An Application of Cluster Analysis to the

Understanding of Consumers Financial Services Behaviour

by
Robert Hamilton1, Paul Hewer2 and Barry Howcroft3

September 2000

Robert Hamilton is Lecturer in Economics and Banking, Business School, Loughborough University.
Paul Hewer is Lecturer in Marketing, Department of Marketing, Stirling University.
3
Barry Howcroft is Professor of Retail Banking and Director of Loughborough University Banking Centre,
Loughborough, Leicestershire, LE11 3TU. Tel: +44 (0)1509 223118. Email: J.B.Howcroft@lboro.ac.uk.
2

ACKNOWLEDGEMENTS
The authors would like to thank all those consumers who took part in the research, and the
financial assistance provided by NCRs Knowledge Laboratory, which made this research
possible.

ABSTRACT

1.

INTRODUCTION

The market for financial services has become increasingly competitive with unprecedented
levels of new entrants and developments in delivery channel strategies. In this ever-changing
climate financial providers are seeking to create sustainable competitive advantage. One
possible solution focuses upon the concept of customer value (Woodruff, 1997) which
involves financial providers adopting an external orientation and seeking to understand more
fully the nature of their customers. A critical feature of this approach is the attempt to not
only anticipate, but also to influence and determine consumers buying behaviour.
Accordingly this paper outlines a conceptual model for understanding consumer behaviour in
the context of financial services. This model is subsequently tested and appraised through the
use of cluster analysis procedures. Section 2 of the paper provides a review of the relevant
literature and develops the conceptual model. Section 3 outlines the research methodology,
Section 4 assesses the findings from the study and Section 5 draws some conclusions.

2.

UNDERSTANDING CONSUMER BEHAVIOUR AND FINANCIAL SERVICES

The need to further academic understanding of consumer behaviour within the financial
services sector has become a critical issue for a number of reasons, not least being the impact
of deregulation and the emergence of new forms of technology. At the same time academics
have suggested that a conceptual framework is currently lacking which is able to explain how
consumers purchase financial services (McKechnie, 1992; Betts, 1994).
A review of the literature on consumer-buyer interactions (Bateson, 1989; McKechnie, 1992;
Harrison, 1994; Ennew and McKechnie, 1998) suggests that two factors principally motivate
and determine individual purchasing or contracting choices, namely involvement and
uncertainty. Consumer involvement in the buyer-seller interchange incorporates a number
of subsets: customer control (Bateson, 1989), customer participation and level of contact
(Chase, 1978). Chase (1978), for example, offered a framework to distinguish between
services based upon level of contact during the service delivery stage. Consumer uncertainty
has been analysed in terms of consumers perceptions of risk and the research suggests that
this is ultimately related to the characteristics of the product (Shostack, 1977; Ennew and
McKechnie, 1998). Such characteristics directly influence consumer uncertainty by

determining their perceptions of complexity associated with different financial products

(Harrison, 1994).
By placing consumer involvement and consumer uncertainty onto a simple continuum
running from high to low, it is possible to construct a two dimensional matrix of consumer
behaviour (see Figure 1). This matrix describes the purchasing/contracting alternatives
available to financial service consumers and, as such, reflects a range of interaction modes
between financial service providers and their customers. Each quadrant represents a different
combination of involvement and uncertainty (referred to as consumer confidence in the
matrix) and, therefore, different modes of banker-customer interactions when purchasing
different types of financial product.
INSERT FIGURE 1
These considerations are significant because the limitation of previous consumer behaviour
models (Nicosia, 1966; Engel, Kollat, and Blackwell, 1968; Howard and Sheth, 1969;
Bettman, 1979) stems from the factors hypothesised to explain consumer motivation and
behaviour, particularly in the creation and maintenance of relationships. Previous models
have tended to focus on the extensive role of information in shaping and directing rational
choice. Nicosia (1966), for example, identifies the search and evaluation of information;
Howard and Sheth (1969) link the amount of information held with the extent of learning and
thus problem solving; Engel, Kollat and Blackwell (1968) identify information input and
processing as central elements in decision-making; Bettman (1979) recognises that
individuals have limited capabilities for processing information and this limitation affects
their decision-making activities. The common causal link in all of these approaches can be
summarised as: information - attitude - purchase. As an explanation of behaviour this form
of linkage is not only predominant in the social sciences, but can also be clearly identified in
behavioural economics (Katona, 1960; Scitovsky, 1976). All of these models are based on
information which is necessarily assumed to be freely and readily available with little
reference made to the context in which information is found and used. Academics have thus
argued that such models are largely unverifiable empirically because they do not offer
testable hypotheses (Tuck, 1976; Foxall, 1991). These earlier models also ignored consumer
involvement with the purchase and the consumers ability or confidence when making
purchase decisions (Morgan and Hunt, 1994). Their specific applicability to the field of
financial services can also be questioned because they typically refer to one-off purchases
5

