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A Study of use and Impact of Market Segmentation Practices on Bank Performance: With Special Reference to Commercial Banks in Colombia | OMICS International
ISSN: 2167-0234
Journal of Business & Financial Affairs
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A Study of use and Impact of Market Segmentation Practices on Bank Performance: With Special Reference to Commercial Banks in Colombia

Asiedu E*

Servicio Nacional De Aprendizaje (SENA) Neiva, Huila, Colombia

*Corresponding Author:
Elvis Asiedu
B.Ed, MSc, and CMI Level 7, Management Studies
Servicio Nacional De Aprendizaje (SENA) Neiva, Huila, Colombia
Tel: +573102790179
E-mail: [email protected]

Received: December 04, 2015; Accepted: December 29, 2016; Published: January 12, 2016

Citation: Asiedu E (2016) A Study of use and Impact of Market Segmentation Practices on Bank Performance: With Special Reference to Commercial Banks in Colombia. J Bus Fin Aff 5:162. doi:10.4172/2167-0234.1000162

Copyright: © 2016 Asiedu E. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

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The Banking and Financial Environment in Colombia has witnessed so many regulatory changes and competitive dynamics. This has made segmentation practices an imperative determinant in their service offering and development to its complex customers. Approach: This study assessed the use and impact of market segmentation patterns and practices on the performance of selected banks in Colombia, post consolidation period of 2012 to date. The methods applied were both primary and secondary while the design was mainly exploratory, relating basic market segmentation variables like market share, geographical location and pricing to bank performance. Statistical test using Herfindal Hirchman Index (HHI) was designed to test for market concentration against bank’s performance. Objective: The idea behind this research was to assist managers, business students, and banking workers to understand the concept and impacts of marketing segmentation patterns and practices on banks performance. Results: Findings from the study indicate that, segmentation practices have immensely impacted on the performance of the selected banks in Colombia. The study exposed that the banks have used segmentation practices to lower their overall operation unit cost, expand their market shares, retain their customers, better their communications, increase profitability and focus on their company. They are well positioned in capital strength and they are the best capitalized banks in Colombia, thanks to their segmentation strategy called data-informed strategy. Conclusion: The study however concluded that there is a threshold point (37.2%) in which any further commitment of funds into market segmentation practice can lead to negative result. Recommendation: It was recommended that less dominated banks can adopt acceptable corporate image, simple and flexible account opening formalities, just-in-time service delivery, employee-customer management, and effective and efficient use of referrals to win customer loyalty which tend to retain old customers and win new customers as well.


Tier-1 capital ratio; Market segmentation; Commercial banks; Bank performance; Customer retention ability; Colombia


Colombian banking industry and segmentation history

Developments in the financial and banking sector such asimplementation of new technologies, constantly changing of customerneeds, increase in the number of products offered and deregulationprocess have made segmentation practices very important in thatsector. Banking and Financial sector in Colombia, South America,since the beginning of the 1990’s has been characterised by its size, itsoligopolistic and segmented structure, and has a history of segmentingmarket to meet their customer’s satisfaction. Colombia, which is in thenorth-western corner of South America, is the 3rd most populous countryafter Mexico and Brazil in Latin America. It ranks as the 28th largesteconomy in the world according to 2015 Index of Economic Freedomwith an overall percentage of 71.7 (+1.0) (The Heritage Foundation,2015). The banking sector is the widest financial intermediary inColombia’s capital market. It is dominated by complicated financial conglomerates with different kinds of intermediaries.

The banking sector in Colombia like any other bank, have a historyof segmenting their market on the basis of their service-offering suchas saving patterns, level of income, demographic characteristics,professional calling, or risk preferences [1,2]. Banks whose marketsegmentation cut across all boundaries benefit from market shareincrement. In Colombia, banks such as Bancolombia have a wide market segmentation that cut across commercial banking, retail banking, construction banking, small business banking, treasury, off-shore commercial banking, government and institution banking, brokerage, credit card, manufacturing, investment banking, and leasing among others [3]. The purpose is to reduce expenses and achieve the objective of rendering services to a ‘niche’ or a given market.

Segmentation practices and patterns began in Colombia in asearly as 1931 when Caja Agraria was established as an entity withpublic capital to serve the agricultural industry in the country. Bartelsupported that the early history of the marketing discipline was focusedon the sales of agricultural products. This bank at that time was taskedto refinance the debts of the coffee growers in the country. BancoCentral Hipotecario (BCH) was also created in 1932 to purchase badloans from commercial banks and mortgage. In 1951, Banco Popularwas founded to grant credits to commerce and small urban businesses. 1953 saw Banco Cafetero created with the aim of financing the coffee growers in the country. Banco Ganadero in 1955-56 was established as a state-own institution targeting commercial cattle raisers in the country [4].

