of whatever it is that you think you might want to create a niche out of. You find out as much as you can about how they do what they do, where they're located, ...
old son of an independent agent activist!”
Making careful selections In banks that succeed with insurance, products and product providers are both very carefully selected. And the bank should be happy with its final choice. “It should be a beauty contest,” Williams urged, “not a
relative-ugliness contest! Partners should be selected based on long-term objectives.” And finally, the decision to launch an insurance affiliate should come from the top down. Without top management championing an insurance program, it won’t work. “Ideas like this don’t rise to the top in banks,” Williams observed, “because there are too many levels to penetrate.”.
+++ H O W TO CHOOSE A NICHE MARKET pecialization can be the key to success. Some banks may specialize in selling insurance to doctors. Others may specialize in a particular product, like Key Man insurance. But how do you choose the right niche for your bank? You conduct diligent research, says Howard Goldstein, vice president and director of the Zurich American Insurance Group (Schaumburg, Illinois). Goldstein, who gives seminars to insurance professionals on finding profitable niches, recently explained some key research strategies to us. First, exactly what is a niche?
information direct from the source-it’s focus groups, and telephone interviewing, and face-to-face interviewing.” Start with secondary research techniques. Then move on to primary research. Obviously, primary research is more expensive.
Product vs. market niches
“It is significantly more expensive,” Goldstein confirmed. “The reason you do secondary research first is that it will get you to the point where you can see if there’s enough available units of whatever it is that you think you might want to create a niche out of. You find out as much as you can about how they do what they do, where they’re located, with minimal-not none-but minimal cost. Then, you use the primary research really to get to real needs-not just perceived needs-buying behaviors, attitudes, and cultures.” “We use a lot of different techniques here,” he noted. “Part of it is taking a look at what your current customer base is comprised of. Because by default or by design, you’re going to have a propensity to meet their needs. So take a look at what you have. You can use data mining techniques to examine your internal data. Or, you can use external secondary sources of identification to find a group of people with the characteristics that you’re looking for.” Can a small bank afford to use primary research? “I’d say they probably can’t afford not to do primary research,” Goldstein responded, “either in-house or outside. It
“There are two kinds of niches,” Goldstein instructed, “product and market. Product niches are focused and very technically difficult to underwrite. That takes expertise. And then, there are market niches, which are really just homogeneous groupings of like customers. And you can do those by industry, size, or buying behavior. It’s usually a number of factors, not just one of those. It’s usually a combination of industry, size, and buying habits. My main perspective is from business to business. But the concepts hold irrespective of whether it’s business to business, or consumer.” But how should a bank go about choosing which niche insurance markets to enter, or which product to specialize in? Goldstein told us that banks can use primary and secondary research techniques to uncover niche opportunities, just like insurance companies do. For example, Zurich American often uses a fairly elaborate process of what is called secondary research. “Secondary research is using source data that somebody else has already gathered,” Goldstein said. “For example, it means going to the library, using books and magazines, using Dun & Bradstreet lists of information. Primary research is getting the
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How do you choose the right niche for your bank?
(continued on page 10)
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(continued,frompage 8) depends upon what it is they want to do. There are people who put together syndicated studies. You can put together or precipitate a syndicated study. Or a smaller bank could work with banks in non-contiguous geographic territories, which it may not be competing against. And the banks could pool their resources. For example, they could do it through an association. An association of community banks could get together and commission a study that would be able to help them out.”
Your bank’s strategic direction will determine the niche you choose.
“Niche marketing is saying that the niche that I really want to meet the needs of is wealthy people, for example. Now, as a group, what is it that their needs are? All niche marketing has to be customer-focused. You can’t decide what you want to sell. You have to decide what your customer needs. That’s why you do all the research.” What are the other steps in the process? “Secondary research is to get you sizing and needs information,” Goldstein reminded us. “Primary research is to find out what your real needs are. And then, the next steps are obviously to develop the products and services to meet their needs, develop the strategies to implement it, and then set up mechanisms to constantly get feedback from the niche, and find out if what you’re doing is correct. They’re changing at the same time that you’re changing. So this is what you need to do to keep up with the market that you choose to work with.” But what kind of hard data does the bank really need before it says, yes, there’s an opportunity there?
