marketing financial services

Marketing Financial Services

Marya SholevarDepartment of Banking and FinanceFall 2015

Why Services Matter

• Services dominate U.S. and worldwide economies

• Services are growing dramatically• Service leads to customer retention and loyalty• Service leads to profits• Services help manufacturing companies

differentiate themselves

Chapter 1 Marketing

• Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large

• Services marketing is a sub-field of marketing, The promotion of economic activities offered by a business to its clients. Service marketing might include the process of selling telecommunications, health treatment, financial, hospitality, car rental, air travel, and professional services.

Why do firms focus on Services?

• Services can provide higher profit margins and growth potential than products

• Customer satisfaction and loyalty are driven by service excellence

• Services can be used as a differentiation strategy in competitive markets

Service Can Mean all of These• Service as a product

Customer service

• Services as value add for goods• Service embedded in a tangible product

Difference between Tangible & Financial Services Marketing

One of the major problems facing the promoters of financial services as opposed to tangible products, is that services cannot be experienced in a tangible manner.

Services cannot be:Touched,Tasted,handled, orpurchased in bulk like tangible products.

Financial Services

Financial Services Institutions

Retail, corporate, investment and private banks• Mutual funds, investment trusts• Personal and group pensions• Life and general insurance and reinsurance companies• Credit card issuers• Specialist lending companies• Stock exchanges• Leasing companies• Government saving institutions• Brokers and agents

Financial Services Environment: A number of external forces have exerted

influence on the sector, including:1- Socio-economic factors: play an important

rule in determining the demand for financial services. Ex. Changes in the distribution of income and wealth and patterns of consumption.

2- Regulatory environment: Regulations have played a major role in shaping the behavior of suppliers and offering increased protection to consumers. Serve to strengthen the procedures and practices already set in place.

3. Technology: Traditionally paper-based systems have become fully automated, providing greater flexibility and scope for expansion. Without a doubt, technology holds the key to future long-term success for financial institutions, from innovative distribution channels, which are both cost efficient and effective at delivering customer service, to customer databases, which enable better use of target marketing

Characteristics of services,1. Intangibility:

1. Inseparability or Simultaneous Production and Consumption

1. Heterogeneity

1. Perishability

1. Inability to own services

Implications of Intangibility

• Services cannot be inventoried

• Services cannot be easily patented

• Services cannot be readily displayed or communicated

• Pricing is difficult

Implications of Heterogeneity

• Service delivery and customer satisfaction depend on employee and customer actions

• Service quality depends on many uncontrollable factors

• There is no sure knowledge that the service delivered matches what was planned and promoted

Implications of Simultaneous Production and Consumption

• Customers participate in and affect the transaction

• Customers affect each other

• Employees affect the service outcome

• Decentralization may be essential

• Mass production is difficult

Implications of Perishability

• It is difficult to synchronize supply and demand with services

• Services cannot be returned or resold

The growing competition in financial services

The financial services industry has undergone much change in the last two decades. In much of the United States and Western Europe, there has been a wave of deregulation that has made competition borderless, not only in internal markets but also across national borders.

This growing competition in financial services is forcing companies to improve, among other things, their marketin and communications activities.

The importance of relationships and trust in financial services

• Relationships and trust are very important in financial services. Because products and services are ofte complex, and in many cases also require some degree of customization, customers place a certain amount of trust in the company or supplier that they choose. The relationships between the customer and the company also tend to be longer in comparison with other industries, such as consumer goods or services, where customer churn rates can be much higher.

• Paying more attention to relationship marketing coming from this need of trust in financial marketing.

Relationship marketing• Relationship marketing can be defined as “an

asymmetrical and personalized marketing process. This process takes place in the long run, results in some bilateral benefits and rests on an in-depth understanding of customer needs and characteristics” (Perrien and Ricard 1995).

Relationship marketing in financial services

• In financial services, products are often complex and have a longterm nature.

• Relationship experiences play a central role in the overall financial decision-making and in providing important benefits and advantages to customers. Additionally, there is a relatively high level of perceived risk, which highlights the particular importance of customer relationships in the marketing of financial services, both to personal as well as corporate clients.

• Another factor seen to contribute to relationship building and maintenance is trust. Trust is seen as a valuable aspect in a relationship which reduces perceived uncertainties and risk and is seen as a key factor in successful relationships

Marketing of financial services• The vast majority of literature in the financial-services arena

has focused on consumer-oriented financial services. This has addressed the importance of the core product, pricing, service, and communications of financial services and products.