In the mid of 1980’s, the financial system in Colombia wereboosting of ninety-one (91) banks with an average of 46% GDP asassets equivalent. Out of the 91 banks, public-owned banks held 48% ofthe sector’s assets with 20% GDP. Foreign Banks had 3% with 1% GDP;Domestic Private Banks had 20% with 9% GDP; Savings and LoansCorporations had 15% with an average GDP of 7% and others were20% (9% GDP). The number of the bank institutions considerably grewup in the 1990’s to 145 banks with total assets equivalent to 68% GDP[4-6]. However, the public-owned banks assets drastically fell to 13%as of 1995 due to the participation of other non-banking institutionswhose assets rapidly grew from 20% between the 1986 to 1989 to37% in 1990 [4]. This made the commercial banks to intensify theirsegmentation strategy to improve their performance. Asiedu supportedthat “segmentation strategy allows firms to understand customer value and identify the most profitable opportunities” [7].

In Colombia, banks such as BanColombia, S.A, Banco de Bogotá,S.A. and Davivienda, S.A. have adopted a segmentation strategy calleddata-informed strategy to develop their customer retention skills [4].This data-informed strategy is used to reward and raise the moral ofprofitable customers who are loyal to the company. The data-informedsegmentation allows firms to analyse how their customers thinkand make decisions about their products and services. This helps tocustomize products to suit the exact needs of consumers. Shaw et al.opined that commercial banks’ capacity in terms of smooth paymentsystem and resource allocation is important in every economy [2,8-10].It is therefore necessary to adopt marketing segmentation practicesas the main basis for allocating resources for marketing, service anddelivery programs as well as product development [7]. This has broughtthe need for government in every country to draw regulatory models(frameworks) to control and guide their activities. The commercialbanks domestic assets in Colombia as of 1999, was 50%. However, thebank’s non-performing loans in Colombia as of 2014 were as low as 2.9% (The World Bank Groups, 2015).

Although the deregulation of Colombian financial industry since1990 (Leg 45/1990) sought to reduce market segmentation, the newsystem continues to induce market segmentation with the aim ofpreventing competition [4]. Colombian banking and financial industryis known for their large volume of liquidity and bank deposit in thepast due to their inappropriate market drives and design. The industryhas witnessed so many regulatory changes and competitive dynamicsmaking segmentation practices an imperative determinant in theirservice offerings and development to its complex customers. However,inn 2012, The Banker, Global Financial Intelligence in London reportedthat Bancolombia, Banco de Bogotá, Banco Davivienda, BBVA andBanco Occidente are the top most five banks within the Colombianbanking sector. This has raised a concern to find out the marketsegmentation practices adopted by typical Colombian CommercialBanks, the benefits derived from market segmentation practices andthe influences market segmentation practices have on customer loyalty through banks product and service offerings in Colombia.

Purpose of Study

The purpose of this study is to examine;

? The uses and impacts of market segmentation practices on bankperformance with special reference to selected commercial banks in Colombia.

? To find out the market segmentation practices adopted by typical Colombian Commercial Banks.

Research objectives

The idea behind this research was to assist managers, businessstudents, and banking workers to understand the concept andimpacts of marketing segmentation patterns and practices on banks performance.

Research questions

? What market segmentation practices adopted by a typicalColombian commercial banks? Is there any relationship between segmentation practices and bank service offerings?

? Is there a positive relationship between market segmentation practices and bank performance?

? What benefits do the selected commercial banks in Colombia derive from market segmentation practices?

Significant of the Study

The paper will assist managers, business students, banking workersand general public in Colombia as well as other institutions interestedin understand the concept of marketing segmentation, or segmentationpractices and bank service offerings or its impacts on banks performance.Since the study seeks to address the benefits organisations derive frommarket segmentation, it wouldn’t be surprised to see experiencedand new researchers in the field of management making reference toit [11]. The study will also help students in their academic writings.Management and marketers in various financial institutions can adoptit as a yardstick to develop marketing strategies to achieve customer satisfaction to influence customer retention, loyalty and profitability.

The concept of market segmentation

The concept of Market Segmentation was first introduced intomarketing terminology in 1956 by an American Marketing Professor,Wendell, Smith and was proposed as an alternative technique for marketdevelopment where there are few competitors with identical products.Smith tried to define market segmentation as a condition of growthwhen core markets are developed on a generalised basis to the pointwhere additional promotional expenditures are yielding diminishingreturns [12]. This means that effective matching of firm’s resources totarget market segments can deliver the greatest return on marketinginvestment (ROMI). Day [2] perceived that market segmentation isa part of the bigger marketing plan adopted by companies to dividetheir markets into distinct groups on the basis of wants, needs, taste or behaviour for their different products and services.

The concept has common variables for consumer markets and itworks for every company. It involves with the division of a broad targetmarket into smaller segments to make marketing simpler and easierto undertake. According to Asiedu “segmentation is a managementtool that enables firms to subdivide their market based on the samebehaviour of consumers into discrete consumer groups [7]. Hecontinued the tool can help firms to identify the unmet customerand employee needs and attend to the”. This really shows that marketsegmentation form an important foundation for successful activities and strategies of every organisation.

Figure 1 demonstrates the common variables of market segmentation for consumer market.


Figure 1: Common variables of market segmentation for consumer market.

