What is customer segmentation?

Like so many buzz words in business & marketing, "customer segmentation" is one of those terms that is interpreted by folks to mean many different types of things. If the word "segmentation" were blurted out in a room of 20 business people, chances are it would conger up 20 different images. So what is customer segmentation, and how can it be used to propel one's business?


Segmentation defined
Customer segmentation is a method for grouping customers based upon similarities they share with respect to any dimensions you deem relevant to your business - whether it be customer needs, channel preferences, interest in certain product features, customer profitability, etc. The key is for you, the marketer, to first decide on what basis you wish to segment your customers (or prospects for that matter). And, the only way to answer this question is to first determine what your objective is for the segmentation, and thus what you want the segmentation to "do for you".


Common segmentation objectives

• Developing new products
• Creating differentiated marketing communications & ads
• Developing differentiated customer servicing & retention strategies
• Targeting prospects with the greatest profit potential
• Developing multi-channel distribution strategies

Once you have decided what your objective is for the segmentation, you can answer the question, "what do I want the segmentation to do for me?"



A brief example: segmenting for customer win-backs
Let's say you worked for a subscription-based magazine such as Newsweek. Your boss has asked you to optimize Newsweek's retention strategy utilizing the current save tactic of sending people who have recently canceled their subscriptions (aka "attritors") 1 of 3 "win-back" mailers. This existing save tactic has been employed by Newsweek for the past 2 years, and the method for determining which attritor receives which mailer has been based largely on "intuition" (aka random selection).


Step 1: Your first step in undertaking this project would be to clearly state your objective. Your objective, as per your boss, is to optimize Newsweek's retention strategy for recent attritors. This is shorthand for saying, "I want you to maximize your return on your retention-dollars invested". Without getting into the nitty gritty of the approach, what you essentially want to do is determine the relative ROIs for each of the 3 mailers at the individual attritor level. For each mailer, you then want to identify those attritors with high ROIs (i.e., those attritors who re-instated their magazine subscriptions after receiving the mailer and provided you with future profits that well-exceeded the cost of the mailer).

Step 2: For each win-back mailer you want to identify those attributes which the high-ROI attritors have in common, essentially creating a profile for "high-ROI attritors" for each mailer.

Step 3: The final step is to operationalize the three profiles you've created so you can use them to determine which of the 3 mailers, if any, to send to future attritors. This essentially entails implementing a process in which new attritors are matched up against the 3 profiles to determine which, if any, best describe them. A more sophisticated approach would be to build predictive models that would calculate the expected ROI for each mailer for each attritor, and then send out the mailer with the highest expected ROI to the attritor. And, for those attritors in which all 3 mailers have negative expected ROIs you might choose not to send any win-back mailers.

Closing thoughts on segmentation
In closing, segmentation can be tricky and complex, and no doubt requires a great deal of expertise & experience. Putting in place flawed segmentation strategies can be far more detrimental to a business than not having them at all. However, when designed the right way, segmentation strategies can provide tremendous returns relative to one-size-fits-all approaches. In future posts I will tackle some other types of segmentation strategies, including those involving new product development and portfolio management. As always, feel free to email me with any of your questions, comments or thoughts. As always, feel free to email me if you have any questions about segmentation and how to most effectively use it within your business.






More posts on segmentation & marketing strategy:

• Segmentation and targeting
• Using the 5Ws for segmentation & marketing innovation
• Using segmentation to develop your marketing strategy
• Marketing Strategy Framework to hang on your wall
• My Frameworks Library - many empowering segmentation tools!

Great books & articles on segmentation:

Check out my favorite business books

read more

Using segmentation to develop your marketing strategy

While there are many ways to harness the power of segmentation, one of the broadest and most valuable applications is for designing your marketing strategy – a strategy that clearly defines who you’re targeting, what you’re going to offer them, where you’re going to reach them, and how you’re going to sell them on your product & brand.

The key “superpower” of segmentation is that it enables you to take a population of consumers and group them based upon similarities they share with respect to the very attributes that you use to define your marketing strategy (i.e., who to target, what to offer them, etc.). What this means is that the segments you derive from the segmentation process will have their preferred marketing mixes already “baked into them”. Powerful stuff.


Segmentation for designing marketing strategies is a 2-step jig

Step 1: Identify “the who”

In the first step you identify “the who”. Who are those consumers in the population who have expressed interest in your product category or who have needs addressed by your product category? In this step you’re simply separating out those interested consumers from the rest of the general population.

