Chapter 12 Marketing Strategies in Financial Services Learning outcomes At the end of the session, students will be able to • Provide an overview of the principal components of marketing strategy and planning • Outline key aspects of financial services marketing strategy and planning • Review arguments for reviewing marketing practices and strategies • Discuss marketing approaches for financial institutions (FIs) post-credit crunch. Session structure • Competitive strategies • Marketing strategies – Being offensive – Protection strategies • Social responsibility and stakeholder thinking – Relationships and brands – Brands as relationships builder • The immediate future – The rise of the alternatives • Marketing more than ever • Summary Competitive strategies • Porter (1980) advocated three main ways of achieving competitive advantage: cost leadership, differentiation and focus. – Cost leadership involves a very tight control of the costs e.g. economies of scale, maximizing customer value . A significant difference between lowering costs and achieving cost leadership i.e. having lowest cost base. At same time, service quality levels need to match target market expectations and the value of employee skills and knowledge be fully appreciated. – Differentiation very hard to achieve in financial services. FIs have tried to achieve differentiation through branding but has not really been successful. New attempt by Santander in early 2010 – Focus strategy requires FI to maintain such close links with its customers/target market leaving no room for competition. Suitable for smaller organizations e.g. smaller building societies. Dwindling number of smaller building societies may suggest that this strategy not proving successful. • Financial services is a highly competitive industry but competition may come from an unexpected direction e.g. First Direct. First non-branch bank whose vision and strategy are benchmarks in industry. FIs now offer on-line or telephone banking, but First Direct, through an understanding of its target market, has managed to hold onto its premium position in the marketplace. What is strategic marketing? • Strategic marketing creates capability of FI to adapt to changes in its marketing environment. • FI aims through its strategic marketing to meet the needs of its stakeholders through creating value more effectively than competitors. • FI requires a flexible and responsive organizational structure and culture that encompasses these stakeholders. • FI will conduct thorough analysis of operating environment by grouping all variables in its environment under the heading of: threats, opportunities, weaknesses and strengths. – SWOT or TOWS analysis evaluates external variables and then internal capabilities in the light of the external forces. • Three broad categories of marketing strategies: defensive, offensive and rationalization Marketing Strategies offensive defensive rationalisation cost reduction geographical new market market niche market follower specialist lower risks services reduce number of improve branches cost/income M&A ratios identification of new segments Figure 12.1. Marketing strategies Marketing strategies: being offensive • Geographical expansion strategy – FIs are seek to enlarge their geographical footprint both in domestic and international markets Physical presence is a means of growing (compare with Macdonalds). • Penetration strategy – Straightforward strategy where an FI will try to grow by selling existing products to its existing customers (cross-selling). – Developments in information systems, specifically data mining, have supported this strategy, as FIs have been able to estimate the probabilities of success of targeting individual customers or segments of customers with selected financial offerings. – This is an ongoing strategy, which has largely arisen from the saturated state of most financial service marketplaces in Europe, with the strategy of relationship marketing arising from penetration. • New market strategies – New countries applying to join the EU, such as Turkey, Macedonia and Croatia offer potential for new markets for established companies to target. – The identification of new segments is of vital significance to FIs, but the saturated markets offer little chance for this. • Market leader strategy – can involve larger FIs acquiring smaller players or those in vulnerable position. Market leaders also to advertise heavily. • Market challenge strategies – opportunities for growth exist through alliances with supermarkets – Retailers have developed strong brands and alliances have allowed the banks access to markets that they might not have reached on their own. – Supermarkets are aware that they need to make sure that they have the largest share of a consumer’s spend, but this spend varies from consumer to consumer. – Customers may not see financial services as being like a supermarket trolley and instead be prepared to buy insurance from one provider, save with another and have a current account with another still. – If this is the case, then the whole concept (and metric) of share of wallet is highly questionable. If customers view the various financial services as quite unrelated to each other (who talks about ‘my financial services provider’?), then the aim of gaining as a large a share of a customer’s wallet appears misguided Marketing strategies: protection • The market follower – pursues strategies of risk reduction. Reduce lending, limit lending to low risk clients, call in loans and overdrafts • The niche strategy – FI identifies a small market or segment of customers whom they believe they can serve exclusively. In saturated markets, it is difficult to ‘exclude’ competition • Diversification – FI will take new products into new markets. Higher risk than other protective strategies – Diversification option has been tried several times in the past. The credit crunch may discourage diversification strategies for the time being. Marketing strategies: rationalization & retention • Rationalization strategies consist of reducing costs through improving cost/income ratios, – selling more to existing customers, with concentration on particular customer segments, avoiding high-risk loans. – cost reduction strategies such as staff cuts, branch closures, opening times • Customer retention has grown in stature as costs of customer turnover (or churn) are calculated. Marketers develop stronger metrics for evaluating marketing strategies. • Developments