Customer Segmentation

In defining a segmentation strategy, it is conventional wisdom that the greatest positive impact on the business’ bottom line can be made by focusing on two categories of customer:

  • customers that currently provide the most value to the business,
  • customers whose level of sales revenue with the business is the easiest to grow.

This can often prove to be a sound assumption. But undoubtedly, for most businesses, there is a great wealth of additional customer segments that can and should be exploited to provide substantial financial benefits to the business.

Customer segmentation can also be used to identify the needs of individual customers or groups of customers, including needs that remain unsatisfied. Where it proves possible to define or discover a segment comprising customers with needs that have not been satisfied, the business may decide to target satisfaction of those customer needs, thereby becoming the first supplier to fulfil customers in the segment. Such a strategy can be used to become the leading player in that market segment in question.

When customer segmentation started to be used by marketing functions, the approach was to defined a number of segments, measure the size of each segment (usually expressed as a percentage of the complete market of which the segment was a part), measure the value of revenue the segment provided the business, and then concentrate marketing efforts on the segment that was yielding the highest value per percentile of customers. For example, if the highest performing segment comprised 25 per cent of the market and was yielding 65 per cent of the business’ sales revenue, then it obviously made sense to concentrate marketing efforts on that segment.

But that is by no means the only way of improving the cost-effectiveness of marketing campaigns.

Here are some typical issues that can be addressed in determining the strategy for a segmentation project, or series of projects.

To start with, sales revenue for a given period is not the only way of measuring a customer’s value to the business. Lifetime value can be a more a useful measure for many campaigns. In other circumstances, the marketing professional might be interested in the likelihood of customer behaving in a particular way in response to a particular campaign for a particular product at a particular time.

Another factor that may be considered in deciding how to use the results of a segmentation analysis are acted upon, is the degree to which the needs of customers in each segment are easily satisfied by the business. A customer may have become a high spender with the enterprise, but the future needs of the customer may not be easy to satisfy within the product-service-delivery strategy of the business. For example, issues such as the following can have a large impact on the success or otherwise of the campaign include:

  • Can the offerings of the business be customized to exploit the potential for profit in the segment at which the campaign is directed (the object segment)?
  • Can the delivery channel for products or services be customized to exploit the potential for profit in the object segment?
  • Is it possible to clearly identify the business’ competitive advantages in the object segment

But undoubtedly, for most businesses, there is a great wealth in analysis of their customer segments that can and should be exploited to provide substantial financial benefits to the business.

Note: Thanks to Peter Wray, CEO of loyaltymatters.com for his insights and contribution.