• There are three basic approaches to marketing financial services: buyer side, seller side, and dyad.

• Seller-side research is a more traditional marketing approach• Buyer-side studies tended to be based on questionnaires and

non-interactive methods.• Dyadic studies generally address interaction or, less

frequently, a network approach

Buyer & Seller

• From a buyer’s point of view - a market is any place where goods, services, or ideas are bought and sold.

• From a seller’s point of view - a market is a group of people with needs and the financial ability and willingness to satisfy those needs.

• Markets are all around us!• Marketing brings the producer and the

consumer together

Traditional Marketing Mix

All elements within the control of the firm that communicate the firm’s capabilities and image to customers or that influence customer satisfaction with the firm’s product and services:• Product• Price• Place• Promotion

Traditional Marketing Mix

• PricePricing Strategy Importance of:• knowing the market• elasticity• keeping an eye on rivals

Traditional Marketing Mix

• Product

Traditional Marketing Mix

• ProductMethods used to improve/differentiate the product and increase sales

or target sales more effectively to gain a competitive advantage e.g.• Extension strategies• Specialised versions• New editions• Improvements – real or otherwise!• Changed packaging• Technology, etc.

Traditional Marketing Mix

Promotion• Strategies to make the consumer aware of the

existence of a product or service• NOT just advertising

ClTraditional Marketing Mixick to add Title

• Place• The means by which products and

services get from producer to consumer and where they can be accessed by the consumer

• The more places to buy the product and the easier it is made to buy it, the better for the business (and the consumer?)

Expanded Mix for Services –The 7 Ps

Product Price Place Promotion

PeopleAll human actors who play a part in service delivery and thus influence the buyer’s

perceptions: namely, the firm’s personnel, the customer, and other customers in the service environment.

Physical EvidenceThe environment in which the service is delivered and where the firm and customer

interact, and any tangible components that facilitate performance or communication of the service.

ProcessThe actual procedures, mechanisms, and flow of activities by which the service is

delivered—the service delivery and operating systems.

Expanded Mix for Services –The 7 Ps

• People– People represent the business– The image they present can be important– First contact often human – what is the lasting image

they provide to the customer?– Extent of training and knowledge

of the product/service concerned– Mission statement – how relevant?– Do staff represent the desired culture

of the business?

Expanded Mix for Services –The 7 Ps

• Process• How do people consume services?• What processes do they have to go through to acquire the

services?• Where do they find the availability

of the service?– Contact– Reminders– Registration– Subscription– Form filling– Degree of technology

Expanded Mix for Services –The 7 Ps

• Physical Environment• The ambience, mood or physical presentation of

the environment– Smart/shabby?– Trendy/retro/modern/old fashioned?– Light/dark/bright/subdued?– Romantic/chic/loud?– Clean/dirty/unkempt/neat?– Music?– Smell?

Expanded Marketing Mix for Services

Ways to Use the 7 PsOverall Strategic Assessment• How effective is a firm’s services marketing mix?• Is the mix well-aligned with overall vision and strategy?• What are the strengths and weaknesses in terms of the 7 Ps?

Specific Service Implementation• Who is the customer?• What is the service?• How effectively does the services marketing mix for a service

communicate its benefits and quality?• What changes/ improvements are needed?

Boston Consulting Group MatrixRelative Market Share

High

Low

High low

STAR

Strategy→ “Build”

PROBLEM CHILD

Strategy→ “Build” or “Harvest” or

“Divest”

CASH COW

Strategy→ “Hold”

DOG

Strategy→ “Harvest” or

“Divest”

Boston Consulting Group Matrix

1) StarWhere the bank would make investments in order to build

up or expand its Business Units (BU),

1) Cash Cow Where the bank would invest just enough money to hold

the BU share at the current level,

Boston Consulting Group Matrix

3. Problem ChildWhere the bank allows market share to decline in order to

maximize short-term profitability & cash flow, regardless of the long-term effect,

3. DogWhere the bank sells or phases out the BU & reinvest

resources.

The Ansoff Model- BCG matrixAnsoff identified 4 strategies following the BCGMatrix:

1) Market Penetration,

1) Product Development,

1) Market Development, and

1) Diversification.