The purpose of segmentation patterns in every aspect of business isto leverage limited (scarce) resources to focus on prospects customerswho are likely to patronage its product offerings. This practice hasenabled many organisations including financial institutions, tounderstand the elements of the marketing mix, distribution, price,promotion and products. It has helped many companies to designtheir products and services to suit the whims and caprices of differentcustomers in the consumer market. Adewoye and Salami arguedthat effective and efficient segmentation practices enable financialinstitutions to maximise return for a given marketing expenditure [13].The financial service requirements and its characteristics for consumersvary with age and that these differences could be used when developing marketing segmentation for such service [14].

Since financial institutions and many other companies have finiteresources, it is however impossible to produce all possible products andservices for everyone, all of the time. Therefore, the best thing to domost of the time is to provide selected offerings for selected groups ofpeople. That’s why different banks offer different products and servicesbased on their geographical location, demography, and psychographic.This process enables firms to focus on the specific needs of customers in the most effective and efficient manner.

Onaolapo et al. advocated that the needs for segmentation practicesby many firms are often influenced by the needs to satisfy customer’srequirements [15]. Some customers require their companies toimprove their cash flows, service delivery, and product quality. Beanand Ennis eloquently responded that a firm with limited resourcesneeds to pick the best opportunities to pursue [16]. The tool allowsbanks to achieve their goals and objectives in terms of efficiency,sustainability and growth. Through segmentation, banks can carefullylisten to their customers and respond to their wants and needs. Asieduargued that the overall outcome is that the tool allows firms to providegreat customer experience by satisfying the needs of customers withthe idea that results are not important, rather the natural outcome of a job well done [7].

Asiedu encapsulated this in his work entitled “Developing Market as a Source of Competitive Advantage: The Role of Management Tools” by arguing that the concept of market segmentation is normallyrelated to product differentiation since a firm needs to adopt differentvariations in its offerings to satisfy those segments [7]. He argued thatif a firm adopt different versions of its product offerings, it allowsthe company to appeal to different market segments. Contrary tothat, Cardozo perceived that if a firm start by adopting new productsvariations, it simply means that, such firm is using a productdifferentiation [17]. But if that same firm begin with the customers’needs, then that firm is using market segmentation approach. No matterthe reasons for market partitioning, segmentation practices can only befeasible if the targeted market is accessible, identifiable and respondto the various marketing mix differently as offered in that particularsector. Agbo et al. among others indicated some causality betweencustomer brand loyalty and profitability of the business [17,18]. Thispaper therefore seeks to explore how the banking sector in Colombiauses this tool (market segmentation) to administer its product offerings in a dynamic or different service market.

The process of market segmentation

The complexities involved in market segmentation processhave made it an exacting activity. According to Griffith and Pol, theprocess involves greater customer variability, problems linked with the identification of the key differences between group of customers and multiple product applications [19]. Several academic pundits and market researchers have proposed myriad criteria that need to be met during segmentation process. Alfansi and Sergeant [20], in their studies came up with 6 criteria that must be met after they reviewed the works of scholars such as Frank et al. [20-24]. Alfansi and Sergeat criteria were based on accessibility, actionability, stability, responsiveness, sustainability and identifiability [20].

Wedel and Kamakura provided the most pertinent segmentationapproach for financial and banking service sector. According to them,marketing segmentation bases can be classified based on “general”(that’s independent of product/services) or “product-specific” and to the extent of each been observable (Figure 2) [25].


Figure 2: Classification of segmentation variables.

Scholars such as Dickens and Chappel et al. argued that theobservable variables such as position in the family, life cycle, culture,gender, geographical location and income are potential criteria formarketing segmentation [26-31]. However, in the context of financialand banking sector, a number of research studies had revealed thatthere are differences in terms of purchasing and demographics. Thoughmany scholars view demographic variables as too small, Alfansi andSergeant maintained that demographic variable is very importantand popular in marketing segmentation due to the following reasons;(i) easy and possible to conjunct demographic variables with other variables (ii) can easily be obtained (Figure 3) [20,32].


Figure 3: Shows the differing classification of consumer segmentation-bases.

In the banking sector, segmentation is mostly limited to categoriesof commercial (corporate), and retail consumers. Commercial(corporate) customers are normally distinguished based on the sectorthey are affected and involved or based on their geographical range ofactivities. Meidan and Harrison argued on their part that demographiccriteria such as income, age, profession, or wealth are very important forpersonal retail banking and credit card segment [33,34]. To talk aboutproduct-specific criteria under observable classification, Khermouch etal. detected that user-variables such as user status, user rate, loyalty,and stage of adoption are crucial factors for marketing segmentation [35-38].

Contrary to the above assessments, Evans et al. developed thatunobservable classification must be taken into consideration duringsegmentation process for banking and financial service sector [39- 42]. These scholars argued that general variables under unobservablesegmentation classification such as personal values, personality,lifestyle or psychographic bases should be considered when segmentingmarket for banking companies. Harrison presented psychographicsegmentation variables by using individual’s perceived confidenceand ability in dealing with financial issues, individual’s own perceivedknowledge and understanding of financial services as well as theexpressed level of involvement and interest in financial service [34].Harrison concluded his study with areas of four (4) segments and theyare; (i) capital accumulators, (ii) financially confused, (iii) cautiousinvestors and (iv) apathetic minimalists. Segmentation practices havebenefited and proved its usefulness to many sectors and organisations.In Colombia, it has allowed banks such as Bancolombia, Banco deBogotá, Banco Occidente, BBVA and Banco de D avivienda to increase their tier-1 capital and market share (The Banker Database, 2012).

