In untroubled economic times, developing relevant products and services for customers is certainly a necessity – customers of financial services firms have many choices and are often quick to jump to the next best offer. But when the economic environment gets more difficult for banks and their customers alike, aligning and integrating the needs of specific customer segments with products and services is absolutely critical, both for top line revenue maintenance and (one hopes) growth, and for effective credit risk management. After all, when has it ever been more important to retain your best, most profitable customers?
Value proposition development must start with a deep understanding of customer needs. And while there are a finite number of these needs (for example, security, control, convenience, freedom), those needs manifest themselves uniquely across consumer segments, across markets, and perhaps most importantly, over time. It is safe to say that as you move along a dimension like affluence, consumers’ expectations will differ significantly. What's more, the process of hedonic adaptation1, whereby what is at first exciting and new eventually becomes a baseline expectation, causes consumers expectations to rise inexorably, requiring constant monitoring and value proposition refinement.
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Banks, especially those with meaningful payments businesses, are blessed with a great deal of information about their customers. But it should be remembered that creating meaningful consumer insight can be done successfully in situations where very little data exists, by developing hypothesis-driven segmentations. And those banks that have harnessed their customer information have built highly dimensional segmentation schemes using transaction data, consumer facing research, and partner data to both describe consumer needs and predict future actions.
Once needs are understood along one dimension, the firm’s assets and capabilities (essentially the ingredients that go into building the proposition) have to be assessed. There is importance in the order here, as many firms start with assets – such as an interesting new technology – and worry about whether there's actually a market need later on, if at all.
There are two prime examples of the pitfalls of the “assets-first” approach. The first is the overwhelming reliance on rewards points as the mechanism or currency for loyalty program value exchange. This mechanism has little to no appeal for a highly time-constrained consumer whose primary need is for convenience, and who doesn't want the bother of checking points balances, or of going through multi-step redemption processes. Successful non-points-based propositions for upscale consumers have been built leveraging one of the banks’ differentiating assets, high-touch service, and very different programs for mass audiences have resulted in profitable business lines using value-based offers (in this case by extending their asset base through external partners).
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The second example is the notion that more choices bring about greater satisfaction, that if we simply give customers more choices, they’ll find or build what’s best for them. The problem is that, the more choices you have, the greater the opportunity cost of the road not taken. Thus, the decision you make, whether it be a credit card or a car, a snack or a new kitchen, will carry with it more buyer’s remorse, more regret, and less overall satisfaction2. Creating a limited number of highly relevant propositions for specific segments will mean more to those customers, and leave them more satisfied, than creating dozens of choices.
Successful proposition development arises from the clear intersection of needs and capabilities, and the exchange of value along many possible dimensions - that results from it. Fundamentally, though, execution is critical. Companies that succeed at innovation spend time and resource from the initial idea all the way through to implementation. The firm must be as engaged in and concerned about what it will take to fulfill the value promise as it is interested in the promise itself, and in developing a program that ultimately rewards sustained, incremental, profitable behavior from its customers.
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