Step 2: Identify your target segments
The second step is where things really get cooking. In step 2 you take the population of interested consumers and group them based upon their similarities with respect to “the what, why, where & how” of your product category.

In this step your goal is to identify the most attractive segments for your business to target – segments for which the following are true:

• One or more of your products meet the segment’s functional & emotional needs
• Your existing channels for selling, servicing & awareness-building align with the segment’s channel preferences and media-consumption habits
• Your product & brand positioning align with the segment’s “reasons for buying” from both a functional and emotional perspective
• You can identify the segment in a cost-effective manner
• The segment is large enough in size and profit-potential to merit investment in a distinct marketing mix

By the end of step 2, you will have identified one or more segments that:

• Are interested in one of more of your products
• Are most effectively targeted using a distinct marketing mix
• AND, are large enough to merit your investment in this distinct marketing mix

These segments will become your target segments and along with their distinct marketing mixes represent your marketing strategy. To reiterate from the intro, the beauty of this approach is that by basing part of your segmentation on similarities shared by consumers across key components of your marketing mix, the segments you derive come with their “marketing instructions” already included.



What about segments you choose not to target?
So what about segments that don’t meet enough of your targeting criteria? What should you do about them? The answer is that it depends.

For those segments large enough in size & profit potential you may consider developing new products, building out new channels, or creating communication strategies that better meet their needs and more effectively “speak to them”.

On the other hand, for those segments that are very small or that would require major retooling of your operations, extensive employee training, or significant stretching of your brand, you would likely leave to other companies to pursue.





More posts on segmentation & marketing strategy:

• What is customer segmentation?
• Segmentation and targeting
• Using the 5 W's to inform segmentation & marketing strategy
• Strategic Marketing Framework to hang on your wall
  

Great books & articles on segmentation:

• Making Segmentation work (Monitor Group)
• Market Segmentation: How to do it, how to profit from it
• Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense (One of the best general marketing books with a terrific chapter on segmentation

Check out my favorite business books

read more

Using segmentation to develop your marketing strategy

While there are many ways to harness the power of segmentation, one of the broadest and most valuable applications is for designing your marketing strategy – a strategy that clearly defines who you’re targeting, what you’re going to offer them, where you’re going to reach them, and how you’re going to sell them on your product & brand.

The key “superpower” of segmentation is that it enables you to take a population of consumers and group them based upon similarities they share with respect to the very attributes that you use to define your marketing strategy (i.e., who to target, what to offer them, etc.). What this means is that the segments you derive from the segmentation process will have their preferred marketing mixes already “baked into them”. Powerful stuff.


Segmentation for designing marketing strategies is a 2-step jig

Step 1: Identify “the who”

In the first step you identify “the who”. Who are those consumers in the population who have expressed interest in your product category or who have needs addressed by your product category? In this step you’re simply separating out those interested consumers from the rest of the general population.

Step 2: Identify your target segments
The second step is where things really get cooking. In step 2 you take the population of interested consumers and group them based upon their similarities with respect to “the what, why, where & how” of your product category.

In this step your goal is to identify the most attractive segments for your business to target – segments for which the following are true:

• One or more of your products meet the segment’s functional & emotional needs
• Your existing channels for selling, servicing & awareness-building align with the segment’s channel preferences and media-consumption habits
• Your product & brand positioning align with the segment’s “reasons for buying” from both a functional and emotional perspective
• You can identify the segment in a cost-effective manner
• The segment is large enough in size and profit-potential to merit investment in a distinct marketing mix

By the end of step 2, you will have identified one or more segments that:

• Are interested in one of more of your products
• Are most effectively targeted using a distinct marketing mix
• AND, are large enough to merit your investment in this distinct marketing mix

These segments will become your target segments and along with their distinct marketing mixes represent your marketing strategy. To reiterate from the intro, the beauty of this approach is that by basing part of your segmentation on similarities shared by consumers across key components of your marketing mix, the segments you derive come with their “marketing instructions” already included.



What about segments you choose not to target?
So what about segments that don’t meet enough of your targeting criteria? What should you do about them? The answer is that it depends.

For those segments large enough in size & profit potential you may consider developing new products, building out new channels, or creating communication strategies that better meet their needs and more effectively “speak to them”.

On the other hand, for those segments that are very small or that would require major retooling of your operations, extensive employee training, or significant stretching of your brand, you would likely leave to other companies to pursue.





