With increased focus on consumer outcomes, the challenge for firms is to be proactive and comprehensive in assessing how their products affect different types of customer.

Why assess consumer outcomes?

In healthy markets, consumers are a key driver of business success. It is therefore unsurprising that firms everywhere are realising that they have to put customers at the centre of their decision-making if they want to succeed. Assessing consumer outcomes should be part of day-to-day product design and evaluation.

Market failures exist, and consumer decision-making can be subject to behavioural ?biases? that limit people's ability to switch following bad outcomes. This is why regulators are increasingly focusing on outcomes and insights from behavioural economics.

The Financial Conduct Authority (FCA)expects firms to:

• assess their full range of products'to check if they are delivering good customer outcomes, especially for ?vulnerable? consumers
• assess the full distribution of outcomes. The FCA considers that everyone can be vulnerable at some point in their life
• be proactive. Rather than just capturing and analysing complaints data, this means drawing on bigger datasets, running scenarios, and stress-testing assumptions.

As we have seen, where the FCA considers firms are not meeting their expectations, it will take action.

Many of these principles may already be part of the culture of your business. However, in practice the prospect of assessing the full distribution of consumer outcomes can sound challenging.

How should we assess consumer outcomes in practice?

• First, define your target market. What is the purpose of your product (or product range)? Who are you trying to attract? Is the product appropriate for them? Which other customers might you also attract? Are there segments/cohorts of customers that could be considered vulnerable?
• Second, test the outcomes produced by the product(s). How would the product affect its consumers under a wide range of (stressed) scenarios? Which groups does profitability depend on? Does the product increase consumer susceptibility to be vulnerable, and if so, to what?
• Third, what is the impact of distribution channels? Manufacturers are increasingly being held responsible for issues that arise downstream.
• Fourth, monitor customer outcomes. Make sure that the people buying the product are your target market and the outcomes are as intended.

Knowing your customers is critical.

Top tip for consumer segmentation

There are various ways to segment consumers?for example, according to behaviours, characteristics or vulnerability.

Regulators and firms may use cluster analysis, which allows them to quickly analyse large amounts of data to assess the behaviour of different customer segments.

The FCA's analysis of bank overdrafts used a clustering approach to identify customer groups that were not using the product as intended, resulting in bad consumer outcomes. This led to regulation and the banning of unarranged overdrafts.

The process is not based on predetermined thresholds or rules. Rather, the data itself identifies cohorts that exist within the population of customers. With your clusters identified, you can start to describe them and see how outcomes differ for different parts of your customer base.

Sign up to our workshop at UK Finance on 22 November, which will discuss the tools and techniques for assessing consumer outcomes in financial services.