Weighing the opportunity costs of marketing segmentation.
Every day, we have choices. Many of them. From the time we open our eyes and get up (or hit snooze) to deciding what to wear, what to eat, what we listen to on our morning commute … the list goes on. Some sources even put a number on the amount of decisions the average person makes each day: 35,000. Staggering, no?
Along with these choices, comes the true cost of each decision – what we give up to get what we chose. While marketing segmentation can be pushed to maximize marketing investments and eliminate excess spending, it also comes with opportunity costs. That’s why it’s important to review the opportunity costs that come along with each marketing initiative – to help ensure what you’re giving up is less important than the value you could gain.
Segmentation: Not as Simple as it Seems
As marketers, we know the general benefits of segmenting our target markets to reach the right people – it’s preached over and over. However, it isn’t always that easy. Many smaller institutions lack the software to monitor or segment members effectively.
And, perhaps what’s even more challenging, financial products aren’t acquired regularly or on set schedules. You may buy a car every three to five years, and purchasing a home happens even more infrequently. So, the ability to know when – and which – members will be in the market for your products is difficult; even if you have advanced MCIF software or link tracking on your website.
Breaking Down Marketing Segmentation Opportunity Costs
Let’s say you’re a smaller credit union with about 7,000 members. After cutting out youth accounts and other basic factors, you’re left with about 5,000 members to promote auto loans to with a direct mailer.
You have two choices in this example:
- Option 1: Segment your list even more – driving the number down to 2,500 members
- Postcards ($1,255) + Mailing and Postage ($700) = $1,955
- Option 2: Mail to the entire active membership of 5,000 members
- Postcards ($1,650) + Mailing and Postage ($1,400) = $3,050
With the price difference of these choices at $1,095.00, this could be crucial savings for your credit union. But it’s imperative to review the opportunity cost of that potential savings.
For example, a $25,000 auto loan @ 4% APR for 60 months gives you a first-year interest income of $916.11. Using this as a rough estimate, your break-even would be roughly two auto loans for Option 1 with 2,500 members (not bad odds). For Option 2, your breakeven would be roughly three auto loans.
Looking at this example in regard to promoting mortgage loans, bringing in one $200,000 first mortgage (30-year fixed rate at 4% APR) would mean the first-year interest income would be $7,935.89. You’d essentially need one of these first mortgages to double your marketing investment on the second option above.
So, the big question.
Would distributing your offer to an additional 2,500 members net you at least one additional auto loan you wouldn’t get otherwise? With a 0.04% response rate (1/2500), the odds are high you’d not only breakeven – but exceed that investment.
On the other hand, if you didn’t want to invest the additional $1,095 mailing to an additional 2,500 members, could you invest those same funds into another marketing opportunity that would grant you better odds? In other words, could you generate a better return spending those funds another way?
Continue to Evaluate Your Odds
This is not to say segmenting is not important or necessary. Many products and services tied to specific user groups will definitely benefit and often require some form of segmentation. And institutions with large memberships will have to segment in order to effectively invest their marketing dollars.
Instead, we are simply stating that the manner in which you choose to segment should always be part of how you evaluate your marketing investments. Yes, segmentation allows you to reduce your target size and tailor messaging to specific demographics.
However, if you choose Option 2 in our example above, focusing your creative more on psychographics will allow you to expand your marketing reach and captivate that larger audience. For smaller institutions launching full campaigns, this additional investment may be worth the risk.
At STRATIX, we help credit unions COMPETE & WIN vs Larger Institutions. Interested? Let’s Chat.