To segment financial service markets, a firm must use marketinformation ascertained from key customers concerning situationrelatedvariables (criteria) and product. These are grouped assegmentation bases, and they include; psychological criteria (such aswhy does my market behaves the way it behaves?), behavioural (when,where and how does my market behave), profile (who are my marketand where are they?). Kotler argued that a market segment consistof group of customers with similar features that are important inexplaining their response to suppliers’’ market stimuli [43]. This reallyshows that important considerations should be made when choosing the differing bases for market segmentation.

Doyle observed the differing classification of segmentation basesand argued that market segmentation deals with a homogenous groupof customers who react differently to distributional communication,promotion, pricing and other marketing mixes variables. When thesevariables (criteria) are applied, the impact is that it affords the marketersat the bank to dichotomies portions of the market from one customer needs to another to achieve corporate profit target [44].

To sum up everything in this section, there are two main basicapproaches to segmenting a firm’s market. They are break-downmethod and built-up method. Freytag and Clarke argued that thebreakdown method is more recognised when segmenting consumermarkets while built-up method is more recognised when givinggeneral analysis based on identification of similarities. The built-up type is customer oriented as it seeks to put more emphasis on customer needs. According to Wind, the goal of market segmentation practices is to solve the conflict between the intentions of banks or any other organisation to satisfy their customers need; been it individual or group [17]. He further argued that it can also be sued to allocate marketing resources economically in time of limited resources (Table 1).

Base-type Segmentation Criteria Explanation
Psychological Psychographic (lifestyle)
Benefit Sought
Banks can analyse consumers’ interest, opinion and activities to understand their pattern of behaviour and lifestyle which affects their decision making processes and purchasing behaviour.
Been able to understand customers purchasing motivation, it can be easy to have insight into the benefits they want from their used products.
Behavioural Transaction/purchase
  Media usage
Product usage
Information about customers’ transactions and purchases provides very rich data for identifying profitable customer segment. This data can provide scope of analysis on who buys what, when and how (how much they spend and, how often), and what transaction channel did they use to purchase?
Information on what media channels are utilized, when, where, by whom and for how long. This provides useful data to find out the potentials of certain market segments.
Usually segments are obtained from analysing markets using their usage of product offering, product category and brand. This may be in the form of time of usage, frequency of usage, and situation of usage.
Profile Lifestyle   Demographic Geodemographic Geographic Analysis on lifestyle is based on the principle that, customers need different products and services at different stages of their lives. For example; young couples, workers, retired.
The key criteria in this area are sex, age, profession (occupation), and religion, level of education, social class and income features. Many of these influences buyers ability to buy a certain product or service.
In the banking service context, this approach is very important. This is because it is presumed that there is a relationship between location and the type of house that people live in, and their buying behaviour.
The banking service during segmentation should also know and understand that the needs of potential customers in one geographical area are always different from those in another area. This stems from their custom, tradition and climate difference.

Table 1: Segmenting variables for consumer markets.

Market segmentation practices and bank service offerings

For successful bank service offerings, a segmentation practicesplays a major role. It is a part of the bigger marketing plan that allowsmarketing managers to separate, identify and evaluate the layers of amarket to design a marketing mix. Market Segmentation plan helpscompanies to focus on all the needs and wants of their customers.According to Asiedu, segmentation is seen as the bedrock of a firm’ssuccess in developing market [11]. However, it varies depending on thetype of business and the objectives in which it focuses. Segmentation ofbanking products and services in Colombia has followed the trend ofconsumer banking segment, commercial banking segment and creditcard segment with emphasis on psychographic, geographic, socioculturalbehaviour and demographic. Abel argued that the techniqueof partitioning a market discloses strategic and profit opportunities for new competitors to challenge market leaders in the system.

Before designing the segmentation plan, the marketing managerneeds to accumulate enough information about the product-usersvariables; considering the geographical location of the business,its demography, and psychographic so that they can target theright market segment with appropriate strategy. Through marketsegmentation, financial institutions like the banks can be able toknow the purchasing habits, needs, lifestyle, age and interests of theirconsumers and take them into consideration when designing productsand services. The practices enable the industry to increase transparencythrough regulating the disclosure of information; albeit at the lowerlevel. The essence of this is to retain customers, promote customerloyalty and satisfaction. Market segmentation practices allow banks toconcentrate on serving the many needs of a specific customer group.The diagram summarises the benefits banks derive from practising market segmentation (Figure 4).


Figure 4: Benefits provided by market segmentation to banks.

