What was written for any one of these groups was often valuable to the other two.

2. The work we did for the Sophisticated clients was often new for us as a team. These clients (of which there were only three) called and asked us questions to which we didn’t know the answers. However, what we learned from them in finding the answers often lead to developments that had application to our other client segments.

We called them the Formula 1 factory. A Formula 1 racing team spends $400 million a season to race two cars. But what they learn gets applied to next year’s top-of-the-line models and, in five years time, it is in the cars you and I drive around. The same was true for us with these clients.

3. Suddenly we realized that the B2 accumulators wanted what the A2 wealthy clients got. The A2 segment paid a minimum of $15,000 per annum for this service (and had the wealth to justify it), while the B2s paid $2,000 to $3,000 per annum, which was a premium price for a group that previously we worked with for almost nothing.

How could we afford to provide the same service to the B2s for less than one fifth of the cost? The answer was due to economies of scale. We built the service for the A2s who paid us enough to justify it. However, to add another dozen B2s cost us almost nothing. They received the same communications (mostly), so there was no more work in churning that out as it had already been written for the A2 segment. If we ran a seminar, hiring the room and the speaker was a fixed cost. The only extra was a small per head charge for the extra B2s who attended.

Was it fair to charge them so much less? What if the A2s found out? The answer once again is yes, of course it was fair. Had we charged $15,000 for the service to the B2s, we would have had no B2s; they couldn’t afford that at this stage of their lives. Secondly, we knew that we added more value to the A2s because they had more wealth. Remember, we don’t charge for our time; we charge for the value we add to clients. If we saved clients ten percent off their capital gains tax bill, who got the bigger check back from the tax man, A2 or B2? Obviously, the A2 clients because they had million dollar plus portfolios.

4. Knowing the types of people we worked with allowed us to identify and ask for exactly the types of clients we wanted in our marketing. Typically, they were business owners, professional people, and senior executives.

5. We could communicate our new value proposition clearly to any new prospects.

6. Anyone who didn’t fit into the segmentation we could pass on quickly and easily (a win for them and a win for us).

7. All our clients (C included) loved being part of a Formula 1 style business. They knew we worked with some high flyers and, for some reason, it made them feel good to be looked after by a business like this even though they would never have that level of wealth.

8. In our external marketing, the work we did for the Sophisticated clients made for some fantastic case studies. For one of our Sophisticated clients, we saved him over $2 million of capital gains tax. That really got the attention of accountants and lawyers when we presented to them about our business.

9. We repackaged the Sophisticated offer and called it the Private Client Service just like a private bank. When we analyzed the time we spent on one of our top clients who paid us $20,000 per year, we realized he was only break even because of the time we spent on him. So we pitched a repackaged Private Client Service to him and he increased his fee to $27,500 just like that because he saw himself as fitting the profile we had created. Now he became a profitable client.

10. Finally, we increased the share of wallet we received from our clients. In fact, for most clients we managed absolutely everything, which increased their assets under management and fees dramatically. In the past some clients had given a bit to us and a bit to other advisors. Once we delivered a service they really wanted, we got it all.

In your business you don’t need to work with these segments. What you need to do is identify the segments that already exist in your client base and create service offerings that really hit the mark. Of course you may identify a group that you don’t want to work with and you can stop, but that is up to you.

For the clients that are not A, B, or C standard, you can provide a reactive service or you can hand off to another advisor for whom these clients are good quality. The handoff might be internal if you are building a larger business or you can hand off or sell these clients to an external firm or advisor if you are trying to stay focused and keep costs under control.

Sometimes people ask, “What about good referrers?” Shouldn’t they be treated as A class clients because of their value to the firm? My answer is no. Give people the service that is appropriate for them. If a B or C class client sends you lots of quality business they may still only want and need the service you have designed for other clients like them. However, for these good referrers you can always provide a little extra each year to tell them you love them. It might be tickets to a game, or dinner at a fancy restaurant, or a nice weekend away paid for by your business as a thanks for the referrals.