rather than the recurrent and long-term relations common in financial services (McKechnie,
1992).
In contrast, the proposed consumer behaviour matrix (see Figure 1) is based upon theoretical
insights from the work of Dwyer, Schurr and Oh (1987) and Thibaut and Kelly (1959).
Methodologically the approach seeks to utilise the notion of the ideal type promulgated by
Max Weber (1949). Weber sought to characterise phenomena into broad groups or ideal
types which represented the self-conscious and one-sided accentuation of the most
significant features of social phenomena. Once classified into groups, the constituent
elements of the phenomena being observed are available for analysis. The rationale for this
approach is that complex social interactions rarely, if ever, operate to a set pattern like
elements in the physical sciences. Rather than postulate general theories that describe
behaviour in all contexts, ideal types describe forms of behaviour in certain contexts, which
facilitate the construction of hypotheses. The ideal type expresses what Weber described as
an objectively possible course of actions within a relevant frame of reference (Parsons,
1951). Behaviour is, therefore, dependent upon both the nature and the context in which it
occurs. An ideal type will therefore possess a number of distinguishing characteristics,
constructed by the researcher to describe the complexities of behaviour within a particular
frame of reference.
Weber argued that the key to developing ideal types was to identify characteristics that
shaped both the forms of the ideal type and the frames of reference. It follows that in
developing ideal types which characterise consumer buying, it is necessary to identify the
underlying constructs which determine consumer behaviour within a particular environment
or frame of reference. Ideal types, therefore, reflect certain underlying constructs or
imperatives, and individual buying behaviour is determined accordingly. This is consistent
with the work of Fishbein (1967) which links attitudes and outcomes, arguing that
individuals attitudes toward certain outcomes motivate behaviour.
The advantage of the consumer behaviour matrix, as an approach to understanding consumer
buying and contracting behaviour, is that it draws upon a diverse source of literature,
including economics (Simon, 1957), consumer behaviour (Bloch, 1982; Bloch and Richins,
1983) and psychology (Thibaut and Kelly, 1959), and combines these within a single
framework. The rich diversity of literature in these areas is brought together to create ideal
types of behaviour which can be applied to actual buying and contracting in financial
6

services. In this way, the consumer behaviour matrix places observed behaviour within a
context. By identifying the underlying factors influencing buying and contracting behaviour
and linking these directly with consumer needs, the rationale for consumer interactions and
relationships can be more readily analysed.
Furthermore, the use of this framework permits the adoption of a deductive approach in the
choice of a clustering variate. The technique thereby facilitates segmentation on a range of
self-selected dimensions (Christopher, 1969). As Ketchen and Shook highlight Cluster
analysis has played a key role in[strategic management research] because it allows for the
inclusion of multiple variables as sources of configuration definition, thus enabling the
creation of potentially rich descriptions (1996: 451). Speed and Smith (1992) in their
review of approaches to segmentation in the financial services sector classify existing
research as either a priori or cluster-based. Harrison (1998) has adopted such a cluster-based
approach in analysing the financial services consumption patterns of UK bank customers.
Using insights from qualitative research (Harrison, 1994), an attempt was made to replicate
and validate the analysis through cluster analysis. The research suggests that consumers
differ in terms of their perceived knowledge and understanding of financial services. They
also differ in their confidence and ability to handle financial matters and in their general
interest in the subject matter. On these bases, attention was drawn to four distinct consumer
clusters, ranging from the financially confused who were characterised by low levels of
both perceived knowledge and financial maturity to capital accumulators who were
characterised by high levels of perceived knowledge and a high degree of financial maturity.
McDougall and Levesque (1994) in a similar fashion sought to segment consumers on the
basis of service quality. Their research was able to draw attention to two segments, those
consumers who were primarily convenience-orientated and those who placed priority upon
performance characteristics.
Services can be classified in a number of differing ways (Lovelock, 1983; Normann and
Haikola, 1986; Storbacka, 1994). They can be grouped in terms of their marketing
characteristics, such as the nature of the provider-customer relationship (Lovelock, 1983) or
on the basis of the content of the interaction between provider and customer (Storbacka,
1994). Storbacka proposed a typology of interactions distinguishable in terms of the duration
and frequency of the interaction, and the level of customer control, contact and participation.
Using this typology he drew attention to five main governance systems: transactions, deposit
and lending, counselling, specialist services and investment services. This paper utilises the
7

