Segmentation rests on the assumption that differences among buyers are related to meaningful differences in market behavior.
What makes a segment meaningful depends on certain characteristics (D'Amico and Zikmund 1993): (1) the market segment has characteristics that distinguish it from the overall market; (2) the market segment has a market potential of significant size, that is large enough to be profitable;
(3) the market is accessible through distribution efforts or reachable through promotional efforts; (4) the market segment has a unique market need and the likelihood that the market segment will favorably respond to a marketing mix tailored to this specialized need is high; (5) the segment's market potential should be measurable.
Ease of measurement is desirable because it facilitates effective target marketing by helping to identify and quantify group purchasing power and to indicate the differences among market segments. In planning the target market strategy, a firm decides on the target market approach to pursue (Berman and Evans 1992). This can be a mass marketing approach (aims at a large, broad consumer market), a concentrated marketing approach (concentrates on one group of consumers with a distinct set of needs, dif- ferentiated marketing approach) or a multiple segmentation approach (aim-
1 PIMS: Profit Impact of Marketing Strategy; a study of business strategy initially sponsored by the Marketing Science Institute.
ing at two or more different market segments, each of which has a distinct set of needs).
In the banking system there has been a general trend towards a more marketing-oriented (demand-determined) strategy and supply-led banking has been increasingly replaced by much more pro-active banking (Gar- dener 1994). In this respect, Gardener mentions the relevant research: a case study (Clarke at al. 1988) on the strategic marketing orientation and respective changes in the organizational design of a large UK bank demon- strates the marketing-induced organizational changes and the commitment of the very senior management towards a marketing orientation.
The research by Feeney (1989) - which employed case study, participant observation and survey methods - emphasized the market (demand) orien- tation of modern corporate banking. Penrose (1959) and Abraham and Lierman (1991), however, point out that while changing the organizational design, too much focus on being demand-oriented may also cause negative outcomes.
Main factors that lead banks to re-structure themselves into well-defined segments can be summarized as: competition, more and more segment based investor analysis, sustainability of performance and growth options, demand for dedicated services at a good price, increased importance of service quality in customers' choice, critical mass in all market segments, accountability and higher visibility of each business line, potential to streamline holding structures.
Segmentation in financial intermediation is an important part of strategy formulation and it develops onto two fundamental levels. In the scope of individual (personal) banking, private banking - which targets high net worth individuals - is distinguished from corporate banking, which aims at corporate clients. On the second level (SBU level), both of them have their customer base subject to further segmentation in order to gain competitive advantage by building comprehensive product offer and specific services.
In private banking, the main challenge is to precisely segment high-net- worth individuals and affluent market clients and understand their differ- ences in profiles and needs. In order to develop customized products and services, private banks - apart from using criteria such as age group, social background and lifestyle - are enhancing their client segmentation with a behavioral approach by using criteria such as risk profile, investment in- volvement, loyalty, usage of special services. Due to the dynamic nature of well-structured information about the client (e.g. history of transactions in client portfolio), customer segmentation itself is dynamic and requires a pro-active approach.
In corporate banking, the segmentation of small and medium size firms is strictly linked to the definition of the business area of the bank and to the
system of offered products and services. It means that segmentation is di- rectly related with the range of services offered to small and medium size corporates, the level of coordination of services with respect to client needs, the level of continuity of the exchange process between the bank and the client firm through time (Caselli 2001).
The selection of segmentation criteria is not easy as it seeks for vari- ables that maximize the homogeneity of the segment within itself and het- erogeneity among segments. The segmentation model approach can offer management an effective support in terms of accessibility, measurability and importance of each segment and requires the identification of the ob- jectives and pursued benefits of the segmentation process followed by analyses for served client portfolios. In this sense, market segmentation is more difficult and complicated for corporate than for private clients due to overlapping and interdependent determinants of firms, such as the charac- teristics of management, structure and financial characteristics of the firm (Caselli 2001).
The evolution of segmentation models for small-medium size corporate clients can be divided into four categories (Caselli 2001): 1) poor segmen- tation, 2) defensive segmentation, 3) complex segmentation, and 4) proac- tive segmentation.
In a two dimensional model (level of market analysis of client firms and level of market analysis of offered services), the evolution of above mod- els shows a diagonal movement from low to high with respect to both di- mensions. Therefore proactive or competitive segmentation models are su- perior in terms of innovation and completeness compared to rich and defensive segmentation models. The analysis reveals that proactive seg- mentation fulfills the product-market matrix by focusing on the descriptive aspects of the target market and on the characteristics of the companies with which the bank is developing a relationship.
The application of proactive segmentation recognizes a source of com- petitive advantage in environmental diversity as the significantly different corporate segment enables the bank to differentiate itself by meeting the specific needs of the segment with its system of services and defends its market position against competitive forces.
The construction of a proactive segmentation model requires a strong focus on the concepts of offered service and target market. In this approach any segmentation process starts by identifying a range of offered products and a possible group of companies that represent the target market of the bank (Caselli 2001).