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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2013

Divide and Group Your Client Base

Segmenting customers is key to developing business in today’s marketplace

Today’s tough underwriting guidelines have squeezed many first-time homebuyers out of the market. In addition, many existing borrowers already have refinanced into loans with rates that may be just about as low as they’ll ever go. These trends will change what was previously a refinance-heavy business into one that soon will favor the purchase-money transactions that occur when existing homeowners move to follow their jobs or trade up to larger — or down to smaller — homes. What will these changes mean for your business?

Many mortgage bankers and lenders already are working to make the transition from refinance shops to ones that are capable of closing a high volume of purchase loans. This is an important change if they hope to compete for the new business that may be right around the corner. The transition involves retaining loan officers to source and close a different, more complicated loan product, but it also means that mortgage companies must learn to segment their prospects in a new way.

In the past, a lender could segment its pipeline by product type. This made sense because it required different skill sets to process government loans, rate-and-term refinances, loans originated for Fannie Mae or Freddie Mac, etc. Technology solutions were deployed in call centers to help lenders route prospective customers to the right product department on the first call. Now, however, those days are ending. 

In the mortgage marketplace of the near future, the characteristics that make the transactions different will be found in the applicants, not the loan products. 

Changing view

Some companies in the mortgage industry build their businesses around loan products and investor types, with little regard for the actual buyer behind the transaction. As lenders begin to make the change to more customer- centric operations, however, one mistake they often make is assuming that all customers are generally equal because they’re all seeking mortgage financing.

Although some companies are experts at knowing exactly which loan products bring them the largest margin, relatively few companies know who their most profitable customers are. In a world with fewer loan products and more homogeneity in the offerings that do exist, it will become more important to understand your customers, segment them effectively and create a borrower experience that will generate referrals and word-of-mouth business.

Segmenting prospects

In the past, industry executives have looked at one primary metric to prioritize their lending businesses: net profit per loan. This metric varied based on loan product type, and there will be fewer types of products going forward. If the consumer is the new metric that matters, how will lenders begin segmenting them? Here are two best practices for customer segmentation.

  • Value-based segmentation. Value can be measured by a customer’s direct purchases, as well as the referrals they generate. Once this measure is known, customers can be ranked by value to the company. Some costs — and perhaps some sources of revenue — will be difficult to capture directly. Bankers and lenders may need to develop new internal procedures to review their financials and periodically update their profitability models.
  • Vulnerability segmentation. It also can be useful to segment customers relative to a critical business attribute, like churn — i.e., the likelihood to defect. It is always more expensive to get a new customer than to keep a current one. This is particularly applicable to smaller institutions or credit unions that service their own loans. As the mortgage market continues to change, the most highly qualified prospects will be increasingly valuable. They may make future purchases, refinance, or seek home-equity loans or other products. When you develop a relationship with your mortgage customers, they also can drive incremental revenue by referring their friends and neighbors.

By segmenting customers based on vulnerability or their likelihood to leave, mortgage companies can send customized offers to the people who are most at-risk of defecting in an effort to counteract these effects. In addition, as many at-risk customers share similar characteristics, segmentation often reveals why those customers want to leave. Lenders then can tackle this problem by building strategies to retain customers and enhance satisfaction.

Data mining

To really gain value from customer segmentation, mortgage companies also can leverage data mining. Predictive analytics enable companies to develop segmentation based on a large number of behavioral factors. These techniques can help to validate that the segments you’ve identified will have a meaningful impact on revenues.

Further, you can create much more sophisticated niche segments that enable you to uncover market opportunities that aren’t readily apparent to your competitors. Advanced analytics and segmentation can be important sources of differentiation in a crowded marketplace.

Data and analytics are tools that can help your company become more customer-centric. That said, you also should examine the way your company currently interacts with customers and map out your end-to-end engagement.

This process starts with how a prospect becomes aware of your company, monitors the application and funding stages, and tracks the journey of the customer becoming an advocate who refers new business to you. There is a common adage that suggests there is no loyalty in the mortgage business. Almost any industry professional can recount stories, however, that underscore the vital importance of enthusiastic advocates.

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Segmentation is one approach that can help mortgage organizations take a systematic approach to understanding which customers are most important to their business. A focus on the customer experience, particularly customer-journey mapping, can help identify gaps and improve end-to-end engagement. As regulatory and market dynamics reshape the mortgage industry, the role of customers will become increasingly important.


 
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