Storbacka typology, but excludes counselling on the basis that it is implicit in the other forms
of governance. Four categories of financial services are, therefore, highlighted as
representative of the range of interactional contexts: transactions-based services such as a
current account; insurance-based services such as house contents, buildings or motor
insurance; longer-term lending services such as personal loans or mortgages, and finally,
investment services which were believed to be relatively complicated with commensurately
high levels of risk, ie PEPs, TESSAs, Stocks and Shares and Pensions. In this manner the
research sought to segment consumer behaviour on the two constructs of involvement and
uncertainty for a range of differing financial products.
2.1

Forms of Consumer Behaviour

The model outlines four ideal types of consumer behaviour which are labelled: repeatpassive, rational-active, relational-dependent and no purchase. These quadrants have
previously been examined in the light of qualitative research (Beckett, Hewer and
Howcroft, 2000), however a brief description of the chief characteristics of each quadrant
follows:
Repeat - Passive
Consumers display low levels of involvement with the financial product as they are fully
aware of the products salient features. Given the low levels of involvement and the limited
perception of uncertainty, these consumers can be described as passive in the sense that
they will make repeated interactions without actively seeking alternatives. This repeated
pattern of purchase behaviour, which is described as behavioural loyalty in the literature,
has been extensively researched (Brown, 1952; Johnson, 1973, 1982).
Rational - Active
These consumers display high levels of involvement in terms of the process dimensions of
control, participation and contact. Confidence in terms of understanding the product and
certainty of ex poste outcome is similarly high. To purchase in an instrumentally rational
manner, individual consumers are assumed to possess sufficient ability and information to
enable them to make clear comparisons between competing products and thus make an
informed choice. If the information is not available or the consumer lacks the ability to make
8

choices, they have to move away from instrumental rationality as discrete contracting is no
longer an effective means of structuring the transactions.
No Purchase
This quadrant describes consumers who, because they have no involvement with the financial
product and do not possess the ability or the confidence to make transaction decisions, make
no purchase.
Relational - Dependent
In this quadrant consumers are highly involved, but are not very confident due to the
complexity of the product and uncertainty of ex poste outcomes. In order to make choices,
the consumer will seek advice and help from banks or third parties and can, therefore, be
described as dependent consumers who form relationships to reduce uncertainty and
structure their pattern of purchases.
Relational contracting does not fit easily into the concept of either an active or a passive
interaction, but it is clearly an important aspect of the banker-customer relationship. It
emerged from the work of MacNeil (1978) and Williamson (1975, 1985), who recognised
that in particular contexts rational-active and repeat-passive contracting were not effective in
structuring exchange. It is typically used in highly uncertain environments where consumers
lack the information to make rational decisions, but, nevertheless, perceive differences in
quality between competing products or services. Under these circumstances, if consumers
want to make informed choices, they have to draw on the assistance of more informed third
parties. This relationship with third parties effectively replaces the information search and
processing activities found in repeat-passive and rational-active contracting. Trust plays a
critical role in this relationship and, to a large extent, the role of professional associations is
to protect consumers from the opportunistic behaviour of third parties.

3.

RESEARCH ANALYSIS AND SAMPLE

The previous section provided a detailed examination of the relevant literature relating to
consumer behaviour in the context of purchasing/contracting financial products and a model
9

outlining four ideal types of consumer behaviour (see Figure 1) was proposed. The main
objective of this research was to examine consumer behaviour and ascertain if the conceptual
model could be supported empirically.
Following a series of focus group discussions, a questionnaire was designed and piloted using
university personnel. The definitive questionnaire was then sent to 4000 UK consumers.
This resulted in 244 useable responses, ie out of the 351 responses, 244 respondents had
answered all of the 24 questions. The relatively low response rate of less than 10% was not
that surprising given the confidential and personal nature of the information requested (see
Table 1). A major concern, however, was the representativeness of the sample in the light of
this response rate. In this respect, when compared with recent UK statistics (Social Trends,
1999; Advertising Association, 1998), it was found that the sample was under-representative
of consumers under the age of 25 and over-representative of consumers in the higher income
groups (ie > 30,000). This profile may be explained by the fact that investment products
have a tendency to be purchased by higher income groups and by consumers aged over 25
years old.
INSERT TABLE 1
Table 1 contains the questions and variables used in the analysis. Variables 1-20 inclusive
focus on the two dimensions highlighted by the Consumer Behaviour Matrix (Figure 1):
consumer confidence and consumer involvement. Specifically, variables 1-4 and 5-8 relate to
consumer deliberation and the importance of talking to somebody face-to-face. As such, they
were interpreted as indicators of consumer involvement. Variables 9-12 and 13-16 relate to
consumer knowledge and understanding, and certainty when selecting financial products. As
such, they were taken as indicators of consumer confidence. Evidence of willingness to
switch financial providers, shown by variables 17-20, was interpreted as being indicative of
rational-active behaviour, whereas reluctance to switch was associated with either repeatpassive or relational-dependent behaviour. The remaining variables (21-24) provided
additional insight into the socio-demographic details of the respondents.
Questions 1-5 relate to the four different categories of financial product: current accounts;
insurance based products; credit based products; and investment based products.
Respondents were invited to respond on a 5 point Likert Scale ranging from Strongly
Disagree to Strongly Agree. Additionally, four socio-demographic questions (Q6-9) were
10

also included to help to differentiate between the consumers on the basis of their behaviour,
attitudes and characteristics.
3.1

