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Marketing Financial Services A Self Study Guide

LESSON FOUR
Operational Marketing 1: Product Policy
Objective: Once strategic and annual marketing plans have been developed, MFIs must
determine the marketing mix necessary to achieve the goals set forth in their
plans. The marketing mix is a combination of four inter-related elements:
products, prices, distribution and promotion. This lesson deals with the first
of these product policy.
1 PRODUCT MIX
Product policy lies at the heart of the marketing mix and encompasses all qualitative
aspects of the products offered. In financial services, this includes the interest and fee
structure of the products, their terms and liquidity. In theory, pricing is directly related to
these aspects, but in fact, pricing should be considered separately. Various aspects of
product pricing are discussed in lesson 5.
MFIs should develop their product policy by closely following their strategic plan. For
example, if an MFI has the strategic goal of serving customers with the full range of
financial products throughout the stages of the life cycle, this will determine their
product-mix. Product-mix refers to the range of products offered by an institution.
The product mix is structured by breadth and depth. Breadth is the number of product
lines offered by an MFI. Depth is the variety of specifications offered within each product
line. A sample product mix is outlined below:
Product
breadth
Loans Savings-
accounts
Fixed-deposit
accounts
Product
depth
Target-groups:
Employees
Craftsmen
Small companies
Loan purpose:
Housing in the north,
Agricultural
development in the
south
Target-group:
Adults
Students
Children
Employees
Terms:
Save as you earn,
Save the same
amount every month
Amounts in monetary
units:
100-1000
1000-10,000
10,000-100,000
Over 100,000
Terms:
3 months
6 months
1 year
2 years
Offering products that are valued and demanded by customers is key to the success of an
MFI. Product policy decisions should therefore be based on an analysis of customer needs.
If an MFI conducts extensive market research to assess client needs, individual products
have a much higher likelihood of success.
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After conducting extensive market research to determine the needs of their target
markets, BURO, Tangail in Bangladesh designed products for a wide range of community
members. Very low opening balances (US$0.22) and open access for their passbook savings
accounts meets the needs of poor community members. Contractual time deposits (3-10
years) with the same low opening balances are also geared toward poor community
members. Other time deposits are geared toward attracting higher-income community
members with terms of 3 months to 5 years and minimum balances of $111.
Ecuador suffered an economic crisis in 1999, with inflation over 50% and currency
devaluations against the dollar of nearly 200%, which discouraged bank clients from
depositing their funds in traditional savings products. After examining the needs of their
clients during the crisis, Banco Solidario in Ecuador focused on offering several hybrid
financial products to their customers with savings and investment components in both US
dollars and the national currency, Sucres. Two of their most popular products are
highlighted below:
Repos: With US$3.5 million deposited at the end of 1999, forward contracts, or "repos"
in dollars and Sucres proved popular. The contracts ranged from 1-29 days with
interest fixed for the term of the contract. High net-worth individuals were attracted
to the repos as a means to diversify their investments and manage against risk. With a
minimum deposit of US$10,000, this product is beyond the reach of typical micro
clients.
Solidarity Debit Card: Following market research that indicated a population of 50,000
microentrepreneurs in Ecuador, Banco Solidario decided to offer a solidarity debit card
account for microentrepreneurs, which is a savings account with an overdraft facility.
Microentrepreneurs utilize their solidarity debit card to purchase goods directly from
affiliated factory outlets and distribution centers. A computerized system transfers
withdrawal information from the participating outlets and distribution companies to
Banco Solidario. Clients thus enjoy instant liquidity and can purchase their supplies at
discount prices. Suppliers receive immediate cash payments from Banco Solidario.
Clients with a positive deposit balance receive interest equal to the rate of a regular
savings account. Clients with negative balances repay their credit following a pre-
determined payment plan with an interest rate lower than the percent saved through
the discounted purchase prices.
In order to attract a variety of customer market segments, the Kenya Post Office Savings
Bank offers a wide range of savings products geared toward low-, middle- and high-income
clients. Minimum opening and maintenance balances range from $2.86 to $142.90 and
interest rates range from zero to 10%, based on outstanding balance and length of deposit.
