Correctly applied, market segmentation is about a company understanding the needs of its customers and therefore understanding how its customers decide between one product and another.
This insight is used to form groups of customers who share the same or very similar value criteria, which the company can use to determine how to best serve each group with its products and services and hence outperform the competition.
The primary objective of segmentation, therefore, is to understand how to win and retain customers. Segmentation and its corresponding product differentiation strategy can give a company a commercial advantage.
How segmentation manifests itself within a chosen market can vary dramatically, and as such opinions are divided on the segmentation strategies that lenders have chosen.
A model question
There are essentially two types of segmentation within this industry. Under the externally driven model, lenders advise their brokers which segment they fall into according to application volumes. This determines the products, level of service, remuneration and attention each broker will receive. Essentially the lender will announce to its brokers that they will provide such benefits as faster turnaround times, greater access to credit underwriters, and more frequent product support and training to those brokers who provide quality volume applications.
Under the internally driven model, segmentation is determined purely by the lender’s internal operations and its strategies for its client base, but their message is that all brokers receive the same levels of service and attention, irrespective of volumes.
Although the external segmentation model is transparent, it does have a propensity to discourage or disengage brokers who are unable to meet some of the lender’s conditions.
But if every business must win and retain customers in order to become and remain successful, why are we getting so hot under the collar about whether segmentation – either external or internal - is a good or a bad thing in our industry?
Choosing your service
Let’s look at Qantas’s Platinum Frequent Flyer program. Platinum customers have their own airport lounge, they get fed and watered and they don’t have to queue at the boarding gate. Why? Because they are loyal to the Qantas brand. But those customers have a choice. They don’t have to fly Qantas. They could choose to fly on multiple airlines instead and receive the same level of service as everyone else joining the queue at the boarding gate.
I don’t believe that there is a right or a wrong model; just as with any other business, lenders must win and hold on to their brokers and how they choose to do that is up to them. But brokers also have a choice.
If you like the benefits that segmentation provides, you can choose it. If you don’t, you’re free to walk away.