The Ansoff Model- BCG matrix

BCGCURRENT MARKET NEW MARKET

CURRENT

NEW

MarketPenetration

MarketDevelopment

ProductDevelopment Diversification

The Ansoff Model- BCG matrix

1) Market PenetrationThis strategy is the least risky of the 4 strategies because it

involves increasing market share in existing markets.

1) Product Development The bank is already well known in its current market

place but there is an identified need for new products to meet the changing needs of this market.

The Ansoff Model- BCG matrix

3) Market Development The bank is already known for its current products, but the

strategy is to take these products into a new market.

3) DiversificationWith this strategy, the bank is moving into new market with

new products.

McKinsey modelThe McKinsey model argues that businesses should develop

their growth strategies based on:

• Operational skills,• Privileged assets,• Growth skills, and Special relationships.

Growth can be achieved by looking at business opportunities along several dimensions, summarized in the diagram.

The McKinsey Model resembles the Ansoff Model

MARKETING CHALLENGES FOR FINANCIAL SERVICES

Financial products and services are a particular type of good that pose special challenges to marketing. These challenges include the following:

1. Intangibility. Financial services meet a general monetary rather than a specific tangible need.

2. Inseparability. Financial services are produced and distributed at the same time.

3. Limited Differentiation. Financial services are very much alike.

4. Trust. Financial service provision involves an intimate relationship between the producer and the consumer

MARKETING CHALLENGES FOR FINANCIAL SERVICES

5. Geographic Dispersion. Because proximity is a key factor in financial service provision, large financial institutions must offer a wide branch network,numerous sales points, or doorstep services to ensure the satisfaction of regional and local needs.

6. Fiduciary Responsibility. The primary responsibility of a depository is to guard the interests of the depositors.

7. Labor Intensity. Financial service provision is highly labor intensive.

Unit Investment Trusts(UITs)

• A Unit Investment Trust (UIT) is a pooled investment vehicle which generally buys and holds a fixed portfolio of professionally-selected securities to achieve a stated investment objective.

• UITs are offered in units which represent an undivided ownership stake in the underlying assets of the trust.

• Trust maturities are predetermined and fixed. Like mutual funds and closed-end funds, UITs are organized as investment companies and are regulated by the Investment Company Act of 1940.

Unit Investment Trusts(UITs)

Product Highlights:• Ease of ownership: UITs carry a relatively low minimum

purchase price, often $10 per unit for equity trusts and $1,000 for fixed income trusts.

• Professionally-selected portfolios: Teams of experienced investment professionals research and choose securities they believe will best meet goals established for each portfolio—with a buy and hold focus to help meet long-term investment objectives.

• Diversification: UIT portfolios can be diversified across many different securities, offering portfolios for almost any asset allocation. This diversification can help to reduce risk

Unit Investment Trusts(UITs)

• Secondary market availability: Most UIT sponsors maintain a secondary market, creating an opportunity for investors to find shorter maturities, higher returns and exposure to retired strategies otherwise unavailable in the primary market.

• Daily pricing and liquidity: UITs are priced at the end of every business day.

• Transparency: Trust holdings are disclosed in the prospectus, upon initial deposit, and listed daily on the sponsor’s website.

• Distribution frequency: For fixed income UITs,interest is typically paid monthly, rather than semiannually or annually.

Unit Investment Trusts(UITs)

• A range of terms or maturities: For equity trusts, maturities typically range from fifteen months to five years, while for fixed income trusts, maturities typically range from five to thirty years.

There are two primary categories of UITs: equity (stock) trusts and fixed-income (bond) trusts. Within these categories, many trusts are available to suit a variety of investment objectives and risk levels.

Equity UITs

Equity UITs are portfolios of domestic and/or international stocks chosen for their potential to provide dividend income and/or total return

The three most common types of equity UITs are strategy trusts, sector trusts and index trusts

• Strategy trusts: A strategy UIT follows a predetermined investment strategy.

Equity UITs• Index trusts: These trusts are portfolios of stocks

based on certain market indexes• Sector trusts: Sector UIT portfolios are primarily

comprised of investments in companies that are involved in a specific industry, such as pharmaceuticals, energy, technology, utilities, financial services or health care—to name a few

Fixed-Income UITsMany fixed-income UITs consist of a single category or pool of

bonds that may include:• Corporate bonds (including investment grade and/or high

yield bonds)• International bonds• Government securities• Municipal bonds• Mortgage-backed securitiesThese trusts come with a stated average maturity and

terminate when the last bond in the trust is called or reaches maturity.