Failing To Understand Consumer Segments, Citigroup Endangers Entire U. S. Economy
Citigroup, apparently, is in big trouble. The big trouble stems from non-performing subprime mortgages. That is, Citi owns mortgages used by subprime borrowers – those with lousy credit scores – to buy houses. The bank has been the subject of much speculation that it should be broken up to release value and only today received a $7.5 billion cash infusion (a bailout) from the government of Abu Dhabi. Here’s a link to one such article:
Citigroup is in trouble, we would argue, because this huge, iconic, financial supermarket never did figure out how to think about and market to consumer segments with the advice, counsel, products, and services that they (the consumer segments) really need. Let me be particularly blunt: I’m willing to bet that the subprime segment of consumers remains extremely – yes extremely – profitable to Citi. That is, I’ll bet subprime consumers are paying billions – yes billions – of dollars each year in late payments, NSF fees, penalties, annual membership fees, and various other needless amounts on their credit cards, wire transfers, credit insurance, etc. To re-state, subprime borrowers are very profitable to banks. It’s just subprime mortgages – one set of products – that are endangering the entire bank.
In an article I co-wrote for Banking Strategies Magazine nine years ago – when asked to comment on the merger that created Citigroup, my co-author, Peter Carroll, and I argued that this was exactly the challenge facing the group: To thrive, we claimed, the bank would have to move from a product-centric banking approach to a consumer segment advice and counsel model. Below is the crux of our argument in that long-ago article, titled “Making the Most of Citigroup – Cross-selling may not unlock the full potential of mega-providers, but shifting the customer approach to advice from products might.”
Financial services providers are product-centered in their approach to consumers… It’s this mechanistic, product-centered approach of suppliers that seems to have forced consumers to compartmentalize, which makes cross-selling more difficult.
Most consumers, meanwhile, say through market research that they really don’t understand financial products. They don’t understand the key terms that describe a product and the associated jargon. Nor do they understand how financial products, in combination, can solve or ameliorate real problems that they face, like providing for their children, coping with ill health, retiring happily, and reducing worry. Meanwhile, they are intimidated by and resentful towards marketers who pepper them with arguments that appear to presume that the role and purpose of each product is a given. People in this group include highly educated professionals, people of considerable accomplishment in their chosen walks of life. They are not intrinsically dim.
Such consumers are a clear majority. And, given these characteristics, they often are not comfortable when purchasing financial services, even though they are knowledgeable and self-confident when they buy other things, such as groceries, clothes and durable goods.
Why then does the industry persist in its overall product-centered approach?
The industry’s own market research often misses the point. As the financial services sector has imported marketing talent and techniques from the world of fast-moving consumer goods, it has often unwittingly imported the assumption that consumers already know what the product is and what it is used for. Too many research questionnaires in essence ask: “What products do you have and why did you buy them?” The answers that one gets to such questions are exercises in rationalization. If the research methodology unconsciously assumes the market is product-centered, its findings will drive towards product-centered recommendations.
It is infinitely more revealing, in qualitative interviews, to ask: “What important events or changes have occurred in your life over the last five to seven years, and how have they affected your financial position?” This approach will tease out the consumer’s background and illuminate his thought processes far better.
If you’re interested in the entire Banking Strategies article, here’s the link:
http://www.bai.org/bankingstrategies/1999-jan-feb/Citigroup/
Yes, for some reason, Banking Strategies still has this article on their site.
As our thinking about stopwatch marketing principles has evolved in the nine years since this mega-merger, we, at MCAworks, have argued that the most appropriate segmentation scheme focuses on the consumer’s stopwatch, resulting in a four-segment solution: Painstaking, Impatient, Recreational, and Reluctant. Had Citigroup managed to execute some form of consumer-centric segmentation scheme and then developed products and programs squarely aimed at the needs of those segments, it would be in much better shape today. Unfortunately, the firm continued to organize around products, pushing each product groups to strive for higher and higher sales goals, until – perfectly predictably – one of those product groups over-sold. To repeat, the company would be in a lot better shape if they had focused on serving the financial needs of the subprime consumer segment rather than simply selling more subprime mortgages. They would be in still better condition if they concentrated on meeting the needs of the Reluctant consumer segment but, well, that’s the topic of a chapter in our book.
