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Segmentation 101
Are you in the midst of putting together your marketing and operating budgets for 2003? How are you going to efficiently allocate marketing and other resources in a way that allows your company to maximize bang-for-the-buck and maintain a very customer-focused attitude? One obvious answer is: segmentation.
Traditional Definition
Your target “market” consists of many types of customers and potential customers for the various products and services that you provide. You need to determine which segments of the market offer the best opportunity for achieving your company’s marketing and sales goals. Consumers are usually grouped and served in various ways based on geographic, demographic, psychographics and behavioral factors. This grouping is called market segmentation.
A market segment consists of consumers who respond in a similar way to a given set of marketing efforts. For example, one segment of people who like to smoke cigars because it is the thing to do in their certain social group - even if they don't really appreciate the habit. Another segment does it because they truly enjoy the taste. Another segment that has never tried smoking a cigar, but has the disposable income to afford buying a pack. It would be inefficient and sub-optimal to treat all these customer segments the same way. Successful companies are wise to focus their efforts on meeting the distinct needs of one or more market segments.
Market segmentation is the selection of groups of people or customers who will be most receptive to a particular product or service. In the consumer marketing realm, the most frequent methods of segmenting include demographic variables such as age, gender, race, income, occupation, education, household status and geographic location; psycho-graphic variables such as lifestyle, activities, interests and opinions; product use patterns; and product benefits. On the business-to-business (or B2B) side – it is most common to segment by industry and company size or revenues. Most segmentation efforts involve combinations of these methods.
Customer Segmentation vs. Market Segmentation
However, people like Michael Meltzer of BB&T in the UK argue that marketing textbooks have it all wrong! These books typically “extol the virtue of segmenting the market rather than an existing customer base… Many of the texts are written with the student in mind rather than the practitioner.” If you were starting to build your company from scratch – then this approach may make sense. However, if you have built up an operating history and a repeat client list – you can typically do much better than that.
Customer Segmentation allows companies to increase customer focus – while simultaneously addressing the efficient allocation of marketing resources. This is extremely relevant as you try to s-t-r-e-t-c-h your marketing dollar in today’s tight and competitive environment
O.S.F.A. is history!
In a world of one-to-one marketing, customization and personalization, undifferentiated services are rapidly becoming a thing of the past. An acute need to increase efficiency and return on investment (ROI) in marketing practices, as well as rising expectations from customers are driving the push towards one-to-one marketing. Enhancements in technological capabilities and a lowering of cost-to-serve customers are allowing your competitors to develop a greater and greater customer focus. This boils down to the fact that, ultimately, each customer is a market segment of size “1”.
Are you currently using a one-size-fits-all (OSFA) strategy? If so, you may want to consider employing a segmentation approach for one or more of the following activities:
- Developing new products and/or services
- Prioritizing product features
- Regionalizing or localizing your product or service offerings
- Designing effective distribution methods
- Determining pricing strategies
- Determining customer service levels and support options
- Developing new, targeted, customer-focused sales and marketing programs
- Improving marketing programs to address strategies for loyalty, retention, up-selling / cross-selling, and referrals
“Can do better” than the old 80-20!
Successful companies as well as entire industries (such as banking) have recognized that segmenting customers by profitability can be a very useful tool which can provide valuable insights into overall company profitability.
"All customers are created equal, but some are more equal than others."
It is typical for customer revenues and profits to follow the famous Pareto principle. As a rule-of-thumb, only 20% of your customers are usually responsible for 80% of your revenues. Profits are split the same way as well – although it is quite common to find that the top 20% of your most profitable customers generate more than 100% of your total profits! That is because there are usually several customers at the bottom of your profit pyramid that cost too much to serve and are usually loss generators.
But in fact, it is easy to do better than 80-20. Jay Curry’s well known “Customer Marketing Method” is one useful tool to start segmenting customers by revenues. Using this method, it is possible to identify and more importantly, to track your most important customers by department, by office or even down to the level of the individual sales person or account manager. Thus you can motivate, measure and reward the behaviors and performance of your sales and marketing organizations as they successfully:
- ACQUIRE MORE - bring customers into the profitability pyramid,
- RETAIN BETTER - keep them in the pyramid, and
- INCREASE PROFITS - move them up the pyramid
Who’re you going to call?
There are several ways that you can choose to segment your customers. Of these, a handful of methods are commonly used. However, some of the most effective metrics to segment customers include:
- Customer revenues
- Customer profitability
- Customer lifetime value, and
- Customer behavior – i.e. recency of interaction or purchase and frequency of interaction or purchase
These practical segmentation approaches can help your salespeople and your marketing departments understand which customer attributes are truly important and that will help them figure out which customer to call on next.
Do you want to help your sales people figure out which prospective customer to call next?
Give us a call first at 1-866-ASK-TMGI.
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