Knowing what not to do Choosing the right niche What steps would a bank go through in choosing which niche markets to enter? Should a bank have some ideas in mind of the target markets or products it wants to specialize in before starting its secondary research? Or should the bank approach the research with an open mind? “Most people will tend to go into it with some preconception,” Goldstein advised, “either based upon their own individual interests, or who the current customers are. And that’s why I suggest you can start off doing data mining within your own organization.” That’s like database marketing and segmentation. “Exactly,” said Goldstein. “Database marketing is just a refinement of market segmentation. So you do that. If you’re really going to step back, then you do a true segmentation study, and say, ‘What is within my trading area?”’ But make sure the niche you select serves the bank’s overall strategy. “The niche that you choose is going to be determined primarily by the strategic direction that the organization is taking,” Goldstein warned. “That’s got to be first. Do you want to be acommercial bank? Do you want to be aretail bank? Do you want to be the biggest player? Do you want to just focus in on a select group of people? So all these things ultimately become part of a strategic marketing plan.” That narrows your universe of possibilities. “Right,” Goldstein agreed. “One of the things I talk about is that the Universe is all things and all people. The first thing you have to do is to cut it according to where you want to play. The part of Zurich that I play in is a large commercial company. There are other parts that specialize in the personal lines-auto and homeowners. So your strategic direction is going to be the first major cut. And then, the next cuts after that, once you decide that, is what’s the propensity already within the organization. Or you can step back and say, ‘I’m starting with a blank sheet of paperlet me do a real major segmentation study.’ But I think in a small bank, that’s hard to do. That tends to get expensive.
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“What you don’t do is to say, ‘I think what they need is this,’” Goldstein warned. “You ask the customer. And you don’t necessarily ask them what they need. You ask them what problems they’re having.” “For example, some people say, ‘I need worker’s compensation insurance.’ Well, they don’t need it-they have to have it because the government is telling them that you can’t open up your shop without it. But how much do you really need? What kind of deductibles do you need to take? What kind of limits do you need? What kind of risk engineering and claim services do you need? “The key is focusing on the customer. And also ask how does that fit into the company’s strategic direction? It’s got to be a match, or it’s not going to work.” What are some examples? “There are some people who focus in on only jewelers,” Goldstein responded. “There are some companies that focus in only on physicians. There are yet other companies that focus only on drivers who have terrible driving records. They have figured out how to make money in markets that are not necessarily easy to make money in.”
You don ’tnecessarily ask the customer what he needs.
Weighing the Pros and Cons What are the pros and cons of specializing in niche markets? “By focusing you are better able to identify and meet customers’ unique needs,” Goldstein reminded us. “1think that’s the only reason you do niche marketing. You make more money by knowing. You’re not making things people don’t want to buy, so you’re not wasting time doing that. You’re not spending extra advertising money pulling in people who you don’t necessarily
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want to do business with. You’re creating very focused products and services to meet those peoples’ needs. And therefore, they should be getting something better. And you should be able to make more money from it.” This is a way of zeroing in on your most profitable customers. “Yes,”Goldstein agreed. “Andif you findout that somebody is not profitable, how do you make them profitable? I’m not in the banking industry, but if you’ve got a whole bunch of people who pay off their credit cards each month, such as myself, I presume the bank doesn’t make any money out of that. But I’m not necessarily a bad customer. There may be other things they can be providing to me, and which keep me happy as that kind of customer. But what other services should they be providing to me? “The whole thing in niche marketing is not selling them whatever products you happen to want to sell. It’s clearly identifying what problems people have, and what products people want to buy. And that’s where the niche comes in. By definition, it’s a homogenous group of people. Now you have a larger number of homogeneous people, so you can afford to spend the money to create tailored products and services.”