Bank Service Offerings can be defined as the services renderedto customers to satisfy their needs. Some of these services couldbe products or services related to banking such as leasing, cashmanagement, investment banking, brokerage, factoring, portfolio,risk management, and trust services. However, bank service offeringsdiffer from one geographical location to the other. That is why marketsegmentation is considered as the most sensitive part of marketingstrategy since the practice is useful to describe and locate targetsegments and influence a firm’s strategy. Banks’ ability to know andunderstand their customer’s level of needs and interest is importantand beneficial in changing, and shaping the firm’s product (service)portfolio. Bancolombia for example offers a large range of services andproducts to customers across all segments through 952 branches with3,333 ATM’s, mobile attention centres (718 Mobile Bank Units) and1193 banking correspondents in Colombia. Bancolombia is the onlycommercial bank in Colombia with 65% geographical coverage in thewhole country [3]. No wonder it is the largest banking company with widest market share in Colombia.

Also, knowledge about market segmentation can be helpful in termsof getting customers to support the firm’s product and service offeringssuch as lending operations and deposit to help increase the bank’stier-1 capital. Tier-1Capital Ratio is designed to measure the financial strength (financial performance) of banks. Market segmentation practices do not only help banks to reposition their brand or develop new products but also ensure better communication between the two parties, thus, the bank and its customers. Asiedu argued in his conceptual framework called “The Six Management Tools for Market Development” that segmentation practices allows firms to develop pricing strategies and marketing campaigns to extract value from both low and high-profit income [7]. Bain and Company argued that making loyalty pay to its full potential require banks to master the five elements of reinforcing their brand, segmenting and targeting customers, transforming customer experience, enhancing product proposition, and improving scale capabilities. These five elements can effectively be done when there is proper marketing segmentation (Figure 5).


Figure 5: Making loyalty pay to its full potential requires mastering five elements.

Hofstede et al. argued that many relate market segmentationpractices to bank-service offerings on the basis of variables such asrisk preferences, saving patterns, demographic features and levelof income [1]. In the financial and banking industry, incidences ofrising overheads expenditure are seen to be linked or related withsegmentation practices. Segmentation practices under the bankingsector can only be successful when marketers are able to identifyindividual similarities and differences within segments that haveimportant effect on buying patterns. In this case, marketers need tosegment the business environment by identifying group of customerswith common interest in terms of gender (male or female), age, status, business, and aged.

After that, they will be able to know and understand their targetmarket by identifying which group of customers their company aim for(that’s; is it males or females, students or businessmen, and what targetage group) . This will give the firm the chance to position their productsor brand by creating concept to appeal to their target market. Thereare many theoretical models abound for the design of a successfulsegmentation plan in bank product and service offering. Scholars suchas Cardozo and Wind identified a three-stage deign and Hofstede andSteenkamp as well as Petit and Brassington also designed a two-stageprocess based on the above characteristics [1,17,45]. Colombian banksmostly embark on segmentation with the aim of increasing marketshare, maximising profit, positioning products and finally enhancing turnover.

Petit and Brassington advocated that ideal market segmentationmust go through at least two stages; namely; micro and macro segmentsstages. According them, while the micro-segments have substantialinfluence on the decision-making features, macro-segments haveinfluence on buying situations [45]. From the print view of Ferreland Pride market segmentation can be classified into consumer andindustrial (Commercial) segments [46]. Though these theorists differon certain points, there are basic tenets common to all and that is,to achieve the same objective based on location, size and usage rate adopted by Cardozo and Wind [17].

Most of the focuses of these theorists are meant to distinguishbetween specific individual customer needs, and the requirementfor target market. Ovia and Cooper supported that organisationalperformance; customer retention and mass customization are likelyto be improved whenever bank products and services are designed tosatisfy customers’ expectation within a market segment [47,48]. Thisimplies that every market segment has its own features and strengths.It is therefore important for various bank marketers to study eachsegment carefully to know if the type and quality of products and services being rendered are in line with customers’ expectation.

Bank performance and customer retention causality

Bank performance based on Key Performance Indicators (KPI) isinfluenced by the profitability of the company, its percentage of themarket share, return on investment (ROM), return on assets (ROA),and return on equity (ROE) as well as its customer retention ability. Inthe words of Salami and Adeoti [49], the quantity and quality indicatorsof a bank performance are regulated by the profitability of the businessand the risk which gives alternatives for assessing and evaluating theachievement of objectives through maximization of owners’ wealth.After 2008-2009 global economic downturns, Colombia banks haveshown a strong increase since 2011 by increasing their bank total asset(20.4%), loans (22.8%) in the same year [5,50]. The financial industryhas grown in all segments with mortgage lending and consumerbanking overtaking commercial lending. Banks have really benefitedfrom effective market segmentation to increase their return on investment, tier-1 capital, return on assets and banking total asset.

Customer retention ability is defined as the ability of a bank to retainits customers based on the assessment of product or service quality.That’s bank performance determines how loyal its customers are andit is normally measured in percentage of long term customers. Thisis very important because satisfied retained customers tend to lowercost (cost less), make valuable reference to new potential customersto increase banks market share, and spend more. However, banks canonly perform well and satisfy their customers when there is proper market segmentation. Banks’ ability to retain its customer’s shows how satisfied their customers and brand loyalties are. Market segmentation can help banks to efficiently match their limited resources to target the market requirements and resource to reduce cost. It paves way to embrace consumer requirement that tends to increase customer satisfaction and retention. Banks can improve their customer retention through segmentation practices. Sylvia and Peter perceived that the ability of a bank to meet the needs of its customers (such as depositors and borrowers), stakeholders, shareholders, and employees show the performance level of the company [51]. In Colombia, the financial sector is quite profitable and credit quality is very strong due to the sound and healthy balance sheet from customers [5].

