(5 minute read)
It’s amazing, especially to industry experts, how many companies continue to make a fundamental marketing mistake before the ink is even dry on their business cards. They come up with a “perfect” product or service — then set out to develop the business and marketing strategies behind it. It’s the strategic equivalent of building a house before drawing the blueprints. It sounds like a cliché, but success in today’s competitive marketplaces still means putting the customer first, and that starts with doing your homework up front. You need to go beyond typical research of industries, markets, competition and other statistics to a more interactive, in-depth analysis of specific customer segments (yours and your competitors).
Some Customers are Clearly More Valuable than Others
Customer segmentation is a critical tool for helping your company maximize profitability among all customer groups. The key, according to Jill Griffin, president of the Austin, Texas-based Griffin Group and author of Customer Loyalty (Jossey-Bass, 2nd Edition, 2002), is “…to help companies identify their most profitable customers (emphasis added) and help them meet or exceed their customer-experience expectations — all the while also providing the appropriate marketing offers and customer service to the rest of your customers.”
It doesn’t matter what product or service you sell. Your customers will vary greatly in both value and behavior, from the products they buy to the frequency of purchases to the amount of money they typically spend.
In the past, segmentation was typically based solely on the attributes of the potential customer: demographics, psychographics, specific attitudes, etc. Today, the model has moved to more value-based segmentation, which focuses on the revenue factor in the equation.
Paul Calthrop, Vice President of management consulting firm Bain & Co., explains the strategy of following this forward-thinking, revenue-based model.
“We need to start with the customers’ value to us,” he explains. “We need to answer the questions, ‘Where do we make our money?’ and ‘Who are our high-value customers?’ Only then do we have a sound basis from which to move forward. Now we can understand the profile of these different customer segments. We can dig deep, knowing we are digging where the money is.”
You’ve Segmented Your Customers — Now What?
Once your company has clearly defined customer segments (potential or current), you can use that information to tailor specific products, marketing programs and support offers across your customer base. You goal is to obtain and retain customers in the most profitable way possible.
A robust database is a key factor in customer-segmentation success. The more information you gather and store about customers, the more effectively you can profile and address their specific needs. In the past, this type of analysis was the domain of large industries such as telecommunications, finance and retail, but today, according to Calthrop “…any company committed to customer-database development is well positioned to effectively segment its customers.”
Taking Care of the “big dogs” — and Beyond
Of course every company is different, but for most a small percentage of customers will ultimately represent a high percentage of profits. This
high segment includes the customers you want to focus the bulk of your efforts on — all the way from technology and product offerings to human resources allocations. You don’t just want to meet these valuable customers’ expectations; you want to exceed them with every interaction.
At the same time, a small fraction (hopefully a very small fraction) of your customers actually detract from your company’s profitability—the
low segment. Just so you know, it’s completely acceptable to “fire” these customers if you have the data to support the decision.
The middle segment is where things get exciting and opportunities abound. Here, you’ll find both sides of the customer-retention equation: the greatest chance for customer development, alongside the greatest risk of attrition. It’s absolutely critical that you remain focused on this important customer segment—even as you prioritize your top-profit customers. Your goal: to convert these customers INTO the top level.
A Powerful Database is Where It all Begins
To segment customers effectively; you need a comprehensive view of customer data. A typical implementation involves data warehousing and marketing-automation applications. Many companies have also adopted advanced data-mining tools, helping even non-technical to access transaction-level data.
Industry experts have noticed the evolution of advanced customer-segmentation tools from outsourced consulting deliverables to dedicated, in-house efforts.
Aaron Zornes, an analyst at META Group, notes: “Enterprise marketing managers generally prefer to keep their customer data in-house today, merge it with accounting and sales figures, and run queries from their own desktops.”
In the past, companies were fortunate to collect data on 5–10 segmented groups. Today, technology helps marketers define customer “micro segments” — quickly tracking as segments change and new categories develop.
The Basics of Customer Segmentation
There are really only five things you need to do to begin segmenting your customers for maximum profitability.
- Determining what data to collect—and how to collect it
- Consolidating data typically stored in disparate information systems
- Developing statistical algorithms/models to help sort customer segments
- Establishing collaboration with Marketing, Customer Service and IT leaders
- Implementing a robust networking infrastructure
Sophisticated databases, marketing-automation tools and segmentation models are important. Companies also need customer-segmentation experts to accurately analyze customer models and develop effective marketing and service strategies.
Case Study: Cypress Semiconductor Corp
Multiple calls to a local office failed to provide satisfactory results. A customer filled out an online survey. Because Cypress’s customer-response system was so finely tuned, the email was automatically forwarded to the Vice President of Customer Sales, who phoned the customer directly — as well as the local sales office — within 24 hours. “The customer was totally amazed and quite pleased with my response and quick action,” the client says. “We booked business with him within three days.”
The Bottom Line
Customer segmentation isn’t easy — just like anything else that requires hard work and offers performance-based results. At the same time, it’s among your best tools for developing and retaining long-term customers.
All you need to do is:
- Focus on customer value
- Deploy data to your advantage
- Initiate new marketing-automation technologies
Performed properly, this strategy can have a significant impact on your bottom line.
For more information about pre-marketing segmentation, or for help with designing and deploying a survey to your customers to gather segmentation data, contact us today!