Avoiding the dangers But are there dangers in going after niche markets? What questions should a bank ask itself before it spends time and effort in going after a particular niche? “The pitfall, especially if you get too focused, is putting all of your eggs in one basket,’’ Goldstein cautioned. “And the questions they should ask themselves are the size of the market they’re looking at, the profitability. And probably the most important thing is, what is it that is going to cause people to go to them instead of to somebody else? What is their differentiation? You can declare that you’re a niche player. But if there are 50 other niche players, all of whom provide better products and services, then you’re not going to be successful at it.” Are banks and corporations often fooling themselves by assuming they have better service and products, and so will succeed-when really they haven’t measured that, and they’re just cheering themselves on? “I think that’s a true statement,” Goldstein reflected. “It’s looking in the mirror and saying, ‘Really and truly, what is it that causes people to come here?’ That’s where you get back to the primary research. What is it the customer needs? How happy are they with what they have? What would cause them to move? “There’s also the person who invents the better mousetrap,” he continued. “For example, researchers did not invent the minivan. Somebody in Ford, who then sold it to Lee Iaccoca and Chrysler, conceived the idea. And then they tested it and people likedit. But it didn’tcome out of marketresearch. The same thing happened with the walkman. Somebody didn’t say, ‘Gee, I’d really like this little thing I can stick in my pocket, which is going to play tapes.’ It was just beyond anybody’s conception, except one person in Japan, the head of Sony. “He went out and handed it out to a bunch of teenagers. Then people saw them walking around with it. And all o f a sudden, the
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next thing was you had the Sony corporation,” Goldstein joked. “So not everything comes out of research. But some things can come out of research.” What red flags do banks have to watch out for to make sure their niche marketing efforts don’t go awry? “That goes back to the most common mistakes banks can make in niche marketing,” Goldstein asserted. “For example, there’s a problem if the niche is too big-if people are just trying to increase revenues because management said, ‘We have to grow in this niche.’ And then, all ofa sudden you lose your focus
How do you know when the niche is too big? of what the real differentiators are in that niche, and you start expanding out and making the niche too big.”
Don’t lose your focus How do you know when the niche is too big? “When the group of whatever these people are becomes nonhomogeneous,” Goldstein explained. “The whole idea of niche marketing is, for example, that I’m going after jewelry stores. And I may even be going after a specific type of jewelry stores-small jewelry stores. They have specific needs. Okay. But once I start going after stores like Service Merchandisewhich happens to be the largest jeweler-that’s not my niche. My niche was small jewelers. “And you also might say, ‘Let’s see. I’m in jewelry stores, which are also retailers. So now, why don’t I start looking at supermarkets?’ If you do that, you’ve just lost your focus.” Does that happen often? “Yes, I think it does,” Goldstein asserted. “The tendency is to think that bigger is better. So therefore, how do I keep on growing my niche? Well, it’s easier to redefine your niche than it is to actually stay within that niche, and increase the number of companies or people you have. It’s easier to broaden than it is to drill down.” Are there any particular niche markets he’d warn banks and others away from, because of the cost and difficulty of penetrating them? “Not really,” Goldstein answered. “It depends upon their marketplace. I’m a firm believer that you can make money at almost anything, if you know what your customer wants, and you know how to price your product properly. And if you can’t, then it’s not a legitimate niche-so you shouldn’t be in it anyway.” And what about the Internet? Obviously, there’s a huge potential audience there. “Yes, but the problem is to reach them,” Goldstein warned. “Part of it is that the Internet itself is a niche-because you have to have a computer. So you are, by definition, at a certain socioeconomic level and age level. And then within that, people actually have to find your site. But there are a staggering number of sites. And ifthey do find your site, you have about ten seconds or a minute to convince people to stay. They aren’t going to give
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