If banks could choose their customers the way kids choose sides on the playground, customers in the 18-to-35 age bracket would be picked last. With their relatively small incomes, low account balances and large student loan debts, young customers aren’t exactly the sort over whom the average bank salivates.

At RBC Royal Bank, however, executives recognized that some of those impecunious young customers might eventually turn into wealthy, profitable customers. So RBC analysts pored through the bank’s data on its young customers looking for subsegments with a strong potential for rapid income growth. Their analysis identified medical school and dental school students and interns as a group with a high potential to turn into profitable customers. So in 2004 the bank put together a program to address the financial needs of credit-strapped young medical professionals, including help with student loans, loans for medical equipment for new practices and initial mortgages for their first offices. Within a year, RBC’s market share among customers in this subsegment has shot up from 2 percent to 18 percent, and the revenue per client is now 3.7 times that of the average customer. Martin Lippert, vice chairman and CIO at RBC Financial Group, says the bank’s willingness to help these young professionals get started will likely be rewarded with a lower attrition rate down the road.

"We may have customers we’re not making money on, but we look at that as more our problem than the customer’s," Lippert says. "Our opportunity lies in finding what the needs of the customer might be so we can offer them additional products and get them to a point where we’re making some return."

While lots of companies claim they’re customer-centric, RBC is one of just a handful of organizations that segment customers based on customer needs, not their own. And by focusing its operations on addressing those needs, RBC has grown its market capitalization from $18 billion almost six years ago to close to $50 billion today.

So far, few companies are as sophisticated at segmenting customers as RBC. Many don’t do any customer segmentation at all, and those that do typically don’t reap much value from the exercise because they segment on the wrong criteria. Precise, needs-based customer segmentation is time-consuming and difficult, and very much in its infancy. But it’s worth doing because it enables cost-effective targeting of customers with product and service offerings that match their needs. That kind of precise targeting obviates spending a bundle on largely ineffective mass mailings—and alienating customers with irrelevant offers. It’s the quintessential win-win: Customers get what they want and subsequently buy more; companies waste less money and increase sales and profits.