Thus far, this chapter has given an overview of the key elements associated with the marketing mix for financial services. This section focuses on the challenges which might confront organizations when trying to manage these elements with a view to the acquisition of new customers. Case study 9.1 provides an example of how HDFC Bank in India has effectively integrated its marketing strategy and marketing mix to promote customer acquisition.
Case study 9.1 Customer acquisition at HDFC Bank
Until the 1990s, the banking sector in India was dominated by two main groups – the public-sector banks and the international banks. The former dealt with the mass market, although the quality of products and services provided was generally considered to be poor. The latter focused on the more wealthy segments and were typically very selective in terms of accepting new customers. Liberalization during the 1990s paved the way for the influx of new private-sector banks, the first of which was HDFC, launched in 1995. The bank’s research had identified a significant middle-class market, which expected a high quality of service and was willing to pay for it. These customers were not prepared to tolerate poor service and long queues in the public-sector banks, but equally were less trusting of the international banks and less attractive to those banks because they were outside the very high-income brackets.
As a new entrant, HDFC needed to develop its marketing mix in order to target these customers and persuade them to switch to HDFC. The basic value proposition that underpinned HDFC’s approach was that of ‘international levels of service at a reasonable price’. Specific marketing mix decisions were as follows.
Continued
Case study 9.1 Customer acquisition at HDFC Bank—cont’d
Product
To meet the needs of the chosen mid-market segment, HDFC offered a comprehensive range of banking services, comparable to the product range of international banks. This was supported by the targeting of specific products to sub-segments based on differences in needs, expectations and behaviours. Staff were recognized as being of considerable importance, particularly those on the frontline, and the bank paid particular attention to recruiting staff with good customer service skills.
Price
HDFC offered its initial bank account with the requirement for a minimum balance of Rs 5000 – significantly below the typical international bank require- ment of Rs 10 000, and so significantly cheaper, but still higher than the public- sector requirement of Rs 500. This ensured that HDFC had the margin to support the delivery of superior service, while remaining significantly cheaper than the international banks.
Promotions
HDFC supports its product and service offer with the usual range of above and below the line marketing promotion, with direct mail, e-mail and SMS becoming increasingly important. A significant recent innovation has been the use of sophisticated analytical techniques to test and evaluate campaigns. This has enabled HDFC to gain a better understanding of how customers respond to marketing promotions and use this information to develop more effective campaigns in the future. In addition, this analysis has enabled HDFC to target its communications more effectively, thus reducing marketing spend and the costs of acquisition.
Place
HDFC focused attention on the 10 largest cities in India, which account for close to 40 per cent of the population, and concentrated on gaining maximum market share in those areas before expanding to other cities. The decision to operate with a central processing unit allowed the bank to keep the cost of estab- lishing a branch network relatively low, and thus supported more extensive coverage (around 500 branches in around over 200 towns and cities). Alongside its branch network, HDFC also delivered its services via ATMs, phones, the Internet and mobiles to ensure that it met the diverse set of needs of its mid- market customers.
The success of HDFC is evidenced in growth rates of 30 per cent per annum and a string of awards from AsiaMoney, Forbes Global, Euromoney and many others.
Sources: Saxena (2000); Interview with Ajay Kelkar (available at http://www.exchange4media.com/Brandspeak/brandspeak.asp?brand_id=811; HDFC Bank (www.HDFCBank.com).
However, not all financial services providers have been so successful in manag- ing the mix for consumer acquisition. Historically, the financial services sector has received considerable criticism for tending to focus on new customer acquisition to the detriment of existing customers. Indeed, the cynical practice of offering unsus- tainably attractive benefits to consumers at the time of acquisition, which are subse- quently reduced, remains a feature of certain parts of the industry. It is undoubtedly true that companies have the right to use promotional pricing as part of its new customer acquisition activities. Promotional pricing is prevalent in virtually every category of consumer goods and service marketing, so why should financial serv- ices be exempt? Promotional pricing does indeed have a perfectly legitimate role to play in financial services. However, it has to be used with care, given the complex- ity of the products, the timescale over which they operate, and limited consumer understanding. With the one-off purchase of, say, a television or a holiday, con- sumers understand clearly the net price they have to pay and are in a position to make a well-informed choice. When ‘buying’ a deposit account from a bank or a building society, consumers may well be in possession of the facts regarding the short-term price promotion but not in a position to judge the long-term competitive- ness of the interest rate. In the field of mortgages, an attempt has been made to factor-in the effect of special introductory offers through the introduction of the Annual Equivalent Rate (AER). The key point to grasp is that care must be taken with the use of new-customer price promotions to ensure the appropriate manage- ment of expectations.