Colombian banking sector since the beginning of the 1990’shave shown great consciousness towards the link between consumerretention and performance [4]. Banks such as Bancolombia, Banco deBogotá, and BBVA among others have involved in cross selling, productbundling, and integrated computer system and loyalty programmes toattract more customers. Adewuyi propounded that customer loyaltyto a bank service and product offering can be developed throughemployee and customer relation, quick delivery services, closeness tocustomer business outfits, corporate image built overtime, accessibility and referral, as well as relaxed account opening formalities [52].

Some scholars also link customer retention and bank performanceto the company’s value maximization in the stock market [7,15,48].The approach is based on the interrelationship that exist betweenoperational efficiencies changes, the prices of the company’s stockin the market, exchange or change rate and the general economicsituation. In Colombia, banks such as Bancolombia, Banco de Bogotá,Davivienda, BBVA and Banco de Occidente are more valuable in the stock market.

Although market behaviour towards stock price in theory, showsthe performance level and how valuable the company is at the stockmarket, salient criteria needed for the calculation for banks in Colombiamight not be available. And it is based on this assumption that madethe researcher to use Profitability Ratio and Tier-1 Capital Ratio asalternative indicators for market value and financial performance.According to Onaolapo et al. [15], a sound financial (banking) systemis built upon adequate and profitable capitalized banks. They continuedthat the use of ratios on performance evaluation covers the size ofturnover, dividend or earnings per share, and return on capital profitmargin. This signifies that the profit after tax, net interest margin andinterest on income in the banking sector determines return on capital employed.

In an attempt to find out the impact of market segmentationpatterns on banks successes in Colombia, key profitability ratios such asTier-1 Capital ratio, Return on Equity (ROE), Net Interest margin andNet Operating Margin were applied. These were used as parameters tofind out the impact of market segmentation patterns on the operational performance of the selected banks in Colombia.

Research Methodology and Design

Asiedu opined that “research aims decides what needs to beaccomplished with the conduct of study” and Bhattacharya continuedthat keeping in mind the aims to be achieved [11,53]. The researcherexplores which approach suits best the attainment of purpose. In anattempt to find out the impact of market segmentation patterns onbanks performance in Colombia, key profitability ratios such as Tier-1Capital, Return on Equity (ROE), Return on Assets (ROA), Net Interestmargin and Net Operating Margin were applied. These were used as parameters to showcase the impact of market segmentation patterns on the operational and financial performance of the selected banks in Colombia. The variables for bank performance and segmentation targets like market share, profit and turnover, operating expenses, return on capital were all sourced from the 2014 annual reports of the five selected banks in Colombia. However, Tier-1 Capital Ratio was sourced from 2012 Bankers database. The study also linked basic criteria of market partitioning patterns with selected commercial banks’ performance on customer loyalty, retention and profitability indices.

Out of the 21 commercial banks explored in Colombia, five (5) ofthem constituting 23.8% were selected for the study. The criteria forthe selection of those five (5) banks were based on 2012 Tier 1 CapitalRatio and 2014 market share. Tier-1 Capital Ratio is used to measurethe financial strengths or financial performance of banks basedon regulator’s view point. It is one of the most crucial indicators offinancial performance in banking. Tier 1 Capital Ratio is a bank’s coreequity. The information regarding bank financial performance andsegmentation targets such as Tier 1 Capital ($m), Assets ($m), Pre-TaxProfits ($m), Return on Capital (%), and Return on Assets (%), weretaken from the 12/2012 Bankers database (Source: thebankersdatabase. com) of the selected commercial banks.

To test, analyse and measure the impacts of market segmentationpractices on the selected banks performance in Colombia, HerfindahlHirschman Index was adopted to calculate market concentration of thebanking sector through the use of deposit size of the various selectedbanks from their 2014 Annual Report. The calculated figures werecorrelated with performance criteria through the use of spearman’srho test. Spearman’s Correlation is non-parametric coefficient which isused to measure the strength of matched (association) of two variables.This test was done to draw the correlation between segmentationadoption and banks performance in Colombia. The analysis explainsthe strength of co-occurrence (linkage) between bivariate in a form of-1 or +1. In this study, a positive correlation coefficient shows a positive relationship between market segmentation and bank performance.

However, a negative coefficient indicates a negative relationshipbetween market segmentation and bank performance. For exampleif X1 represent business development (or market share) as calculatedusing HHI and Y1 represent the profitability rate among the selectedcommercial banks: with ‘Z’ representing a bivariate random sampledsize. Therefore; z(X1, Y1)→ (Xz, Yz), ……(X2, Y2) can be determined.According to Hofstede et al. and Onaolapo et al. the calculation throughthis token hence ranks Herfindahl Hirschman Index (HHI) for →t=1,2, 3, 4………. and period with Net Operating Margin (NOM), Returnon Equity (RoE), and Net Interest Margin (NIM) for the various operational duration (period) of the selected commercial banks.