More posts on segmentation & marketing strategy:

• What is customer segmentation?
• Segmentation and targeting
• Using the 5 W's to inform segmentation & marketing strategy
• Strategic Marketing Framework to hang on your wall
  

Great books & articles on segmentation:

• Making Segmentation work (PDF)
• Market Segmentation: How to do it, how to profit from it
• Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense (One of the best general marketing books with a terrific chapter on segmentation

read more

Marketing & the 5 W's: why every marketer should take a journalism class

Journalism 101. Who, what, when, where, why, how?... these key dimensions that are the foundation of journalism can also be used to design great marketing & segmentation strategies, and to turbo-charge your innovation efforts.

The 5 W's as they have been dubbed, can serve as a powerful tool for gaining deep insight into the contextual nature surrounding the need for and use of your product. I like to think of the 5W's as the marketing equivalent of an industrial-grade power shovel, allowing you to "dig deep" so you can get to those precious consumer gems that lay beneath your feet.

Context is king
Powering the 5W's is the essential notion that everything that we do is embedded in a context, and the better you, the marketer, understand the different contexts in which the need for/use of your product occurs, the better equipped you will be to develop marketing strategies or innovations that truly pop!

How do I use the 5 W's?
The simplest way to begin using the 5W's is to start with the most basic question and loop it through each W:

• {When/Where/Why/How/For whom} might the need for my product arise?

Spend at least 5-10 minutes on each W, making a list along the way. Allow your thoughts to percolate; don't be afraid to make assumptions - you can always validate them in the future. Do the exercise again a day or two later - often the most insightful thoughts will come after a period of incubation.

As you begin to use the 5W's, one thing that will become clear to you is that one or two of the Ws will often be more relevant to your product than others. You'll also notice that the Ws will frequently interact with each other in meaningful ways, and that you'll often want to drill down on a given insight using "follow-up" Ws. Note these interactions and drill-downs and allow them to generate further insight into the contextual nature of demand for your product. Often the deepest insights lay in these pockets.

Gatorade: a brief example of the 5 W's in action
Let's take Gatorade, that cold, refreshing beverage that most of us have purchased at some point in our lives. Reaching into our magic hat of W's, we come up with "Where?", leading us to ask, "Where might the need for Gatorade arise?"

Given that Gatorade is 'the ultimate thirst quencher', I begin to think of places where the need for thirst-quenching is likely to arise. A few examples that come to mind include basketball courts, hot climates (e.g., Phoenix, The Mojave Desert), marathons, and the Dead Sea.

Let's reach into the hat again... this time I pull out "When?", leading us to ask, "When might the need for Gatorade (thirst-quenching) arise?" Some initial thoughts that come to mind include summertime, playing sports, during a long hike, the morning following a night of drinking, a few hours after eating extremely salty food, and last but certainly not least, during a prolonged bout of diarrhea.

Let's now drill down on one of the "When's" - during a prolonged bout of diarrhea - and ask, "Where might such bouts occur?" One thought that comes to mind is certain poor villages around the globe where outbreaks occur regularly. Gatorade could be used in such places to quickly rehydrate people, especially children, who can die from the dehydration caused by the outbreak. Needless to say the potential benefits to Gatorade, the Gatorade brand, and the people of such villages would be numerous.

5 W's Recap
How to use the 5W's for developing marketing strategies & for business innovation likely merits an entire book; perhaps we'll put one together in the near future. Hopefully in this post I've given you a little taste of how one of the bedrocks of journalism can also serve as a potent tool for marketers & innovators alike. Much more to come.





More posts on the 5 W's:

• 5 Ws innovation framework
• Using the 5Ws to reduce customer churn
  

Check out my favorite business books

read more

Marketing & the 5 W's: why every marketer should take a journalism class

Journalism 101. Who, what, when, where, why, how?... these key dimensions that are the foundation of journalism can also be used to design great marketing & segmentation strategies, and to turbo-charge your innovation efforts.

The 5 W's as they have been dubbed, can serve as a powerful tool for gaining deep insight into the contextual nature surrounding the need for and use of your product. I like to think of the 5W's as the marketing equivalent of an industrial-grade power shovel, allowing you to "dig deep" so you can get to those precious consumer gems that lay beneath your feet.

Context is king
Powering the 5W's is the essential notion that everything that we do is embedded in a context, and the better you, the marketer, understand the different contexts in which the need for/use of your product occurs, the better equipped you will be to develop marketing strategies or innovations that truly pop!

How do I use the 5 W's?
The simplest way to begin using the 5W's is to start with the most basic question and loop it through each W:

• {When/Where/Why/How/For whom} might the need for my product arise?

Spend at least 5-10 minutes on each W, making a list along the way. Allow your thoughts to percolate; don't be afraid to make assumptions - you can always validate them in the future. Do the exercise again a day or two later - often the most insightful thoughts will come after a period of incubation.