In addition to concerns about the way in which marketing mix variables are used, we must also recognize that the specific features of the financial services sector may create additional challenges. Chapter 2 devoted considerable atten- tion to the array of products that comprise the domain of retail financial services.
In Chapter 10, we present key models and concepts concerning the successful management of products. Meanwhile, it is important to appreciate that the rela- tionship between product and process is particularly close in the case of financial services. When a person ‘buys’, say, a current account; that person is seeking to secure access to a range of service benefits on a continuing basis. The availability of Internet banking facilities may be perceived as a product feature or a process associated with the consuming of the product. However, in the context of cus- tomer acquisition – the focus of this part of the book – we should consider process in terms of how an individual first becomes a current-account customer of a given provider. It must be borne in mind that the processes associated with cus- tomer acquisition comprise things that the organization chooses to require, and certain things that are imposed by external agents such as the regulator. To con- tinue with the example of a current account, many countries have strict rules regarding money laundering. This results in the need to provide original forms of documentary evidence as proof of identify and address. It adds a degree of complexity to the new customer acquisition process and may cause frustration for the customer; however, it cannot be avoided, and this must be explained and managed.
A further aspect of the mix that may be challenging in a financial services context is place. In the conventional consumer goods context, place is pretty straight- forward; it concerns the means by which the consumer gains access to buying the product – i.e. the channel of distribution. This meaning of the term also applies in
the case of financial services. For example, IFAs represent the primary means of distribution by which a consumer gains access to the products of Skandia, the Swedish-owned life insurer. However, having become a customer of Skandia, ongoing service contact is likely to be directly with the company via the telephone, for example. Thus place is a rather ambiguous concept, since it can refer both to the channel of distribution that a consumer uses to become a customer and to the means by which a customer engages in service interventions with the provider company.
Owing to the economics of new customer acquisition, it is becoming increasingly important for companies to market themselves on the basis that there will be an ongoing customer relationship in which a number of products will be bought by the customer over a prolonged timescale. In other words, the profit is in the lifetime value of a new customer, and not necessarily in the profitability of the first product purchased. Customer profitability is determined to a large extent by a surprisingly small group of variables that apply fairly consistently to most forms of financial services products. Consider the case of, say, a loan that is secured on the value of a consumer’s home. This type of loan is sometimes referred to as a second mortgage because, in law, the lender can only gain access to the property’s security value once any first mortgage debt has been discharged. The profitability of a new second- mortgage customer is a function of:
● the amount of money loaned
● the term of years over which repayment of the loan takes place
● the likelihood of the customer defaulting on the loan
● the interest margin
● the purchase of other products from the lending company.
Relatively small changes, either positive or adverse, in one or more of these variables can exert significant impact on profitability, especially if all five variables are affected. This model works equally for first mortgages and unsecured loans.
In the life insurance sector, the profitability of a new customer is a function of:
● the value of the sum assured
● the term that the policy remains in force
● the likelihood of a claim being made
● policy margins
● the purchase of other products from the insurance company.
Again, the cumulative impact of positive or adverse variances with respect to these key variables has a compounding effect upon customer profitability. These variables should be factored into the plans that are designed to achieve a targeted level of new customer acquisition. The logic of this thinking indicates a balanced scorecard approach to new customer target-setting. To target crudely on the basis of maximizing new customers or products sold in a given budget year is to play a pure numbers game that invites considerable long-term commercial risks. Case study 9.2 gives some examples to illustrate this point.