Applying Customer Values to Target Market Segmentation

An Example: Segmentation in the Defined Benefit Retirement Market

Middle-aged African American couple discussing retirement plans with financial advisor.
Financial Advisors Use the Market Segmentation Process to Recommend Retirement Plan Products to Their Investorss. Getty Images | Jose Luis Pelaez Inc. | Blend Images

The target market segmentation process is fundamentally a "dance" between consumers' psychological needs, economic benefits, and functional values and the actual product or service that is being marketed to the consumers. Consider these factors:

  • Psychological Needs - Status, self-assurance, peace of mind, perceived risk of change;
  • Economic Benefits - Consideration of price, discounts, credit terms, and fiscal gains.
  • Functional Values - Reliability, availability, ease of use, efficacy, efficiency, and safety.

A Segmentation Example for Retirement Plan Sponsors

The target market segmentation example provided below is designed for retirement plan sponsors. Retirement plan sponsors include organizations that invest the retirement contributions of public and private investors. Commonly known plan sponsors include CalSTRS (California State Teachers Retirement System) and TIAA-CREF [Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF)].

Critical Dimensions of 5 Plan Sponsors for the Defined Benefit Market

  • Segments: Spenders, Menders, Extenders, Fenders, Enders
  • Critical Dimensions:

Spenders = Minimize Volatility

These plan sponsors intend to keep plans active either for talent retention (a goal of corporations) or because they are public (paternalistic or union influence).

Spenders will be first movers since they have a high balance sheet exposure to pension volatility. Because of high funded levels, these sponsors can afford to consider expensive changes. Spenders will be most interested in structured products and increasing long-duration fixed income.

Menders = Innovators

These well-funded sponsors are small enough relative to the overall balance sheet to have a low degree of financial volatility risk.

They will tend to keep their Defined Benefit plans active, but can easily freeze them if they need to do so. These plan sponsors are interested in risk-return optimization. They will consider new products, particularly those that promise alpha generation, asset-liability management, and sophisticated risk protection. This group of plan sponsors evidences heightened interest in solving for the "return gap." 

Extenders =  Wait & Pray

These plan sponsors fall into two groups: Those who can readily freeze the plan and those who will hold out as they have no ability to freeze.

The freezers make up about 25% of the private-sector Defined Benefit assets under management (AUM) and will stick with the status quo as long as possible. They tend to be significantly underfunded and can readily by frozen. But these plan sponsors will resist change and hope that favorable equity and interest rates will help close the funding gap. 

The holdouts have small (relative to the overall balance sheet) fully-funded Defined Benefit plans. They have no ability to freeze their plans as they are not able to reduce future benefits. Plan sponsors that can holdout will focus on equity risk premium, counting on the market to cooperate, and will make only incremental asset allocation changes over the immediate term.

Fenders = Roll the Dice

Significantly underfunded, these plan sponsors have limited opportunity to freeze, but a high risk appetite. In an attempt to climb out of the underfunded pit, they will shop aggressively for high returns, looking to portable alpha and alternative investments such as hedge funds and private equity. As a last resort, they will depend on the Pension Benefit Guaranty Corporation (PBGC) to provide pension benefits.

Enders = Likely to Terminate

Overfunded and willing to pay extra costs to make changes, these plan sponsors can move quickly. They cannot afford to stand still - the accounting and contribution volatility is simply too great. So they will choose to freeze or exit their Defined Benefit plans. These plan sponsors will be attracted to buy out solutions, many of which, in the near-term, will take the form of annuity purchases from insurers.

They will continue to be highly receptive to emerging buy-out solutions.