Matching Services to Client Needs: How to Segment Your Clients

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:

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.

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.