Saturday, December 27, 2008

Segmenting your market

“Know your client,” we hear over and over again. And an MFI’s loan officers generally do know their individual clients very well. But how does that translate to good decision making on the part of MFI management?

Not everyone wants a loan from your MFI, so it’s important to understand just what types of people do want your financial products and services. Then you can tailor your pricing, products, distribution channels (place) and promotion to these client types, or segments.

Effective segmentation starts with identifying a group of potential clients who have similar attributes and who will help your MFI achieve its outreach and development goals. The challenge is to group this segment into a useful single category – too narrow and the group may be too small, too broad and the category may be unhelpful. A segment is most useful when it groups potential clients in such a way as to enable the organization to service them through a single approach (those 4 Ps again!).

Next, the manager must ask if the segment is large enough to justify serving it with tailored products or services. For microfinance institutions, this means estimating the number of potential clients within the segment and their total demand for credit.

Are you feeling overwhelmed yet? If so, then let’s take a step back and break this segmentation business down.

We’re providing microcredit, so let’s start at the micro level: profiles of “typical” clients. Write out a biography – a story of sorts – of a typical client in each segment you discover. Each biography should attempt to answer the following questions:

· What are the problems of this type of client?
· Where do they turn to for information to solve their problems? Cable TV? Their local wise woman?
· What are this client’s hopes and dreams?
· What benefits can this client get from your product?
· What product attributes do they care about?

Your loan officers can and should help you build customer segment profiles. However, when conducting market research you shouldn’t rely on one source alone. You should triangulate – using multiple sources to help get a more accurate picture. And there’s no better source in this case than the client.

The best way, therefore, to answer these questions, is to sit down with some typical clients and ask them. How did they learn about your MFI? What are they really using your services for? What benefits do they get from your services? What do and don’t they like about your products? You get the idea.

Once you’ve gotten a clear picture of different segment profiles, write down a biography of a typical client from each segment. For example: Nana used to work as a history professor. But after the fall of the USSR and the collapse of the economy, both she and her husband lost their jobs. To make ends meet, Nana began trading in a bazaar – a high turnover business. To match the cash flow, Nana needs small loans which also “turn over” regularly, e.g. with four month terms.

Nana’s high level of education makes her quite capable of managing her loan and keeping good accounts, but accounting isn’t something she’s been trained in, and a good set of books just makes it easier for corrupt officials to extort fines and “fees” from her. It’s not that Nana is dishonest, but the tax and business registration systems are so confusing that it’s easier for her to stay in the informal sector.

Nana’s husband remains unemployed, and she is the primary source of income for her family. She’s determined to send her children to the best schools, and they cost money. She doesn’t want to be a trader and has no ambitions to increase the size of her business. She would give up her job in a minute if she could get her old job back at the university. But for now, she works hard in the bazaar to maintain her family. During slow times in the bazaar, Nana chats with friends – community is important to her and she is respected and in turn respects her friends’ opinions. When there are no clients, she also reads the newspaper. She has little free time at home, but enjoys watching cable TV when she can.

The client biography is also a good exercise for your other stakeholders, e.g. donors and investors. But more on that later.

Discussion questions:

· What benefits from the loan does Nana care about?
· What advertising mediums can the MFI use to reach Nana?
· What message(s) should the MFI use to appeal to Nana?
· What product and delivery issues should be considered given Nana’s educational profile?

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