To further meet the needs expressed by their customers, KPOSB has enriched existing
products with special features for which they charge commissions, such as direct deposit of
salaries. Also to meet client demand, KPOSB offers an International Visa Card to premium
savings account depositors. Cardholders have ATM access to a number of banks.
MFIs should clearly communicate their full product mix to customers. Part of this
communication includes the packaging of products. Catchy brand names and differently
colored passbooks are examples of ways an MFI can differentiate between the products
offered.
2 PRODUCT DESIGN
The key question to be answered in product design for financial products is, "What terms
are demanded by our actual and potential clientele?" An example of the possible demand
structure of a rural population is provided in the following box.
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Why does the rural population require lump sums of money?
1. Life-cycle needs: Birth, death and marriage, education and
house building, widowhood, old age and the need to leave
something for one's heirs.
2. Emergencies: Impersonal emergencies such as floods,
cyclones and fires and personal emergencies such as
illness, accident, bereavement, desertion and divorce.
3. Opportunities: Starting or running a business, acquiring
productive assets/land/housing or buying life-enhancing
consumption goods.
The goal of product design is not to create a different product to satisfy every possible
client need. MFIs should design products that respond to several different needs with only
a few variables. The most important variables of product design are typically:
Term structure;
Payment structure;
Liquidity/Accessibility; and
Return (see lesson 5).
Product design variables must be appropriate for the markets that the MFI has decided to
target.
To open and maintain a savings account or time deposit with Sonapost in Burkina Faso,
clients need deposit the equivalent of only $7.50. Details and procedures were
designed to be easily understood to accommodate Sonapost's clientele, composed
primarily of small shareholders without much formal education.
BRI's UDES designed simple, voluntary savings products with a range of liquidity and
return options. Minimum opening balances are very low: with the current
Rupiah/dollar exchange, just $.67 for a rural savings account, $1.34 for an urban
savings account and $.33 for a passbook savings account. Interest rates provide
positive real return to depositors and increase with deposit size. Accounts below a
certain size receive no interest in order to reduce costs.
Ithala in South Africa stressed simplicity when designing their passbook savings and
time deposit accounts. They based the design for their savings products on those
formerly offered by the post office banks and building societies, the only financial
institutions that previously served low-income populations in rural areas. In order to
encourage depositors to save larger amounts, Ithala offers higher interest rates and
charges lower service fees on accounts with higher minimum balances.
BAAC in Thailand offers a variety of specialized products tailored to the special needs
of their customers in the rural Thai milieu, in addition to offering a standard range of
savings and time deposits. Their specialized products include savings for religious
pilgrimages, funeral aid associations and personal accident insurance.
In addition to product design variables that are appropriate for the target markets, the
quality of the contact between the personnel of the MFI and their clientele is very
important. Customer service can be a key product characteristic. This aspect is especially
relevant for savings products, where image, service orientation and accessibility all
contribute significantly to a saver's decision to deposit money.
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When determining product design, an MFI must decide whether to offer each product
independently, or to collaborate with another service provider. For example, if an MFI is
targeting low-income rural women, the MFI could decide to develop an insurance product
in collaboration with an insurance company. If research indicates that client demand for a
hybrid product is high, MFIs should investigate collaborating with an institution that is
already experienced in the complementary area. Venturing into the development of an
entirely new type of product is normally a lengthy and costly process.
Sonapost in Burkina Faso has entered into partnership with a local insurance company
to provide life insurance to depositors holding checking and passbook savings accounts.
This simple, inexpensive insurance has an annual premium of $10.50. Subscribers have
the right to $750 for illness-related death and $1,500 for accident-related death.
Sonapost has launched this product to meet customer demand, promote their savings
products, gain an edge over their competitors, and increase their profits.
BAAC has recently developed three new savings products with insurance components
through collaboration with an insurance company. The first is a savings account that
combines life insurance coverage at ten times the deposit balance, up to a maximum of
$5,309. The other two are contractual savings plans that offer tax-exempt interest
earnings. One is a two-year plan with a minimum deposit of $27 per month. The other
is a five-year plan with a minimum deposit of $13 per month. Both of these savings
plans were designed with a life insurance component for parents up to 45 years old
with children up to 17 years old. A child serves as the beneficiary of the account. If
the parent dies, the insurance company completes the monthly deposit payments into
the savings plan until the end of the contract.