Research Methodology

Given that the primary aim of this research was to group consumers on the basis of their
behaviour, attitudes and characteristics relating to financial products/services it was decided
to use cluster analysis. This method attempts to maximise the homogeneity of objects (eg
consumers) within the clusters, while simultaneously maximising the heterogeneity between
the clusters (Hair et al, 1998: 470). Support for adopting this methodology comes from Punj
and Stewart (1983) when they state that important use of cluster analysis has been made
in seeking a better understanding of buyer behaviours by identifying homogeneous groups of
buyers.
Following the approaches put forward by various writers (eg Hair et al, 1998; Ketchen and
Shook, 1996; Doherty et al, 1999; Saunders, 1994), the key questions1 when using cluster
analysis would seem to be:
-

How should one measure similarity?

How should the clusters be formed?

How many clusters/groups should be formed?

How should the final cluster solution be validated?

Has one found distinct, stable and meaningful clusters?

These questions will now be addressed by outlining the process adopted, the results achieved
and an interpretation of the results to ensure that the final cluster solution is both meaningful
and useful (Punj and Stewart, 1983).
The method used was Wards which is both (i) a hierarchical procedure as it moves in a
stepwise manner to form an entire range of clusters; and (ii) an agglomerative method as
clusters are formed from the combination of existing clusters starting with each observation
(case) being a cluster (Hair et al, 1998). The measure of similarity used was the Squared
Euclidean distance measure.

11

To answer the question How many clusters should be formed?, an examination of both the
agglomeration schedule and the dendogram (Hair et al, 1998) suggested that either a six
cluster solution or a five cluster solution might be the most appropriate. Therefore, to
determine the best solution, from both a statistical and a practical viewpoint, a number of
other factors were considered. Firstly, both solutions were compared on the basis of
distinctiveness using the Levene statistic, ie testing the homogeneity of variance for each
variable among the clusters (Norusis, 1997), and the values of the F ratio, taken from the
Anova. Compared with the five cluster solution, the six cluster solution for both measures
provided more variables that were significantly different (at the 0.05 level). Further
supporting evidence for the distinctiveness of the six cluster solution came from the results of
a multiple comparison procedure, the Bonferroni test (Norusis, 1997).
Secondly, from a practical viewpoint, although Figure 1 would suggest a four cluster solution,
further analysis of the characteristics of the six cluster solution suggested that the latter
solution would allow a greater understanding of consumer behaviour and would also make
the model more dynamic. This issue is addressed in more detail in the interpretation section
of the analysis. In order to determine whether or not the chosen six cluster solution is stable
(or reliable) as well as distinctive a non-hierarchical clustering procedure (K-means
clustering) was performed on the data using the cluster centroids from the Wards method as
the initial seed points (Hair et. al, 1998). This approach allows one to (i) fine-tune the
results and (ii) validate the final cluster solution (Milligan and Cooper, 1987).
To test for an acceptable level of agreement between the two clustering methods the Kappa
Coefficient2, which may be used as an objective measure of stability (Punj and Stewart,
1983), was calculated. Table 2 shows the consistency between the results of the two
clustering methods with 192 (78.7%) of the 244 cases appearing in the same clusters. The
Kappa coefficient (0.743) also indicated an acceptable level of agreement (Cramer, 1998)
between the two methods. Table 2 also highlights, in terms of the number of observations in
each cluster, the similarity between the two clustering methods.
INSERT TABLE 2

