Business transition – the importance of understanding the customer and customer segmentation

In this series looking at business transition principles, Mike Leeson takes a look at why understanding the client and client segmentation are so important in helping to build a sustainable business, and Mimi Pienaar shares her insights into how firms could start the segmentation process.

When a business transitions, there are many areas the owners will need to look at. We have identified the following six areas as key: business planning, understanding the customer, investment planning options, profitability analysis, people assessment and operational efficiency. Last month we focused on business planning, this month we will focus on understanding the customer and the importance of customer segmentation.

Understanding the customer

The international advice market is evolving, and we are seeing a new type of customer emerge. Greater availability of information is aiding customer awareness, and, as customer expectations evolve, there is demand for greater transparency and value. Advisers need to consider how they can meet these increased customer demands as the future success of their business will depend on retaining and growing their customer base, and ensuring the services they offer are suitable for each individual customer.

To keep pace with the evolving needs of customers, advisers must ensure they develop a business model which places the customer at the centre of their business. They need to know what type of customer they want, what services these customers truly value, how they can offer such services, what the cost of providing those services are, and what they need to charge customers to make it commercially viable.

Not all customers are the same, and businesses need to identify different servicing models required to suit different needs. Some businesses are currently unaware of the similarities and differences in their customer base, or the link to profitability.

By understanding more about the types of customers they have and the services they offer, the firm can start to shape their proposition and service accordingly. An adviser proposition can’t be all things to all people. By identifying their strengths and targeting their business based on those strengths they will build a more customer focused and profitable business model.

Mimi Pienaar from Masthead has worked with Old Mutual International for over three years, developing a Practice Management business development programme, helping adviser firms build a sustainable business model.

“Once a firm has identified its strengths and decided on its target market, it can then identify the ideal customer profile it wants to attract. The business may have existing customers which don’t fit the desired customer profile, and tough decisions may need to be taken on whether they continue to service these customers.

“The different services offered by the firm will also need to be reviewed along with identifying the services they want to offer going forwards. They need to look at designing the advisory service they wish to offer - typically this is linked around the financial planning process.  It needs to include everything they do for the customer. This then enables them to cost the advisory service they offer.

“Segmenting customers is a crucial step. Advisers should use a consistent model to identify criteria and use around four or five criteria that is easily understood by everyone. 

“Advisers are increasingly looking at the different types of investment approaches available to their customers and are formulating these into distinct service levels.  It is then up to the customer to decide which service suits them, with help and guidance from their adviser.  It should not be assumed that someone with a larger portfolio needs or wants discretionary fund management or that someone with a small portfolio does not want a bespoke portfolio of funds.  As long as they understand the service they are getting and are prepared to pay an appropriate charge for that service, the size of their portfolio should be less important. 

“Having a segmented customer proposition like this can help advisers ensure they are offering different investment solutions to meet different customer requirements. It can also ensure the adviser is paid an appropriate fee for the services they provide and can help build overall profitability and sustainability of the business.  Understanding what the customer really values and knowing how to deliver this at a price they are willing to pay and at a level that maintains profitability for the business is critical for businesses in transition.”