3 PRODUCT DEVELOPMENT
Product development is the process of continually refining client-oriented products. It
includes several phases, such as exploring customer needs, screening ideas, evaluating
products through pilot testing, revising product design based on the results, and, finally,
launching the products. All of these phases are intertwined.
Due to the nature of this guide, in-depth analysis on product development is not provided.
This section will instead present an overview of product development for MFIs.
A number of toolkits have recently been developed, or are in the process of being
developed, regarding product development in MFIs. Of particular interest to those
interested in more detailed information, please refer to the following:
Market Research for Microfinance. This workshop/field training system was designed
for MFIs with a clear commitment to developing and introducing new products.
Products ready for pilot testing, should be an output of the course.
The MBP Guide to New Product Development and New Product Development for
Microfinance: Design, Testing, and Launch (Brand 1998a, Brand 1998b) from
Microenterprise Best Practices, Development Alternatives, Inc. These technical notes
describe the process MFIs need to follow in order to design, test, and launch new
products.
Product development for an MFI is often focused on the development of new financial
products for new target markets. Product development also focuses on other goals,
though, which have different and less costly, implications than new product development.
Various product development goals are provided in the following box.
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Goals of Product Development
Attracting new clients with new products (diversification)
Increasing sales to existing markets (market development)
Developing new services for existing clients
Offering existing products to new markets (market penetration)
Product development to increase per unit profits (Cost reduction measures)
The process of product development is comprised of four stages.
i. Exploration involves understanding the market and customer needs and is often
based on customer suggestions.
ii. Screening involves generating ideas and developing plans through group
discussions, customer focus groups and staff meetings. Screening results in
innovative ideas and solutions to existing problems.
iii. Evaluation. Management, or a cross-functional team, evaluates each product and
recommends specific improvements, if necessary.
iv. Marketing includes all aspects involved in launching the new or refined product
based on information gathered during the first three stages of the process.
Customers should actively participate in each step of the process to ensure that the
finished product will meet customer demand and prove successful. MFIs need to answer
the following questions, which should guide the overall process:
What are the clients' needs?
How can these needs be met?
Do any institutional obstacles exist to inhibit us from meeting these needs?
If yes, how can we overcome these obstacles?
Before a product is launched, an MFI should test and refine the product through interaction
with clients. This may be done through pilot testing, as described in section 2.3. The
product can also be presented to a client focus group on an informal basis to gather
comments. Customer feedback allows an MFI to identify any possible socio-cultural
misunderstandings concerning the product.
The box below provides an example of how customer feedback can assist an MFI in the
development of appropriate products.
Concept
Prototype
Customer
Reaction
Refined
Concept
Savings for Kids
Draws students to the
MFI
Potentially develops
long-term, loyal
customers
Rejection of the
word "kids"
Students fear going
into banks
Students prefer to
save at home
Student Savings Plan
Encourages students to save at
home in a specially-designed
box.
Students bring their savings
boxes to school regularly
MFI collects student savings from
school
Marketing Financial Services Lesson 4
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Once a product has been refined through customer feedback, the MFI should develop a
prototype of the product. Using the example of the student savings account, this would
include designing the savings passbook and testing its use with students and the bank
employees responsible for collection.
Union Bank in Jamaica, formerly known as Workers Bank, developed their products using
all four of the stages described above. Their mix of savings products offers a range of
liquidity and return that respond to the characteristics and needs expressed by their
various customer markets. Some products are traditional banking products and others are
based on informal financial products. The bank has created unique trademarks and
product labels so that clients can distinguish their products from those of competitors.
Some of their more innovative products include:
Gold Stamp Savings: Screening demonstrated through a study that the target market
desires access to life insurance. The Gold Stamp savings account therefore offers the
depositor a life insurance policy equal to the outstanding savings balance in the event
of death (up to a maximum of $1,320). Just $1.32 is required to open an account.