12

3.2

Interpretation of the Final Cluster Solution

From the statistical analysis of the final six cluster solution it would appear that a distinctive
and stable solution has been identified. However, as Doherty et al (1999) argue the real acid
test for the appropriateness of the final cluster solution is whether it can be meaningfully
interpreted. Similarly, Saunders (1994) suggests Statistically significant results are of no
consequence if they are not usable or accepted by managers (1994: 23) and Punj and
Stewart argue that Clusters, or classes, must have demonstrable implications for hypothesis
generation, theory building, prediction, or management (1983: 146).
INSERT TABLE 3
Table 3, as well as providing further support for the distinctiveness and reliability of the final
solution, provides information essential to the interpretation of the solution (Hair et al,
1998); the final cluster centroids; the F values; the levels of significance for each of the 24
variables. Based upon analysing the F values, which test for differences between the means
of the clusters (McDougall and Levesque, 1994), we can suggest that the most influential
factors were those of: the importance of talking to somebody face-to-face for a current
account (V5: F=45.27) and credit-based products (V7: F=44.84); knowledge and
understanding of insurance and credit-based products (V10 & V11: F=30.17), but also
uncertainty when selecting investment (V16: F=25.59) and insurance-based products (V14:
F=25.84). The socio-demographic characteristic which proved the most influential factors in
differentiating between the clusters was the level of education (V23: F=73.67).
The remainder of the paper assesses these results from the application of the cluster analysis
technique in the light of the previously outlined consumer behaviour matrix. As a first step to
this analysis the nature of each of the clusters was plotted onto the matrix (see Figure 2).
INSERT FIGURE 2

4.

RESEARCH RESULTS

This section provides a discussion of the research results and relates the main characteristics
of each cluster to the two dimensions of consumer involvement and consumer confidence,
13

shown in Figure 2. As mentioned earlier, deliberation and talking to somebody were taken as
indicators of consumer involvement. Similarly, knowledge and understanding, and certainty
were regarded as indicators of consumer confidence. Evidence of a willingness to switch
financial providers was interpreted as being indicative of rational-active behaviour and
unwillingness to switch was regarded as being associated with either repeat-passive or
relational-dependent behaviour.
4.1

Cluster One

The involvement of consumers in cluster one was fairly low. They exhibited the lowest
levels of deliberation of all the clusters for three of the four products under consideration, but
felt that it was fairly important to talk to somebody face-to-face. In contrast, however,
confidence levels were very high. The respondents believed that they possess a good
knowledge and understanding of each of the financial products and exhibited the strongest
disagreement with the assertion that they felt unsure when purchasing them. In terms of
switching behaviour, this group of customers had not considered switching financial products
in the past two years. In fact, this group revealed the lowest levels of switching behaviour of
all the clusters for each of the financial products under consideration. On the basis of these
characteristics, cluster one is defined as repeat-passive in Figure 2.
The cluster was the smallest group with 13.1%4 of the consumers. This is a potentially
significant finding given the perception that consumers traditionally display inertia in their
financial affairs (Knights, Sturdy and Morgan, 1994; Beckett, Hewer and Howcroft, 2000).
The study also sheds light upon the socio-demographics of this cluster, which possessed the
highest annual household income of the six clusters, ranging from 30,000 to 49,999.
Group members were also aged between 36-45 years old and educated to postgraduate level
and with one child.
4.2

Cluster Two

This group of consumers expressed agreement for both the importance of deliberation and, in
particular, with the need to talk to somebody face-to-face when selecting financial products.
The group, therefore, exhibited a high degree involvement. In contrast, however, confidence
levels were low. The respondents felt that they had a fairly good knowledge and
understanding of financial products, but when compared to the other groups, this cluster
14

exhibited the lowest levels for knowledge and understanding of all the groups except for
cluster six. Similarly, in terms of being unsure when selecting financial products, this group
had the second highest level of uncertainty, with cluster six - once again - exhibiting the
highest level. In terms of switching behaviour, although not as extreme as cluster one, this
group had not considered changing financial providers in the past two years. On the basis of
these characteristics and by the fact that this group exhibited the highest propensity to talk to
somebody face-to-face when selecting financial products, it is defined as relationaldependent in Figure 2. Respondents considered it important to establish a relationship with
either financial providers or third parties and this appears to have had an influence on their
subsequent switching behaviour.
The cluster comprised 23% of the respondents and, as such, was the largest segment o f the
sample population. In terms of socio-demographics, it possessed the lowest annual
household income, ranging from 10,000 to 19,999. Group members tended to be aged
between 36-45 years old and were educated to only O or A Level standard.
4.3

