Segmentation is just numbers on a page until you make money with it!
That’s what I tell my clients and students. The single hardest part of segmentation isn’t the analysis; rather, the greatest issue is implementation!! How do you take action on the analytical insights and design strategies to make money?
Let’s make sure we have a common understanding of behavior-based segmentation, and then review the five most common applications where the segmentation analysis can drive incremental revenue and retention.
When I refer to segmentation, I am speaking about an analytic approach that seeks to group customers into segments that have the most behavior factors in common (usually 6-8 segments). The goal of the analytic work is to provide insights into each of these groups that can lead to customized customer experiences, driving incremental revenue and customer retention.
Our recommendations on segmentation highlight behaviors rather than attitudes. This approach reflects a focus on the ultimate goal: changing behaviors. In addition, one of the greatest challenges of attitudinal segmentation is tying that segmentation back to specific individual customers in your database. By building analysis based on behavior, you look at customer-specific patterns of transactions, spending levels and interactions. The link to groups of customers automatically flows from the analysis.
6-8 Segment Goal
With our clients, we usually develop segments with the goal of creating 6-8 segments. This range is not magical; rather, 6-8 reflect the number of distinct strategies that most companies can manage initially. Overtime, segments tend to subsegment; the rule of thumb is to subsegment every time that the subsegments respond to different marketing approaches and your company can handle the variations.
Let’s back up and assume you have had 6-8 segments developed for you – the top 2 reflect “best customer behavior” – one is usually high frequency and medium value and the other is lower frequency and higher value. Over the course of one year, both segments average around the same higher spending level. Now, once you have gained some level of understanding of these segments, here are some actions that a marketer can use to change behavior and impact the business:
- Retention – The customers in these two segments are often the most valuable in the customer base, so when they leave, they cannot easily be replaced. Predictive modeling can be used to prioritize these customers on likelihood of attrition, then implement special programs to highlight the value of the company or brand and maintain those customers for longer.
- Cross-sell – Often the first place to drive incremental revenue is to cross-sell to your best customers. You can do this through a simple matrix of products usually purchased together, or use market basket analysis to gain a deeper understanding of purchase combinations that are not obvious from the outset.
- Content-based marketing – The strongest way to differentiate your organization from the competition is to provide added value in terms of information and stories that engage your customers, ensuring that they feel valued for themselves and not just for their next transaction.
- Community – Another way to reinforce the value of your organization is to provide a platform where customers can build community by sharing tips, learnings and plans with each other. Such a platform also gives loyal customers a chance to feel valued by contributing to the company’s plans – whether about existing products, new products, customer experience, pricing, etc. By linking customers together, you can reinforce your company’s value and build more commitment to the brand through events and shared community. Social media can be your friend in community building.
- Customization – If there is a group of customers that are worth spending extra time and money to personalize offers and products to fit their needs, these segments surely are in the ballpark. Additional versions require additional time and effort from creative, offer planning, technology for email and direct mail and budget for multiple printing (if DM). If the extra effort must take place, this is the group to receive then benefits and generate additional revenue.
So now you have five ways to connect with your most valuable customers and generate revenue. When you connect, you ensure that your best customers know that you value them, not only for their transactions but also for who they are. Segmentation without these actions is only a spreadsheet.
Marketing must make it a priority to have an execution plan in place before the analysis is ever complete. Otherwise, the analysis sits on the shelf until the data is too old to be valuable. Begin with the end in mind, as Stephen Covey said. When you do, you can see your analysis turn into incremental revenue and your career blossom accordingly.