Interest offered is just under the national average deposit rate. Between 1996 and
1998, this product accounted for roughly 8-9% of total deposit volume, but 33-36% of
the number of accounts. It has proven especially attractive to clients in rural
communities and inner-city communities with high crime rates.
Partner Savings Plan: Market exploration identified the informal 'partner' as the most
important source of cash savings and credit for low-income people in Jamaica.
Members of a 'partner' pool funds each week into a 'hand' and one member receives the
pooled funds in a 'draw.' The process continues until every member has received a
'draw.' Union Bank therefore designed Partner Savings Plan based on this informal
product and maintained the same terminology. Clients save for 16-48 weeks with
minimum (weekly, bi-weekly or monthly) contributions of just over $5. In addition to
receiving interest, account holders automatically participate in a drawing with cash
prizes.
4 PRODUCT LIFE CYCLE
Business products typically pass through four product life cycle phases. Examining
product life cycle can thus be useful in determining the marketing mix appropriate for a
product. The life cycle of a product can be represented by plotting aggregate sales
volume and the corresponding profit curve over time, usually in years.
-20000
-10000
0
10000
20000
30000
40000
50000
60000
70000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
sales
profit
Marketing Financial Services Lesson 4
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The four phases of the product life cycle include introduction, growth, maturity and
decline. Management should be able to recognize in which phase of the life cycle their
products are located at any given time. For this reason, management information systems
should provide the relevant information on a regular basis. When determining the
marketing mix for a product, an MFI should consider the life cycle phase and competitive
environment of the product.
a. Introduction. During the introduction phase, a product is launched into the market
with a full-scale marketing program. It has completed the product development phase,
ideally including screening as well as prototype and market tests. The introduction is
the most risky and expensive phase; most products are not profitable. Substantial
amounts of money can be spent to gain consumer acceptance of the product. The
major emphasis of marketing during the introduction phase should be to make sure that
the target population knows the product and its characteristics.
b. Growth. In the growth or market-acceptance phase, sales and profits often rise at a
rapid pace. If the profit outlook is particularly attractive, competitors enter the
market. Due to competition, profits begin to decline near the end of the phase. The
major focus of marketing strategies should be to achieve or maintain a significant
market share. This is the phase where many MFIs currently find themselves and their
products.
c. Maturity. During the first part of the maturity phase, sales continue to increase, but
at a declining rate. As sales level off, profits decline because competition forces a
company to increase their promotion, develop new product features, cut their prices,
or all three.
d. Decline. For most business products, a decline phase, demonstrated by steadily
decreasing sales volume, is inevitable for one of the following reasons:
The need for the product disappears.
A better or less expensive product fills the same need.
People grow tired of the product.
Seeing little opportunity for revitalized sales or profits, most competitors leave the
market. However, a few firms may be able to develop a small market niche and remain
moderately successful.
Phase
Introduction Growth Maturity Decline
Characteristics
Customers Innovators Mass market Mass market Loyal customers
Competition Little if any Increasing Intense Decreasing
Sales Low levels, then
rising
Rapid growth Slow / no annual
growth
Declining
Profits None or loss Strong, then at a
peak
Declining annually Low / none
Marketing implications
Overall strategy Market development Market penetration Defensive
positioning
Efficiency or exit
Costs High (Due to start-
up costs)
Declining Stable or increasing Low
Product strategy Undifferen-tiated Better product
characteristics
Differentiated
product lines
Pruned line
Pricing strategy High prices Decreasing Low Increasing
Distribution strategy Selective Intensive Intensive Selective
Promotion strategy Create awareness Create brand
preference
Create brand
loyalty
Reinforcement
Marketing Financial Services Lesson 4
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Product life cycle is a business concept that is meant to apply to all types of products.
Financial services, however, generally follow a specific profile. Their introduction phase is
normally much shorter than for other, physical products due to their replicable nature. In
contrast, the maturity phase is much longer than for general business products. In fact,
many financial products remain unchanged over very long periods of time.