Cluster Three

Cluster three exhibited very low levels of involvement. The respondents expressed
agreement on the importance of deliberation for insurance, credit and investment based
products, but disagreed that it was important when changing a current account. They strongly
disagreed, however, that it was necessary to talk to somebody face-to-face when selecting
financial products. In fact, this group exhibited the lowest scores for the importance of
talking to somebody of all the clusters for each of the four products. In terms of confidence,
however, the group was fairly confident. They believed that they possessed a high level of
knowledge and understanding of financial products and did not feel unsure when purchasing
such products. In terms of switching behaviour, this group also had the highest propensity to
switch.
When compared with the other groups, cluster three falls somewhere between the high
confidence levels of groups one and five and the low levels of groups 2 and 6. The group
also has the lowest levels for involvement of all the clusters. This is because of the strong
disagreement with the need to talk to somebody face-to-face when choosing financial
products. This factor, combined with the very high willingness to switch financial products,
suggests that they might be using direct delivery channels, such as the telephone, in their
15

search and buy procedures relating to financial products. In this respect, this cluster is
indicative of a group of consumers who are changing their behaviour and migrating from the
relational-dependent to the rational-active quadrant in Figure 2.
The cluster comprised 17.6% of the consumers in the sample and was the third largest group.
They possessed a fairly high annual household income of between 20,000 and 29,999.
Significantly, they were the youngest of the six clusters, aged between 26-35 years old, and
were educated to a higher level than the others.
4.4

Cluster Four

Group four exhibited characteristics which are readily associated with both repeat-passive
and rational-active behaviour. Levels of involvement were low, but not quite as low as group
three, with respondents placing slightly more emphasis on deliberation and the need to talk to
somebody face-to-face. The consumers in group four were also slightly more confident that
those in group three, but much less inclined to switch financial products. Cluster four is,
therefore, shown as straddling the repeat-passive and rational-active quadrants in Figure 2. It
is, however, impossible to say whether this group will eventually exhibit the sort of
characteristics associated with the rational-active heuristic. This is certainly a possibility, but
it is equally plausible that some consumers will always exhibit hybrid characteristics of the
two quadrants.
This was the smallest cluster, comprising 11.9% of the sample population. The sociodemographic characteristics of this group revealed that it possessed the second lowest income
of the six clusters, between 10,000 and 19,999. Moreover, respondents were aged between
26-35 years and had the lowest educational qualifications of the six clusters, with O and A
levels.
4.5

Cluster Five

Cluster five exhibited the highest levels for involvement of all the groups. Respondents
recorded the highest scores for deliberation for each of the four products. Similarly, the
importance of talking to somebody face-to-face recorded the highest scores of any other
group for credit and insurance based products. Confidence was also high (the second highest
score to cluster one). Consumers strongly agreed with the assertion that they had both
16

knowledge and understanding of all four financial products and consequently disagreed with
the notion that they felt unsure when choosing them. The group revealed a fairly high level
of switching behaviour. In fact, for insurance based products the cluster had the highest score
of all the groups.
This group of respondents, which comprised 19.7% of the sample population, was the second
largest cluster. It combines a very high level of involvement with high levels of confidence
and switching behaviour. In this respect, it correspondents to the rational-active mode of
behaviour depicted by the top right hand quadrant in Figure 2. The socio-demographic
characteristics of this group also show that the respondents possessed a moderate income of
between 20,000 and 29,999 and that they were the oldest of the six clusters, aged between
46-55 years old, with professional qualifications.
4.6

Cluster Six

The consumers in cluster six had fairly low levels of involvement. They did deliberate when
considering the purchase of financial products, but the levels of deliberation were relatively
low, especially for investment products. With regard to face-to-face contact, the respondents
believed that it was fairly important for investment and credit based products, but less
important for current accounts and insurance products. In terms of confidence, this cluster
exhibited the lowest level of knowledge of all the groups for each of the four products.
Similarly, the group also revealed the highest levels of uncertainty of all the groups. This was
particularly the case for insurance, credit and investment based products. The group,
nevertheless, shared a high willingness to change financial providers.
In comparison with the other five groups, this cluster exhibited fairly low levels of
involvement, but significantly it had the lowest recorded levels of confidence. This suggests
that cluster six, which comprised 14.8% of the respondent sample, should be located in the no
purchase quadrant of Figure 2. A combination of fairly low levels of involvement and very
low levels of confidence when purchasing financial products would appear to override the
groups propensity to switch and effectively stop them from making choice decisions. The
socio-demographics of this cluster revealed an annual household income of between 20,000
and 29,999, aged between 26-35 years old and educated to first degree level.

17

5.

