Why Customer Understanding Starts With Knowing Your Target Market
One of the statistics I find myself coming back to repeatedly in Customer Understanding discussions is the claim that around half of working-age adults in the UK have numeracy skills equivalent to those of a primary school child.
The figure appears regularly in industry commentary and the underlying message is usually clear enough: if a large proportion of adults struggle with basic numeracy, firms need to be extremely careful about the amount of numerical information they present to customers.
At first glance, this feels entirely sensible. For a long time, I suspect many of us have accepted that logic without questioning it too deeply.
After all, if many adults find percentages, fractions, ratios and calculations challenging, surely the obvious answer is to simplify financial communications. Fewer numbers. Less complexity. Less information. Simpler language. Lower reading ages.
The more time I spend working in Customer Understanding, however, the more I wonder whether this illustrates a broader challenge that firms face and that we may sometimes be solving the wrong problem. Not because numeracy, or literacy for that matter, are unimportant. Clearly they matter. Nor because organisations such as National Numeracy are wrong to highlight genuine challenges that exist across the wider population.
Rather, because effective Customer Understanding starts with knowing who your customers actually are.
Consumer Duty requires firms to consider the needs, characteristics and objectives of their target market. Yet in practice, discussions around customer understanding can sometimes drift towards population averages and broad societal statistics. Useful though those measures may be, they do not necessarily tell us very much about the specific customers a firm is trying to reach.
That distinction sounds obvious, yet it often disappears remarkably quickly from Customer Understanding discussions.
The Investment sector provides a particularly useful case study. Whilst discussions around Customer Understanding often draw upon statistics relating to the general population, the profile of prospective investors can look very different. As we will see, those differences have important implications for how firms think about customer understanding, and where they focus their efforts when designing communications.
The assumption nobody questions
When we hear that around half of working-age adults possess relatively low numeracy skills, it is easy to picture that statistic applying equally to everyone. But the UK population includes people with no qualifications, people with no savings, people with no intention of investing, people who may never purchase an investment product in their lives and people who may have little or no engagement with financial markets. It is a broad societal measure, not an investor measure.
The question therefore becomes whether prospective investors actually look like the wider population. Our own research suggests they may not.
Long before Consumer Duty arrived, manufacturers were required to consider the knowledge and experience of their intended customers. Under MiFID target market frameworks, manufacturers routinely distinguish between different customer groups based partly on familiarity with financial products and concepts. Those knowledge and experience assessments are then communicated to distributors through EMT data.
This is a subtle but important point. Manufacturers do not generally define target markets using reading ages. Nor do they classify customers according to numeracy ages. Instead, they recognise that familiarity matters. Customers with different levels of knowledge and experience may require different products, different explanations and different safeguards.
In some ways, the industry has already acknowledged that understanding is heavily influenced by prior knowledge. Yet when Customer Understanding discussions take place, we often seem to drift back towards literacy and numeracy as the primary explanation for misunderstanding. I am increasingly convinced that this is only part of the story.
Do prospective investors really look like the wider population?
Consider the statistics that often underpin these discussions. Many of the figures regularly quoted by organisations such as National Numeracy ultimately trace back to the Government’s Skills for Life Survey, one of the largest assessments of adult literacy and numeracy ever undertaken in England. The survey assessed thousands of adults against national literacy and numeracy standards and found that around 49% of working-age adults demonstrated numeracy skills at Entry Level 3 or below, a level often described as being broadly equivalent to those expected of children aged 9 to 11.
The same body of research, alongside wider Census data, also provides an important reminder about the composition of the wider population. Across England, approximately 33.9% of adults hold degree-level qualifications or above, while 18.1% have no formal qualifications. These figures are often used, quite reasonably, to inform broader discussions around literacy, numeracy and communication standards across society as a whole.
The question, however, is whether prospective investors look like society as a whole.
As part of CUE’s ongoing calibration work, we recently analysed the educational profile of UK retail investors segmented by their knowledge and experience of investing. The findings were striking.
Among our Mass Retail / Basic investor segment, representing individuals with relatively limited investment knowledge and experience, 47% held either a Bachelor’s degree or a Masters / PhD qualification, while fewer than 5% reported having no formal qualifications. Among our Educated / Informed segment, the proportion holding degree-level qualifications or above increased to more than 60%. For Sophisticated investors, representing those with the greatest investment knowledge and experience, the figure exceeded 75%.
In other words, even the least experienced investor segment in our research exhibited an educational profile materially different from that of the wider population.
This distinction is important because educational attainment is consistently identified by OECD and UK adult skills research as one of the strongest predictors of literacy and numeracy performance. While qualifications do not guarantee financial knowledge (indeed the vast majority still possessed relatively limited investment knowledge and experience), they do make it harder to assume that general population literacy and numeracy statistics transfer directly to prospective investors.