5 PRODUCT EXAMPLES FROM THE FIELD
a. Rural Bank of Talisayan in the Philippines is one of the more innovative rural banks in
the Philippines in regards to savings products. In addition to normal savings accounts
and time deposits, the bank offers specialized savings products not found in their
competitor's product line, including the following:
Time Deposit Plus is a five-year installment savings plan targeted toward paying
for educational expenses. 12% interest is paid annually to clients who make a
minimum monthly deposit of $12.50. Clients automatically receive one lottery
coupon for each $2.50 deposited and are entered into an annual lottery.
Depositors are able to borrow up to their amount saved for emergency purposes.
Double Your Money is a time deposit that allows clients to double their deposit in
six years. The balance on deposit can also be used as collateral for loans.
Share and Care is a savings account and life insurance policy for depositors
between 18 and 55. The account is opened with an initial deposit of $12.50.
Interest paid is 5%. After three years, depositors are entitled to a free annual
medical exam. After four years, if the depositor dies, their beneficiary receives
the account balance and a payment of $250. Account holders are automatically
entered into an annual lottery.
Save for Progress is a savings and credit plan for small entrepreneurs without
collateral. Clients deposit a minimum of $2.50 per day, week or month. After 30
days (for daily deposits) 3 months (for weekly deposits) or 6 months (for monthly
deposits), the depositor is able to access a loan for twice the amount saved. The
interest paid on the savings is 3% higher than on regular savings accounts. Clients
are also eligible for monthly raffle contests.
b. People's Bank in Sri Lanka offers a wide variety of savings products, including
traditional passbook savings accounts, time deposits, purpose-based savings plans for
teachers, health professionals and clients planning to make a religious pilgrimage, and
contractual savings plans that open access to loans. In addition to these, they offer
the following innovative savings products:
Growing Fortune for Very Young Children: Clients can open these savings
accounts with a minimum deposit of $0.71 in the name of children under six.
Interest offered annually is 10.5% to 11.5% and the savings can be withdrawn once
the child reaches 18 or in the case of an emergency. Once the amount on deposit
reaches $14, the child receives a toy; at $36, the child receives a backpack; at $71,
the child receives a notebook and pencil; and at $143, interest is increased by 1%.
All gifts are given publicly in the customer hall.
Growing Fortune for Schoolchildren: This savings product is for schoolchildren
over the age of six. Accounts can be opened with a minimum deposit of $0.71 and
interest offered is currently 10%. Savings can be withdrawn once the child turns 18
or in the case of an emergency. Children can deposit their savings each week
directly at their schools or at the nearest bank branch. Depositors automatically
participate in a medical insurance that covers severe health problems such as heart
and brain disease, normally not covered by health insurance.
Marketing Financial Services Lesson 4
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Savings Plan for Women: This passbook savings account is designed especially for
women and can be opened with a minimum deposit of $1.43. Interest offered as of
the first quarter of 2000 is 9%. Account holders are automatically entered in a
yearly lottery with prizes including jewelry, TV sets and, as the first prize, a new
car.
Non-Resident Foreign Currency Accounts: These accounts are for Sri Lankans
working abroad. Account holders can entrust authority to a nominee to operate
their account - even after their death. Account holders are entitled to obtain an
international Visa Card as well as other loan products from People's Bank. Interest
is paid in the same currency in which the account is maintained.
c. Small Farmers Cooperatives Ltd. in Nepal have introduced a range of novel savings
products. These include:
Double Your Money: Fixed-term deposits that pay twice the amount of the original
deposit at the end of five years, which equals an effective annual interest rate of
nearly 15%, 3% higher than the rates offered by commercial banks.
50 for 42: If account holders make uninterrupted deposits for 42 months, they
receive in return an amount equal to 50 installments in the 43rd month. This
product is based on informal savings plans popular in the region, though those plans
offer no interest. This product offers an effective interest rate of 9% that is 1-3%
higher than the rates offered by commercial banks.
Provident funds: Several SFCLs create a provident fund for their staff, which
employees receive once they retire or leave the organization. Most maintain the
provident fund within the SFCL. Staff receives higher interest from the SFCL than
from commercial banks and the SFCL creates a stable funding source with these
funds.