CONCLUSIONS

In this paper we have used a variety of means to validate the clusters. Arguably the real test
of cluster analysis, however, is its usefulness in supporting theoretical expositions. Within
the context of this paper, the derived clusters have been useful in supporting the theoretical
framework of consumer behaviour in financial services.
A significant finding of the study is the suggestion that the predominant consumer behaviour
type is that associated with the relational dependent heuristic, ie cluster two, which accounts
for 23% of the respondents. At one level, this would seem to justify the relationship
marketing strategies of financial service providers. However, the evidence from this study
suggests that this group of consumers is the poorest, with an average annual household
income of between 10,000 and 19,900. As financial providers typically focus their
relationship strategies on their more affluent customers, the size of this cluster may not be
necessarily reflecting the success of this strategy. In fact, the evidence suggests that the
emphasis on having a relationship with a financial provider or third party is primarily driven
by a low level of confidence which might be a function of the relatively low levels of
educational attainment of this group.
Another significant finding is the 19.7% of the sample respondents who are represented by
cluster five and associated with rational-active behaviour. If the two straddling clusters, ie
groups three and four, are taken into account, this behaviour type is probably the most
common. This is important, especially if it can be shown that these straddling clusters
represent migratory groups from the repeat-passive and relational-dependent quadrants to the
rational-active quadrant. The empirical results do not allow us to make such claims, but it is
interesting to note that the straddling clusters are younger (26-35 years old) than either the
repeat-passive (36-45 years old) or the rational-active (46-55 years old) groups. In general,
we could surmise that high levels of confidence and involvement, typical of rational-active
behaviour, is to some extent a function of age and experience. However, the relatively young
age profile of the two straddling clusters might be indicating that the process of gaining
confidence and becoming more involved in financial affairs is somehow speeding up because
of developments in direct banking, better education, moves in society generally towards
greater consumer empowerment, etc.

18

The smallest consumer grouping is represented by cluster one, which accounts for 13.1% of
the respondent sample. The cluster corresponds to the repeat-passive heuristic and, as such, it
dominated the financial service markets in the past. In many respects, it corresponds to
Simons (1957) behavioural loyalty and, more recently, research by Knights, Sturdy and
Morgan (1994) and Watkins (1990), for example, reaffirmed this finding by suggesting that
consumer inertia rather than activity and rational thinking typified the search and buy
behaviour of consumers in financial services. Significantly, however, if this group is getting
smaller, the financial service providers policy of focussing their relationship marketing
strategies on this cluster is not misplaced. Not only are they the most affluent and, therefore,
potentially the most profitable cluster, but they also might be susceptible to migratory or
changing behaviour patterns which could increase, amongst other things, their propensity to
switch financial providers.
The final group represented by cluster six, ie no purchase, represents the most difficult and
strategically challenging to financial providers. It has the same age and income profile as
cluster three and consists of consumers educated to first degree level and yet confidence
levels are extremely low and their willingness to become involved in financial decision
making is not much higher. Despite this, the age and educational level of this group suggests
that they have profit potential. Strategies, which emphasise trustworthiness, reliability,
security, etc, might, therefore, be successful in changing the behaviour of this group and
moving them into the relational dependent quadrant. More research needs to be undertaken,
but this would certainly be the case if, for example, this cluster was typical of first time
buyers. The security of a relationship with a financial provider based on trust, familiarity,
track record, etc, would then be extremely important.
The empirical evidence does not indicate whether consumers in the relational-dependent
quadrant will eventually gain confidence and adopt the traits of rational-active behaviour
indicated by clusters three and four. However, aking the example of first time buyers, once
again, it does seem plausible to suggest that experience with a financial provider, and
financial products in general, might lead to an increase in confidence levels and a greater
willingness to switch financial providers.
In fact, although levels of involvement for both clusters three and four are low, this was
largely due to the belief that it was not necessary to talk to somebody face-to-face when
choosing financial products. This was especially the case for cluster three, which also had the
19

highest levels of switching behaviour. If it can be shown, however, that these groups are
using direct forms of banking, ie the telephone, pc banking and the internet, etc, then clearly
face-to-face involvement would be unimportant. Rather, the nature of the consumers
involvement has changed and become more remote and impersonal, but critically it is still a
form of involvement. If this is the case, then cluster three in particular might be regarded as
either straddling the relational-dependent and rational-active quadrants or already be fully
exhibiting behaviour associated with the rational-active heuristic.
In the final analysis, the study has shown that there is no universal market in the financial
services market. By focussing on just four generic product groupings, the traditional view
that financial service consumers are predominantly characterised by inertia and apathy has
been shown to be no longer the case.

20

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24

NOTES
1.

This list is not exhaustive. Depending on the type of data used additional questions
may need to be addressed. For example see Punj and Stewart, 1983.

2.

The value of the Kappa Coefficient can range from 1 to +1 with a positive value
indicating a greater than chance agreement (Cramer, 1998).

3.

In light of the Kappa Statistic the inclusion of V24, despite its relative insignificance,
does not seem to have caused serious deterioration of the performance of the model
(Punj and Stewart, 1983).

4.

Figures for size of cluster obtained from Wards method (used henceforth for
approximate size of all clusters).

25

FIGURE 1
CONSUMER BEHAVIOUR MATRIX
High

Repeat-Passive

Rational-Active

No Purchase

Relational-Dependent

Consumer
Confidence

Low

Involvement

26

High

TABLE 1
QUESTIONNAIRE ITEMS USED FOR CLUSTER VARIATE

Qu. No.