Importantly, this does not prove that investors are experts. In fact, one of the most interesting findings from our broader research points in the opposite direction. Approximately 80% of individuals most likely to invest over the coming years still fell into segments characterised by relatively limited investment knowledge and experience, likely therefore encountering investment concepts for the first time.
At first glance, this seems contradictory. How can investors be relatively well educated while simultaneously lacking financial knowledge? The answer, of course, is that education and experience are not the same thing. A solicitor may never have invested. An engineer may never have invested. A doctor may never have invested. A university lecturer may never have invested.
All may possess strong literacy skills. All may possess strong numeracy skills. Yet none automatically understands drawdown, diversification, accumulation units or the practical implications of investment risk.
That distinction matters because knowledge and experience have long sat at the heart of how financial services already thinks about target markets.
Experience is not the same as capability
Consider a customer approaching retirement for the first time. They may have spent decades successfully managing household finances, paying a mortgage, interpreting bills, reviewing pension statements and making major financial decisions. Yet when confronted with pension drawdown, many find themselves entering unfamiliar territory. The challenge is rarely that they suddenly cannot understand percentages. The challenge is that they are being introduced to a concept they have never needed to understand before.
The same thing happens in bereavement journeys. Terms such as Grant of Probate, Letters of Administration and Estate Administration become critically important at exactly the moment many individuals are encountering them for the first time.
These concepts are not difficult because customers are struggling with percentages and language. They are difficult because the customer is attempting to construct an entirely new mental model while simultaneously navigating an emotionally demanding situation.
This distinction may seem subtle, but I think it changes everything.
If the primary challenge were literacy, the solution would simply be shorter words. If the primary challenge were numeracy, the solution would simply be fewer numbers. But what if the primary challenge is unfamiliarity?
What if the customer is capable of reading the information and capable of understanding the arithmetic, yet still struggles because they are being introduced to a concept they have never encountered before?
At this point, the discussion starts to move away from readability and towards something rather different: learning.
What educational psychology has known for decades
Interestingly, this is not a new problem at all. Educational psychologists have spent decades studying how people learn unfamiliar concepts. One of the most influential findings from this body of research is that understanding is not simply determined by intelligence or educational attainment. It is also influenced by how information is introduced, how much new information is presented simultaneously and how effectively new concepts are connected to existing knowledge.
Cognitive Load Theory, for example, suggests that working memory has finite capacity. When too many unfamiliar concepts, conditions, exceptions and decisions arrive at once, comprehension begins to deteriorate. Importantly, this deterioration occurs even among highly educated individuals. The issue is not capability. The issue is overload.
Schema Theory explores a related idea. Humans tend to understand new information by connecting it to existing mental models. Learning becomes easier when unfamiliar concepts are introduced progressively and linked to things we already understand. Good teachers intuitively apply this principle every day. They build foundations before introducing complexity. They use worked examples. They introduce ideas in a logical sequence. They allow understanding to develop layer by layer.
The more I look at Consumer Duty, the more I suspect that many of the FCA’s expectations align closely with these educational principles.
When the FCA talks about layering, signposting, timing, presentation and testing, it is not merely discussing drafting style. It is recognising that understanding depends on how information is absorbed. In effect, the FCA is encouraging firms to think about how customers learn, not simply how they read.
Customer understanding as a learning challenge
Viewed through that lens, many of the techniques associated with Customer Understanding start to make much more sense.
Plain English matters because customers should not waste cognitive effort decoding confusing sentences.
Word familiarity matters because unfamiliar language consumes mental resources that could otherwise be used to understand the underlying concept.
Layering matters because customers should not be forced to process every concept simultaneously.
Signposting matters because customers need a coherent journey through the information.
Cognitive load matters because even intelligent and educated individuals can become overwhelmed when too much unfamiliar information arrives at once.
Seen individually, these techniques can sometimes appear disconnected. Viewed collectively, however, they all point towards the same objective: helping customers understand something they may be encountering for the first time.
That is why I increasingly believe that Customer Understanding should be viewed not simply as a communication challenge, but as a learning challenge. The goal is not to write everything as though the audience possesses the literacy or numeracy skills of an eleven year old. Nor is the goal to assume that every customer arrives with extensive financial knowledge.
The challenge lies somewhere between those extremes.
Many prospective investors appear materially more educated than the wider population. Yet many also possess relatively limited investment experience. They are often perfectly capable of understanding complex ideas, provided those ideas are introduced in a way that supports learning rather than overload.
Perhaps that is the real lesson sitting behind Consumer Duty. The objective is not to talk down to customers. The objective is not to eliminate every number, every technical term or every complex idea. The objective is to help customers build an accurate mental model of something they may never have encountered before.
Just as a good teacher guides a student through an unfamiliar topic, a good financial communication should guide customers through unfamiliar concepts carefully, progressively and with clarity.
The more I look at Customer Understanding, the more I find myself returning to the same conclusion. Perhaps the biggest challenge is not literacy. Perhaps it is not numeracy either.
Perhaps the real challenge is helping people learn.