A good client segmentation strategy can help you serve a diverse client base, build a profitable and scalable business and improve client satisfaction.
“Most advisors do not do a good enough job with segmentation. And when they do, they segment only quantitatively,” says George Hartman, CEO of Toronto-based Market Logics Inc.
“Some equate segmentation with discrimination, which is not a correct view,” Hartman adds.
Many advisors would like to engage in segmentation, “but get caught up in the day-to-day realities of serving their clients,” says Pierre McLean, senior vice president of sales at Franklin Templeton Investments Corp. in Toronto. “As a result, they do back-of-the-envelope, rudimentary segmentation.”
When segmenting clients, bear in mind that some clients might not meet your segmentation criteria, advises Hartman.
Adds McLean: “Keep it simple.”
With that in mind, here are some segmentation strategies you can use:
> Sort clients by size
Make a list of all your clients by account size. This will allow you to determine your typical A, B and C clients. You should note that size is not always a reliable indicator of your “best” clients, Hartman says. Some may have large accounts that generate low fees.
> Sort clients by revenue
Rank your clients by the revenue they generate.
“Revenue is one of the basic criteria for segmentation,” advises McLean. It enables you to identify clients who are most important to the viability of your practice.
> Sort clients by profitability
“Profitability is perhaps the No. 1 criterion in segmentation, but only 2% of advisors understand how to determine it,” cautions Hartman. Put simply, profitability is a function of revenue generated from each client less fixed and variable costs associated with maintaining that client. Determining client-specific expenses can be difficult, which is why this measurement is not widely used.
> Apply both quantitative and qualitative criteria
“Balance the use of quantitative and qualitative criteria,” suggests McLean. For instance, in addition to quantitative variables such as asset size and revenue, you would also consider other issues such as client personality, number of referrals made, client availability and the level of influence you have on the client.
These “soft” variables introduce an element of subjectivity but can be useful when determining the level of attention you give to certain clients.
> Build a matrix of services
You can build a simple three-column matrix that identifies the services you offer; the frequency or level of services; and who is responsible for delivery of the services. This will allow you to put a structure to your segmentation strategy.
“You will be able to calibrate your services to those that need it the most, or help you focus on your top-end clients,” says McLean. As well, you will be able to efficiently allocate your resources in providing the appropriate services.
IE