Marketing Financial Services Book 1 Marketing Financial Services Book 1 Edition 4 July 2006 Marketing Financial Services Book 1 Published by The Chartered Institute of Bankers in Scotland Drumsheugh House 38b Drumsheugh Gardens Edinburgh EH3 7SW Ed 3 written by Dr Alan Wilson, University of Strathclyde This edition revised and amended by Alan G Swankie FCIBS and Colin Watson BA, FCIBS Editing and typesetting by Keystone Business Associates, Glasgow Printing by Ritchie (UK) Ltd, Kilmarnock The Chartered Institute of Bankers in Scotland has taken all reasonable measures to ensure the accuracy of the information contained in this book and cannot accept responsibility or liability for errors or omissions from any information given or for any consequences arising. © The Chartered Institute of Bankers in Scotland, July 2006 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from The Chartered Institute of Bankers in Scotland. Marketing Financial Services Book 1 Marketing Financial Services 1 The Role of Marketing 5 Introduction 6 The role of marketing 7 The marketing environment 8 Marketing mix decisions 9 Further features of marketing 10 The development of marketing 13 The evolution of marketing in the financial services sector 14 The marketing concept 17 Loyalty and relationship marketing 18 Marketing mismanagement 20 What does marketing involve? 23 Marketing financial services 35 Marketing model 37 What is the marketing environment? 38 The microenvironment 39 The macroenvironment 44 Review 57 2 The Customer 61 Introduction 62 Consumer buying behaviour 63 The consumer buying decision process 67 Influences on behaviour 72 Evaluating the customer experience 79 Organisational buying behaviour 81 The buying process 85 Influences on organisational buying 87 Segmentation and target marketing 88 Market segmentation 93 Bases for market segmentation 96 Consumer responses 108 Segmentation for the corporate sector 109 Target marketing 115 Segmentation strategies 117 Review 123 Marketing Financial Services Book 1 3 Managing Marketing 131 Introduction 132 Marketing information 132 The market research process 138 The marketing planning process 147 Corporate plans -v- marketing plans 148 The marketing planning cycle 150 The marketing plan 150 The branch/business centre planning process 151 Development/revision of marketing objectives 151 Revision or formulation of marketing strategy 153 Development or revision of the plan for implementation or control 153 Implementation of the marketing plan 154 Review 155 4 Market Research 159 Introduction 160 Marketing information systems 162 Different types of market research 164 The importance of market research 166 Research methodology 167 Motivational research techniques 174 Decision making 175 Review 176 Answers to Question times 179 Glossary 183 References 187 The Role of Marketing 5 1 The Role of Marketing Objectives By the end of this chapter, you should be able to: • Explain and describe the concept and the practice of marketing. • Outline the nature and evolution of marketing in the financial services sector. • Differentiate between the marketing of products and the marketing of (financial) services. • Explain how an organisation markets its products or services. • Outline the major elements of the environments which influence the marketing activities of financial services organisations. 6 Marketing Financial Services Book 1 Introduction What is your perception of marketing? Is it a key component of selling? Is it advertising? Is it public relations? While marketing embraces selling, advertising and public relations, its total sphere is much broader, representing an overall business philosophy. Let’s examine three definitions: “Marketing is the management process responsible for identifying, anticipating and satisfying customer requirements profitably.“ Constitution of the Chartered Institute of Marketing (2003) “Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organisational objectives.” Constitution of the American Marketing Association (2003) “Getting the right goods, to the right people, in the right place, at the right time, at the right price, with the right level of communication profitability.” Chartered Institute of Marketing (UK) The first definition provides a concise summary of the aim of marketing. The second more clearly defines the tools through which marketing realises its objectives, while the third covers the key elements of marketing. The aim of marketing is to identify target markets and develop products and services that will meet the needs of consumers in these markets both now and in the future. If an organisation is serious about its marketing, then it will strive to understand the needs of its current and future customers, as well as having a sound understanding of what its rival organisations are offering the market. To be successful, the organisation needs to understand how its market operates, and the organisation will integrate its operational activities around the conditions in the market. Quick question Quick question Quick question Quick question Quick question Write your own definition of marketing. Write your answer here before reading on. The Role of Marketing 7 The role of marketing You can now see that marketing is about a lot more than designing press and television advertisements! The marketing function calls for an analysis of present market conditions and the devising of a strategy that will meet the needs of the market as the organisation moves forward. Marketing is very closely aligned to the success of any business, whether that is an international financial services organisation or a corner shop. To survive and grow (or, in these fast changing times, even to stand still) an organisation has to be able to satisfy the needs and wants of its customers. If this is achieved, these customers will not only come back for more products and services, but will also recommend the products and services to other potential customers. To satisfy the customer’s needs, there must be an acceptable level of quality, reliability and service – both at the time of sale and after the sale. In addition, the offering must be made at the right price and must be available in the right locations. Even if all of these factors are present, the organisation must let the potential