Remember you are not trying to upsell people to the larger size Coke like they do at the cinema. You are trying to provide the right service to the right client.

Another issue that comes up is whether to offer the client a choice of service packages in a menu style. Although I have seen businesses where this has worked, my personal view is that I wouldn’t do it. Most advisors want to offer the client a choice because they haven’t done the work required to truly understand the client’s needs. This is not a great basis for adopting such an approach. Once you have done the work and created the client profiles, it doesn’t take long at a first meeting to work out which type of person they are and to offer them the appropriate service package. In fact, you can even change the language you use in the first meeting to suit the client you are with.

For example, a new client comes in and you decide after a while they are a delegator or Low Involvement style. As you sum up the service you can offer you may say something like, “Mr. or Mrs. Client, let me tell you how we work here at XYZ Financial. I can’t sign the forms for you, but I can do just about everything else to remove the hassle from managing your financial affairs. Does that sound like something that would work for you?” If I am a delegator client, this is what I want to hear.

However, say those words to an Involved and Direct client and you lose the business. They may not say anything to you directly but inside they will be thinking, “Listen my friend, I’ve built what I have over a lifetime of hard work. The last thing I am going to do is let you put it at risk.” So once you realize that the client in front of you is one of these, you can change your words to suit saying something like, “Mr. or Mrs. Client, let me tell you how we work here at XYZ Financial. We don’t believe we have the right to tell anybody what to do with his or her own money. Our job is to provide data, research, and information that assists you in making informed decisions about how your money is managed. Naturally, if we think you are going to make a big mistake we will speak up, but otherwise it’s your call.” This is what these clients are looking for.

What do we actually deliver out the back for each client? Exactly the same thing–otherwise known as top quality financial advice. However, we speak to them in a language that they understand and respond to.

So how do you find the groups within your client’s base? Just complete a simple analysis of your top 20 clients. Prepare a spreadsheet noting the following information:

o Client age

o Retired or still working

o Occupation, if still working

o Previous occupation, if retired

o Total family income

o Assets under management with you

o Other assets not with you (such as family home, other property assets, other investments, stocks)

o Services you have provided to them (tick all that apply), such as insurance advice, investment advice, pension advice, estate planning advice, tax planning advice, cashflow planning, and anything else you provide

From this simple analysis you can look for the common threads or groupings within your existing clientele. It is amazing how, without any conscious effort, most advisors have two or three key groups they already work with. By identifying this in your segmentation work, you can start to specialize in your niche markets, improving your focus and your marketing messages to speak directly to these types of clients. What have they purchased from you?

Once you have identified the groups, think about their top five issues or “pain points.” These don’t need to be restricted to financial issues. What keeps these people awake at night, and how can you package a bundle of services that will help remove the worry or take away the pain (with some smart strategies)?

Take a look at the profitability figures again for advisors that do what we call effective segmentation. It should be starting to make sense as to why they achieve a 515% increase in profitability once they get this right.

KEY VALUE DRIVER

PROFIT PER PRINCIPAL

INCREASE IN PROFIT

CLIENT SEGMENTATION

No

Yes

Effective

(Segment, differentiate services, review regularly, allocate in consultation & most staff aware of key clients)

?53,901

?136,716

?331,478

-

154%

515%

Source: FP Advance Business Fitness Report

Getting the segmentation work right allows you to generate deeper insights into your clients’ needs and wants and to provide services they really want. This knowledge has direct application to every form of client contact, whether face-to-face, in writing, or via e-mail, and in all your marketing. By demonstrating this deeper understanding in all aspects of your business, you become a magnet for more of the right types of clients.

Try it and see.

This is a published version of a focus session presented by Brett Davidson at the 2011 MDRT annual meeting in Atlanta. Davidson is chief executive of FP Advance Ltd., London, U.K.