This can demonstrated mathematically as

image (1)


P stands for = Spearman’s correlation co-efficient

R (Y1) = Rank of variable Y1

R (X1) = Rank of variable X1 and

Z = Sample size.

Therefore, the equation was given as shown here below;

image in a computed form… (2)

To make sure the information provided was reliable, valid andauthentic, primary sources which focus on survey research strategywas conducted [7]. The customers of the selected banks constituted thetarget population for the study. The questionnaires were designed tosolicit for customers opinions on the effects of segmentation practiceson the selected banks’ customer retention strategy. The data fromthe respondents were used to evaluate the successes of the selectedbanks. The criteria were used to surrogate customer defection ratio bymanagement and bank consumer retention ability. The researcher usedthese questions to find out how this practice influences customer loyaltyand retention in the banking and financial industry. The questions wereboth closed and opened ended and were designed to elicit customers views on branch loyalty, targeting and organisational product.

Findings and Discussion

This part of the study contains the findings obtained throughanalysis from Tier-1 Capital Ratio as of December, 2012 and HerfindalHirschman Index as well as response rate from customers based onquestionnaires to test customer retention and loyalty. It presents adetailed discussion from the results obtained while making reference back to the literature review earlier in this article.

Table 2 shows the results obtained using Tier-1 Capital Ratio and itindicates the top five banks performance in the financial industry as of2012 in Colombia. The tier-1 capital ratio deals with tier-1 capital ($m),Assets ($m), pre-tax profits, return on capital (%), and return on assets(%). This ratio was used to find out if their business segment such ascredit card banking, consumer banking, and commercial banking are accepted and supported by customers. No bank can increase its tier-1 capital without first getting customers to support and patronise its products and winning of customer loyalty rely on proper segmentation practices. The idea is to investigate on how marketing segmentation practices influence the financial performance of banks. This is because effective marketing segmentation allows banks to tailor their products and services such as lending operations and deposit to meet customer needs. Looking at the Table 2 on tier-1 capital ratio, thanks to Bankers Database, 2012, it could be seen that the return on capital on all the five (5) banks in Colombia were more than the minimum requirement of 6% as stated by Basel III (Table 2).

Rank Bank Tier-1 Capital $M Assets $M Pre-tax Profits Return on Capital (%) Return on Assets (%)
1 BanColombia 5120 55,272 1224.43 23.91 2.22
2 Banco de Bogotá 4657 45,444 1507.68 32.37 3.32
3 BancoDavivienda 2453 26,599 512.89 20.9 1.93
4 BBVA Colombia 1124 17,240 345.78 30.76 2.01
5 Banco de Occidente 1088 13,327 200.18 18.39 1.50

Table 2: Top five banks in Colombia in 2012 based on tier-1 capital ratio.

The stats according to tier-1 capital show that the largest bankin Colombia as of 2012 was Bancolombia. The second largest bankaccording to tier 1 capital is Banco de Bogotá, follow by BancoDavivienda, BBVA and Banco de Occidente. These banks are the bestcapitalized banks in Colombia as per their return on capital. They havehigher capital than any other bank in Colombia. This results shows thatthese banks have advantage because it has a lower regulatory capitalrequirement due to their business segment. This reveals that thesebanks have been strong in their consumer banking segment, credit cardsegment and commercial banking segment. These banks based on theirtier-1 capital have advanced on the five elements of winning customerloyalty and have begun to translate such loyalty to better their teir-1 capital and economic.

Also the researcher used Herfindal Hirschman Index to calculatethe market share of these banks in 2014. The idea was to find out ifthese banks have greatly benefited from the use of market segmentationpractices in terms of market share. It could be seen from the table that allthe five (5) banks scored an index greater than half of the market sharein Colombia. This simply shows that these five (5) commercial bankshave total dominance in the banking and financial sector in Colombia, thanks to their effective and efficient segmentation patterns. The index score state that when a score is less than 100%, it means there is weak position. However, if the indexes are more than 100%, it shows strong result in the segmentation patterns and practices adopted by the banks or the monopoly of the market. When we also look market shares in total deposit as of 2014, it could be seen that five (5) banks in Colombia have excellent results in their segmentation patterns and practices. The results show that the marketplace of the banking and financial sector in Colombia is highly concentrated and the banks are characterised by its size, its oligopolistic and segmented structures (Table 3).

S/No. Participants (Banks) Deposit in 2014 (Annual Report) Market Shares (In Total Deposit-A1%) Square of Market Share (A12%)
1. BanColombia, S.A 56231 30.05          903
2. Banco de Bogotá, S.A 41512 22.18          491.95
3. Banco de Davivienda, S.A 33773 18.05          325.80
4. BBVA, S.A 32303 17.26         297.91
5. Banco de Occidente, S.A 23323 12.46         155.25
  TOTAL 187142 100 HHI=2173.91

Table 3: Total unconsolidated deposit and market share among sampled banks in Colombia.