As you begin to use the 5W's, one thing that will become clear to you is that one or two of the Ws will often be more relevant to your product than others. You'll also notice that the Ws will frequently interact with each other in meaningful ways, and that you'll often want to drill down on a given insight using "follow-up" Ws. Note these interactions and drill-downs and allow them to generate further insight into the contextual nature of demand for your product. Often the deepest insights lay in these pockets.

Gatorade: a brief example of the 5 W's in action
Let's take Gatorade, that cold, refreshing beverage that most of us have purchased at some point in our lives. Reaching into our magic hat of W's, we come up with "Where?", leading us to ask, "Where might the need for Gatorade arise?"

Given that Gatorade is 'the ultimate thirst quencher', I begin to think of places where the need for thirst-quenching is likely to arise. A few examples that come to mind include basketball courts, hot climates (e.g., Phoenix, The Mojave Desert), marathons, and the Dead Sea.

Let's reach into the hat again... this time I pull out "When?", leading us to ask, "When might the need for Gatorade (thirst-quenching) arise?" Some initial thoughts that come to mind include summertime, playing sports, during a long hike, the morning following a night of drinking, a few hours after eating extremely salty food, and last but certainly not least, during a prolonged bout of diarrhea.

Let's now drill down on one of the "When's" - during a prolonged bout of diarrhea - and ask, "Where might such bouts occur?" One thought that comes to mind is certain poor villages around the globe where outbreaks occur regularly. Gatorade could be used in such places to quickly rehydrate people, especially children, who can die from the dehydration caused by the outbreak. Needless to say the potential benefits to Gatorade, the Gatorade brand, and the people of such villages would be numerous.

5 W's Recap
How to use the 5W's for developing marketing strategies & for business innovation likely merits an entire book; perhaps we'll put one together in the near future. Hopefully in this post I've given you a little taste of how one of the bedrocks of journalism can also serve as a potent tool for marketers & innovators alike. Much more to come.




More posts on the 5 W's:

• 5 Ws innovation framework
• Using the 5Ws to reduce customer churn
  

read more

How to target your best prospects and maximize your ROI

In a prior post I discussed customer segmentation, a topic renowned for producing headaches and mild bouts of anxiety among even the sharpest of business people. The makers of Tylenol might want to consider becoming a sponsor for seminars on the topic; of course, providing free samples for those in need throughout.

In that earlier post I promised that I would discuss some of the ways in which segmentation can be used; in this post I'd like to talk about one such way - segmenting customers by profitability, and then using this knowledge to significantly improve your prospect targeting, and hence your ROI.

The concept behind segmenting your customers by profitability makes intuitive sense. Wouldn't you want to know which of your customers are providing you with your profits, and how to find prospects who look just like them?... wouldn't you also want to know which customers say adios to your service mere days after signing up for it - especially after you've spent so much effort & money acquiring them?

The friendship analogy
The analogy that always comes to mind when I think about this topic is that of friendships. Did you ever have a friend who would constantly borrow money from you and never pay you back? And, of course, whenever you needed a favor, he was nowhere to be found. My guess is that such a friend would likely not be the best man at your wedding, if he received an invitation at all.

On the opposite end of the spectrum we have the angelic friend. The friend who would give you the shirt off his back. The friend who carried you miles to the nearest hospital after you twisted your ankle during your annual camping trip.

To ask the obvious follow-up question, which of these two friends did you prefer? And, for future "friend-making", if you could buy a crystal ball that would allow you to discern "the angels" from "the moochers", would you purchase it? I know I would.

Bringing it full circle
Segmenting your customers by profitability, and using the insights to improve your prospect targeting is a lot like picking new friends.

When picking new friends you want to look for people who have the same qualities as those of of your closest, dearest friends (i.e., "the angels"). So too is the case with your prospect targeting - you want to target those prospects who share the same qualities as your most profitable customers (e.g., have similar information profiles in your database). And in addition, you want to limit or stop targeting those prospects who look like your unprofitable customers (i.e., "the moochers").

Plenty more on segmentation to come in future posts. Please feel free to email me if you have any questions or would be interested in discussing the topic in more detail.

-------

More posts on segmentation:

• Using the 5Ws for segmentation & marketing innovation
• Using segmentation to develop your marketing strategy
• What is customer segmentation?
  