customers know about the offerings – in other words, what the business has to offer the market must be communicated to potential customers, both cost effectively and in terms that these likely customers can understand. If all this is to be delivered to the market, the organisation must know what customers need and want – both now and in the future. The organisation must also be aware of the trends in the market and of developments that are likely to affect the business itself and the needs of the customers. In other words, the business must have a clear understanding of the marketing environment. Quick question Quick question Quick question Quick question Quick question What factors do you think comprise the marketing environment? Write your answer here before reading on. Quick question Quick question Quick question Quick question Quick question What factors must these products and services have if they are to satisfy the customer’s needs? Write your answer here before reading on. 8 Marketing Financial Services Book 1 The marketing environment Included in the factors that make up the marketing environment are: • social trends • technological factors • economic trends • legal, regulatory and political factors. Once the organisation has an understanding of the customer and the environment within which it operates, it is then in a position to develop a marketing strategy. Even a large multinational financial services organisation will not necessarily choose to offer products and services to everyone. Instead its strategy will focus on the target areas – or segments – which its analysis will have determined are the most attractive to that organisation. We will look at the concept of segmentation later in Book 1. However, the organisation is not operating in a vacuum. Unless it is in the unlikely position of operating in a monopoly situation, it will need to compete for business with rival organisations. It may be that the customer can obtain a similar product or service from a rival organisation; for example, a customer may choose to buy a money transmission account from your company or the rival next door. Alternatively, the customer may choose a different solution altogether; for example, instead of commissioning a mural for the nursery in their home, the customer may opt to have a high quality decorating job carried out by a firm of painters and decorators. Once the organisation has chosen what segments it will make its offerings to, the decision must be made as to how to deliver to the market in a way that gives the organisation an advantage over its rivals. Then, when this strategy has been developed, the business must make marketing mix decisions. If you look on the strategy as the long term marketing goal(s) of the organisation, the marketing mix decisions are the tactical choices that the business must make in order to deliver this strategy. Quick question Quick question Quick question Quick question Quick question What factors do you think would come into the marketing mix decisions? Write your answer here before reading on. The Role of Marketing 9 Marketing mix decisions While we will examine the marketing mix in much greater detail in Book 2, the types of decisions we will be looking at revolve around the following areas: ■ Product decisions What products or services will the organisation offer to the market? Decisions will cover what new or amended products the organisation wants to offer to the market, and how these are tested. Branding decisions are also considered here. ■ Price decisions What price is to be charged for these products? For example, in a price sensitive market, is the decision on price to attract a lot of customers to the product, or is the organisation going to set a higher price in exchange for a more discerning client who is willing to pay a premium for a more personal service? ■ Place decisions Where is the company seeking to carry out business? In the past twenty years there has been an explosion of the range of delivery channels that financial services organisations use to reach their customers. In the past the main delivery channel was the high street branch, and whilst this can still remain an important tool for some organisations, other methods now used include the internet and telephone banking, supermarket banking, etc. Decisions on these delivery channels will fall under the “place” heading. ■ Promotion decisions How is the business going to let potential customers know what they are offering to the market? What are the most suitable media by which potential customers can be informed about the organisation’s products and services? ■ People decisions Who is the organisation going to employ? How are these people to be trained and developed? How are they to be rewarded? Whilst these areas – commonly referred to as the “5 Ps” – have traditionally made up what is known as the marketing mix, two other areas have been added more recently: • physical evidence • process. We will look at all of these areas in much more detail later in the course. As you have already seen, there is not only one definition of marketing. However, a number of common themes run through the most generally accepted definitions. 10 Marketing Financial Services Book 1 Further features of marketing The main explanations of marketing will cover: • satisfying the needs and wants of the customer • identifying and making the most of the marketing opportunities that are presented to the organisation • identifying the most suitable customers for the organisation, and targeting promotional activities to ensure that these customers hear about what the organisation can offer in a comprehensive and cost effective way • building and maintaining a competitive advantage over rival organisations • making the best use of the resources that are available to the organisation • increasing profitability (against predetermined measurements) and market share • satisfying the needs of the key stakeholders in the organisation, for example, shareholders, customers, managers, staff, creditors, the wider community, etc. To simplify this, what we are looking at is the ways in which the organisation is able to meet its chosen customers’ needs and wants in a way that gives an acceptable return to the organisation and its stakeholders. Drilling down