in information technology enable FIs to look at individual customers and calculate their value to the organization. Greater appreciation of existing customers as a result. • Related marketing concepts such as relationship marketing and customer loyalty with some progress made • Balance needs to be achieved between increasing market share and customer lifetime value (i.e. the value of a customer to a FI during the period of relationship). Social responsibility and stakeholder thinking • Traditional marketing strategies are modelled on a military analogy and much of the terminology, such as ‘offensive’ and ‘defensive’, most FIs now promote social responsibility. • Most FIs justify their actions on the basis that they have a duty to their shareholders, with customers also being cited. What if, however, there are other groups to whom they have a duty? • The term ‘stakeholder’ has already been mentioned in earlier chapters and has been defined as ‘any group or individual who can affect or is affected by the achievement of the organization’s objective’ (Freeman 1984: 25) • Working within stakeholder framework can enhance corporate strategy by understanding the roles and interactions of companies and stakeholders and moves management on from the ‘reigning orthodoxy of shareholder value’ (Freeman 1984). • Businesses engage with a range of stakeholders whose views of the business may vary greatly (Andriof et al. 2002). The benefits of such a strategy are that former competitors collaborate rather than battle, changing the business landscape. • Through a series of actions, FIs can direct their efforts to stakeholders to try to restore confidence through exhibiting trustworthy behaviours. Requires a significant change. Mutuals, co-operatives etc not far from this model. Social responsibility • FIs have developed policies in related areas e.g corporate social responsibility (CSR), sustainability (Crédit Agricole), social commitment (Grupo Santander), corporate responsibility (Commerzbank) and community outreach (Alpha Bank). • CSR can be represented as economic, legal, ethical and philanthropic responsibilities. Economic obligations underpin the other three. – Legal responsibilities require FIs to comply with local, national and international law. – Ethical responsibilities might mean not financing companies engaged in unsustainable activity – Philanthropic responsibilities are expectations that Fis will promote welfare and goodwill. • Ethical and socially responsible behaviour rests on a number of dimensions – Employee diversity that includes gender, race and disability – Employee support such as union relations, concern for safety and health, development – Product development to include safety, suitability to customer needs, avoiding funding of unethical or environmentally damaging projects – Collecting, storing and using information responsibly – Overseas operations, in terms of behaving responsibly in new markets, understanding networks – Impact on the environment, such as recycling, minimizing pollution, reduction in waste, innovation in work practices – Community support, to include financial support for charities, the arts, the disadvantaged. • Evidence on FI websites that many of them have subscribed to interpretations of socially responsible behaviour, e.g. sponsorship of the arts, support of farming in developing countries, • Also information that undermines FI messages e.g. May 2008, Friends of the Earth announced that UK banks are funding rapid expansion of biofuel production in Latin America (www.foe.co.uk). Immediate future • From a marketing perspective, FIs may cut their marketing budgets in times of recession. Not advisable to cut budget as consumers and other stakeholders have lost confidence in financial services • Marketing and marketers have the requisite expertise to, first, gain insight into how stakeholders now view FIs and then to begin to develop strategies to deal with the long, slow haul of rebuilding confidence and trust into the system. • The current environment of financial services marketing is an opportunity for alternatives in marketplace to increase market share. • There are also some well-established institutions, such as National Savings and Investment, that could play a part, trusted by 25 % respondents, compared to a figure of 16 per cent with high-street banking brands (Mintel 2008). There are constraints on how competitive they can be. • Real opportunity for alternative providers to gain market share untainted by the short-termism of some of the FIs. • Banks are, however, strongly embedded in the fabric of modern society customers are very disinclined to switch, especially to non-traditional FIs. Marketing more than ever • The issue of trust should be strategic objective • Findings of the FSA reveal that most FIs will mislead their customers if they can make more profit by doing so. • Regulatory bodies unable to control FIs. • Good marketing practice should focus on the role of trust in maintaining relationships • Little evidence to suggest that FIs are going to radically reappraise their short-term approach to strategic development. • Figure 12.2 suggests an approach for rebuilding trust and regaining confidence. Figure 12.2. Strategy for building trust and confidence financial institutions stakeholders core values customers confidence demonstrated increased sales through the brand investment fewer complaints regulators long-term sustainability trust-building: suppliers and face-to-face contact alliance groups socially responsible transparency well crafted communication & ethical marketing competitors staff Summary • Link between setting objectives and formulating strategy shown • Marketing strategies for financial services have been considered and evaluated in this chapter, especially considering strategies for growth highlighting the difficulties for FIs. • A discussion of offensive and defensive strategies has shown how FIs need to balance the acquisition and retention of customers. • Developing niche strategies and following the idea of being a niche company is considered in financial services, pointing out the problems of this strategy in a mature marketplace. • FI adoption of corporate social responsibility is considered, with gaps identified between the rhetoric on the websites and evidence from green charities. • Opportunities for companies largely unaffected by the credit crunch are evaluated, and whether they are able to maximize their advantage.