More so, in an attempt to test the relationship between bankperformance and segmentation adoptions, Spearman’s correlationcoefficient was used. The result from the test showed a significantrelationship that exists between the market share of the selected banksand their total (overall) expenses. The relationship according to thetest was 0.581 which implies that banks with large market shares tendto lower their overall operation unit cost and increase profitability.This finding was done based on each bank’s market position withinthe sampled banks. It consisted of both less-dominant and dominant companies in the sector.

The functional models such as quadratic, exponential equationsand linear logarithm also proved that there is high contribution of30.85% in the market share variation and this shows that the total(net) market expenses grow through different marketing segmentationpractices among commercial banks in Colombia. It was reported thatthe five selected banks can still increase their market share until theyget to their peak of 37.2%. However, any further increases above thispoint of 37.2% net (overall) expenses shows diminishing effect whichin return diminishes the market share. The findings resulted that whenmarket segmentation expenses is as high as 37.2% of total operatingexpenses, then benefits derivable can reach its extreme point whereadditional commitment of fund will reach a direction which can lead to negative result.

To determine the impacts of market segmentation patternsand practices on customer retention and loyalty strategy on banks,the researcher employed a quantitative analysis by investigatingthe research question through questionnaires to test the five bankscustomer retention strategy. The table below shows the opinion of therespondents, and degree of customer retention ability for the sampled banks in Colombia.

From Table 4, it could be seen that, out of the 50 customerswith active account as of the beginning of the period, 47 of themrepresenting 94% have remained loyal to BanColombia. This showsthat Bancolombia’s business segment such as credit card, consumerbanking and commercial banking segment have helped them to buildan interactive relationship based on humanistic experience and trust.This shows that Market segmentation practices do not only help banksto reposition their brand or develop new products but also ensurebetter communication between the two parties, thus, the bank andits customers. Thus, segmentation allows banks to carefully listen totheir customers and respond to their wants and needs. BanColombia’sdegree of customer retention and loyalty shows their ability to providegreat customer experience by satisfying the needs of their customers.40 (80%) for Banco de Bogotá, 37 (74%) for Banco de Davivienda, 35(70%) for BBVA and 25 (50%) for Banco de Occidente show a massiveimpact of market segmentation patterns and practices among the banking and financial industry in Colombia.

Banks Customer’s with Active Accounts (Beginning of Period) Sampled Customer with Active Accounts of Period Degree of Customer Retention and Loyalty (%)
BanColombia, S.A 50 47 94%
Banco de Bogotá, S.A 50 40 80%
Banco de Davivienda, S.A 50 37 74%
BBVA, S.A 50 35 70%
Banco de Occidente, S.A 50 25 50%

Table 4: Customer retention and loyalty ability based on selected banks.

To amass everything, the findings indicate that marketsegmentation practices have benefited these five banks, more thanany other bank in Colombia in terms of financial performance and market share. Segmentation practices have led these banks to a moreprecise definition of the financial market in Colombia in terms ofcustomer needs. The tool has improved the understanding of themanagement towards their customers. These five banks have usedmarket segmentation practices to exploit and identity a niche marketwhich most of the banks have ignored as not being large enough forthem to make profit. This has helped the banks to acquire large marketshare in the financial and banking industry in Colombia. What thestudy figured out was that these five banks with large market tend tolower their overall operation cost and increase profitability. Marketsegmentation has benefited these banks to demonstrate high level of customer retention and loyalty.


This article has assessed the use and impacts of marketingsegmentation practices on bank performance in Colombia. The studyresearched into the type of market segmentation practices adoptedby typical Colombian banks, the impacts of market segmentationpractices on bank performance on the selected banks in Colombia andthe extent to which segmentation practices have influenced customer loyalty through banks product and service offerings.

The study revealed that market segmentation has benefited somesection of the banking and financial industry in Colombia than others.That is, it has enabled the selected banks to dominate the marketshare and customer patronage. It was discovered that Segmentation ofbanking products and services in Colombia has followed the normaltrend of business segment such as credit card segment, consumerbanking segment and commercial banking segment with emphasis onpsychographic, geographic, socio-cultural behaviour and demographic.Segmentation has allowed the banks to build an interactive relationship based on humanistic experience and trust.

Findings disclosed that the selected banks such as Bancolombia,Banco de Bogotá, Banco de Davivienda, BBVA, and Banco Occidenteare well positioned in capital strength and they are the best capitalizedbanks in Colombia due to their business segments in terms of creditcard, consumer banking segment and commercial banking segment.The study exposed that the banks have used segmentation practicesto lower their overall operation unit cost, expand their marketshares, retain their customers, better their communications, increaseprofitability and focus on their company. It was however revealed thatBancolombia is the largest bank with tier-1 capital of $5120 Million in Colombia.


Based on the above findings, it is recommended that carefullyanalysis of the operating environment should be made to ensureeffective and efficient segmenting of bank’s customer pool to helpdesign its service and product offering. Dominated and less dominatedbanks can adopt acceptable corporate image, just-in-time servicedelivery, employee-customer relation, effective and efficient use ofreferrals and simple account opening formalities to win customerloyalty and satisfaction, which in return, helps to retain old customers and win customers as well.


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