into the definition Having looked at what marketing is at a high level, we will now look in a little more detail at what the definition of marketing means in practical terms. As we have already seen, the range of people involved in the organisation’s marketing effort can be wide and varied. Indeed, some of the activities may be outsourced to external organisations such as advertising agencies. However, it is difficult to think of a business that has no marketing effort at all – even a one-man plastering business which relies purely on word-of-mouth referrals will still carry out some marketing activity such as designing and printing flyers and business cards to leave with satisfied customers to pass on to family and friends. Quick question Quick question Quick question Quick question Quick question What areas do you think are included in explanations of marketing? Write your answer here before reading on. The Role of Marketing 11 As a result of marketing activities, exchange can occur. In other words, one party can provide goods and/or services to another party in exchange for something of value – usually money. This exchange should bring satisfaction to both parties, and if it does not, then it is unlikely that any subsequent exchanges will take place between these parties. The marketing activities should therefore work towards the creation and maintenance of satisfying exchange relationships. The environment within which the buyers and sellers operate is not static. Technology, the economy, society and legal, regulatory and political forces are dynamic which means that, as each one of these factors change, there will be a consequent effect on marketing activities and how they help to facilitate exchange. Quick question Quick question Quick question Quick question Quick question Under each of these headings, give an example of changes and their impact on the marketing environment: Technology Economy Society Legal, regulatory and political forces Write your answer here before reading on. 12 Marketing Financial Services Book 1 The examples that you have chosen will vary, but here are some illustrations: Examples Examples Examples Examples Examples • Technology – developments in the internet and telephony systems available to financial services organisations has changed the ways in which many customers now interact with their financial services provider. • Sustained economic growth and low levels of inflation and unemployment have increased the demand for savings products (as many customers now have more surplus funds to invest) and lending products (as customers have more faith in the stability of their employment, they are therefore more likely to take on longer term borrowing commitments). • A societal change such as the introduction of more flexible working arrangements has allowed more women to return to the workforce after the birth of children. • The change in the role of financial services regulation since the late 1990s has seen the increased prominence of the Financial Services Authority and its impact on financial services organisations. As we have now seen, marketing is about more than the promotion of products (although that is still a key facet of the marketing mix). If we look back to the Chartered Institute of Marketing’s definition at the start of this chapter, we will see that it is also about getting the right goods, to the right people, at the right time and at the right price, therefore we are also looking at distribution, pricing decisions and the people involved in these. By taking this wider view we can see that marketing lies at the core of any organisation. By carrying out marketing activities in a planned and thorough way, the business will have a better understanding of the needs of its customers and will have a better grasp of what the competition is doing and what the future trends of the business are likely to be. We are all customers in some aspect of our lives. Don’t lose sight of this as you work your way through this course. We prefer to buy rather than to be sold products and services. If you are confronted by an ill trained sales person and it becomes transparent that their key driver is to meet their target, this will undoubtedly affect your decision making process. The converse influence is achieved if you are provided with high quality advice and service that is very much directed towards meeting your needs. The Role of Marketing 13 The development of marketing In this section we will start by looking at how marketing has developed from the mass production era and then more specifically at the evolution of marketing in the financial services sector. It is generally accepted that the marketing era in business is actually the third major era in business history. The first two were the production era, followed by the sales era. The production era In the second half of the nineteenth century, the industrial revolution was well established. As a result, goods were produced more efficiently and at a lower cost, due to the improvements in transportation, the development of factories, the division of labour, etc. As technology developed, more and more goods were flooding into the marketplace, and the demand by consumers for manufactured goods was strong. This focus on production continued into the early part of the twentieth century. The sales era From the 1920s onwards, the previously strong consumer demand for products began to subside and entrepreneurs began to realise that just supplying goods to the market was no longer enough to obtain sales. It became apparent that these goods would need to be “sold” to potential consumers. From the mid-1920s until the early 1950s, businesses were able to grow their profits by increasing sales which is why this period of time gained the reputation of being sales-focused. The most important marketing activities therefore were advertising and personal selling. The marketing era By the 1950s it was becoming apparent to some entrepreneurs that efficient production techniques and effective promotion of products was not going to be enough to guarantee sales. Things were turned on their heads as businesses realised that the first step in gaining sales would be to find out what it was that the customer wanted to buy and manufacturing this, rather than making