Question

Var. No

Financial Services Attitudes:

Q1

I tend to deliberate a lot when changing

my current account
my insurance products
my credit-based products
my investment-based products

Q2

V1
V2
V3
V4

It is important to talk to somebody face-to-face when selecting

my current account
my insurance products
my credit-based products
my investment-based products

Q3

V5
V6
V7
V8

I possess a good knowledge and understanding of...

my current account
my insurance products
my credit-based products
my investment-based products

Q4

V9
V10
V11
V12

I felt unsure when selecting

my current account
my insurance products
my credit-based products
my investment-based products

Q5

V13
V14
V15
V16

Over the past two years I have considered switching

my current account
my insurance products
my credit-based products
my investment-based products

V17
V18
V19
V20

Socio-Demographic Variables:
Q6

What is your current (gross) annual household income?

V21

Q7

Age Last Birthday

V22

Q8

Which of the following qualifications do you possess?

V23

Q9

How many dependent children do you have?

V24

27

TABLE 2
MEASURING AGREEMENT BETWEEN
THE WARDS METHOD AND THE K MEANS METHOD

Ward

Clusters
1

1
87.5%

(28)
5.4%

75%

(3)

(42)

K-Means Method
3
4
9.4%
(3)

Method

Total

8.9%
72.1%

(5)
18.6%

(31)
3.4%

(8)
86.2%

(1)
6.3%

(25)

3.4%

3.4%

(1)
2.1%

(1)

5
6

(1)
2.8%

11.1%

(3)
2.8%

(1)
13.9%

(4)
19.3%

(34)

(47)

5
3.1%
(1)
3.6%
(2)

Total
13.1%

7.1%

(32)
23%

(4)
9.3%

(56)
17.6%

(4)

(43)
11.9%

3.4%
(1)
81.3%

10.4%

(29)
19.7%

5.6%

(39)
2.8%

(5)
75%

(48)
14.8%

(1)
16%

(2)
16.4%

(1)
18%

(27)
16.4%

(36)
100%

(39)

(40)

(44)

(40)

(244)

Measure of Agreement: Kappa Value 0.743

Note: The value in parenthesis is the count within each cell and total by clustering method.

28

TABLE 3
SIX CLUSTER SOLUTION OF THE K-MEANS CLUSTER ANALYSIS
WITH INITIAL SEED POINTS FROM THE WARDS METHOD
Variables
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11
V12
V13
V14
V15
V16
V17
V18
V19
V20
V21
V22
V23
V243

Final Cluster Centres

Cluster1 Cluster2
2.18
3.47
3.26
3.70
3.53
3.55
3.79
3.68
3.38
4.13
3.26
3.55
4.00
4.00
4.00
3.91
4.29
4.09
4.18
3.79
4.18
3.79
4.18
3.32
1.21
2.13
1.24
2.60
1.53
2.85
1.41
3.15
1.29
2.49
1.21
2.83
1.74
2.74
1.56
2.66
3.94
2.28
3
3
3
1
2
2

Cluster3
2.18
3.51
3.59
3.95
1.56
1.56
2.10
2.49
4.36
4.10
4.10
3.69
1.64
1.90
2.23
2.56
3.08
3.44
3.08
3.08
4.10
3
4
2

Cluster4
3.25
3.95
3.90
3.85
2.03
1.90
2.15
2.90
4.28
4.08
4.08
3.73
1.58
1.75
1.95
2.40
2.03
3.18
2.93
2.83
2.95
3
2
2

29

Cluster5
3.48
4.27
4.32
4.36
3.48
3.34
4.18
4.05
4.45
4.25
4.25
4.02
1.66
2.00
2.14
2.18
2.00
3.73
2.93
2.57
3.32
4
5
2

Cluster6
2.70
3.45
3.68
3.68
2.73
2.85
3.60
3.83
3.63
2.63
2.63
2.58
1.95
3.10
3.53
3.65
2.73
3.10
2.85
2.85
3.23
3
4
2

F Value

Sig.

11.890
5.866
3.983
3.067
45.266
30.800
44.841
15.573
6.534
30.173
30.173
17.146
7.656
25.842
23.101
25.593
9.044
22.512
6.504
9.779
17.063
7.352
73.671
1.424

.000
.000
.002
.011
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.216

FIGURE 2
SIX CLUSTER SOLUTION AND CONSUMER BEHAVIOUR MATRIX
High

1
4

Repeat-Passive

Rational-Active

Consumer

Confidence

No Purchase

Relational-Dependent

2
6
Low

Involvement

30

High