manufacturing the first activity and then trying to manipulate customers’ tastes to create a demand for the product. This realisation was the dawn of the marketing era – when customer orientation came to the fore, but this was not the end of the matter. By the 1960s, most organisations were aware of the importance of marketing and invested in their marketing functions, but the predominant view of marketing was still transaction-based. As a result, the focus was to identify customer needs and wants, ascertain the appropriate target markets and become successful through appropriate marketing campaigns. The drawback to this approach is that it tends to focus on isolated, one-off transactions. Recognition was growing that whilst these transactions were important, if the organisation was to continue to prosper, longer term relationships with customers needed to be developed. Thus relationship marketing was born. 14 Marketing Financial Services Book 1 Relationship marketing refers to the building of long term relationships with customers, which will benefit both the customer and the organisation, through increasing the quantity and the quality of exchanges. Thus over time the customer builds trust in the organisation and the organisation better understands the customer and so is in a better position to meet their needs. As the era of relationship marketing has grown, this idea of relationship has widened from simply the organisation and the customer to relationships with suppliers, referral partners, influencers, etc. The idea of relationship has also extended to staff who must be motivated and have a clear idea of the organisation’s marketing strategy. The idea of relationship marketing is vital within the financial services sector and we will refer to this as the course develops. The evolution of marketing in the financial services sector In the past, marketing was seen as the concern of manufacturing industry with little or no relevance for a service industry such as banking. A banker was regarded as a professional, offering services to those who sought them rather than as a business person trying to sell products to new and existing customers. Competition was severely limited. There was little or no advertising, prices were fixed through a cartel, hours of opening were uniform and the range of services available varied little from one bank to another. By the 1970s the position was changing. While the major clearing banks did not compete amongst themselves on price, there was growing competition among their subsidiary companies. Controls on lending, which had held back the clearing banks, diverted business to other financial institutions such as finance houses. Newcomers, such as the US banks which had opened London offices and well established rivals such as building societies, added to the pressure. In the 1980s, shaped by the forces of deregulation, financial and technological innovation, social change and competition, the market for retail deposits became a market for a plethora of financial services. Competition increased between banks, other financial institutions and non-financial organisations. This continued into the 1990s with: • a number of building societies converting into banks • retailers such as Marks and Spencer, Virgin and Tesco offering investment and bank-related products • assurance and insurance companies offering bank services • computer software companies developing computer-based financial services The Role of Marketing 15 • car manufacturers and utility providers offering credit cards • motoring organisations and exhaust replacement companies offering insurance. In response, UK retail banks have adopted marketing strategies that reflect the demands of their customers. Particular concern is being placed on the building of customer loyalty through the development and maintenance of enduring, long term customer relationships. The impetus for developing relationships has been the growing awareness of the following two economic arguments: • It is more expensive to win a new customer than to retain an existing customer. Recruiting new customers is a costly business involving advertising costs, selling costs, credit-checking costs and administrative costs. It has long been claimed that it is up to ten times as expensive to obtain business from new customers as additional business from existing customers. • The longer the association, the more profitable the relationship between the bank and the customer. A customer has a lifetime requirement for financial services and therefore a potential lifetime value to the bank. If we consider a basic money transmission account, in the early years there are likely to be high transaction levels, low balances and low profits for the bank. Profit comes with customer maturity, through higher income, higher balances, lending services, deposit products and insurance commissions. A transaction-oriented view of the customer would consider the sales value and profitability of each single product or sale. A relationship-oriented view of the customer considers the revenues and contributions earned from a long term relationship with a customer. When customers leave a bank, they not only take profit with them from current transactions but all future profit also. To develop relationships effectively, banks are having to understand their customers better through the collection and interpretation of information about their customers’ circumstances and requirements. Careful planning of both the positioning of the bank and the provision of services is undertaken to meet customer needs. Activity is then monitored and evaluated to compare performance against the plans. From this commentary on the evolution of marketing both generally and within the financial services sector, you can see the close link between marketing and customer relationship management (CRM). They both embrace every area of the business comprehensively, with the ultimate aims of identifying and meeting customer needs, maximising customer retention and attracting new business. This chapter opened by asking for your perception of marketing. Marketing is significantly about perception. Most people assume that the ever-present challenge to attract customers is achieved by the financial services organisation providing the best