Great books & articles on segmentation:

• Making Segmentation Work (PDF)
• Market Segmentation: How to do it, how to profit from it
• Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense (One of the best general marketing books with an excellent chapter on segmentation)
  

read more

How to target your best prospects and maximize your ROI

In a prior post I discussed customer segmentation, a topic renowned for producing headaches and mild bouts of anxiety among even the sharpest of business people. The makers of Tylenol might want to consider becoming a sponsor for seminars on the topic; of course, providing free samples for those in need throughout.

In that earlier post I promised that I would discuss some of the ways in which segmentation can be used; in this post I'd like to talk about one such way - segmenting customers by profitability, and then using this knowledge to significantly improve your prospect targeting, and hence your ROI.

The concept behind segmenting your customers by profitability makes intuitive sense. Wouldn't you want to know which of your customers are providing you with your profits, and how to find prospects who look just like them?... wouldn't you also want to know which customers say adios to your service mere days after signing up for it - especially after you've spent so much effort & money acquiring them?

The friendship analogy
The analogy that always comes to mind when I think about this topic is that of friendships. Did you ever have a friend who would constantly borrow money from you and never pay you back? And, of course, whenever you needed a favor, he was nowhere to be found. My guess is that such a friend would likely not be the best man at your wedding, if he received an invitation at all.

On the opposite end of the spectrum we have the angelic friend. The friend who would give you the shirt off his back. The friend who carried you miles to the nearest hospital after you twisted your ankle during your annual camping trip.

To ask the obvious follow-up question, which of these two friends did you prefer? And, for future "friend-making", if you could buy a crystal ball that would allow you to discern "the angels" from "the moochers", would you purchase it? I know I would.

Bringing it full circle
Segmenting your customers by profitability, and using the insights to improve your prospect targeting is a lot like picking new friends.

When picking new friends you want to look for people who have the same qualities as those of of your closest, dearest friends (i.e., "the angels"). So too is the case with your prospect targeting - you want to target those prospects who share the same qualities as your most profitable customers (e.g., have similar information profiles in your database). And in addition, you want to limit or stop targeting those prospects who look like your unprofitable customers (i.e., "the moochers").

Plenty more on segmentation to come in future posts. Please feel free to email me if you have any questions or would be interested in discussing the topic in more detail.

-------

More posts on segmentation:

• Using the 5Ws for segmentation & marketing innovation
• Using segmentation to develop your marketing strategy
• What is customer segmentation?
  

Great books & articles on segmentation:

• Making Segmentation Work (PDF)
• Market Segmentation: How to do it, how to profit from it
• Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense (One of the best general marketing books with an excellent chapter on segmentation)
  

read more

What is customer segmentation?

Like so many buzz words in business & marketing, "customer segmentation" is one of those terms that is interpreted by folks to mean many different types of things. If the word "segmentation" were blurted out in a room of 20 business people, chances are it would conger up 20 different images.

So what is customer segmentation, and how can it be used to propel one's business?

Segmentation defined
Customer segmentation is a method for grouping customers based upon similarities they share with respect to any dimensions you deem relevant to your business - whether it be customer needs, channel preferences, interest in certain product features, customer profitability, etc.

The key is for you, the marketer, to first decide on what basis you wish to segment your customers (or prospects for that matter). And, the only way to answer this question is to first determine what your objective is for the segmentation, and thus what you want the segmentation to "do for you".

Common segmentation objectives

• Developing new products
  
• Creating differentiated marketing communications & ads
• Developing differentiated customer servicing & retention strategies
• Targeting prospects with the greatest profit potential
• Developing multi-channel distribution strategies

Once you have decided what your objective is for the segmentation, you can answer the question, "what do I want the segmentation to do for me?"


A brief example: segmenting for customer win-backs
Let's say you worked for a subscription-based magazine such as Newsweek. Your boss has asked you to optimize Newsweek's retention strategy utilizing the current save tactic of sending people who have recently canceled their subscriptions (aka "attritors") 1 of 3 "win-back" mailers. This existing save tactic has been employed by Newsweek for the past 2 years, and the method for determining which attritor receives which mailer has been based largely on "intuition" (aka random selection).

Step 1: Your first step in undertaking this project would be to clearly state your objective. Your objective, as per your boss, is to optimize Newsweek's retention strategy for recent attritors. This is shorthand for saying, "I want you to maximize your return on your retention-dollars invested".

Without getting into the nitty gritty of the approach, what you essentially want to do is determine the relative ROIs for each of the 3 mailers at the individual attritor level. For each mailer, you then want to identify those attritors with high ROIs (i.e., those attritors who re-instated their magazine subscriptions after receiving the mailer and provided you with future profits that well-exceeded the cost of the mailer).

Step 2: For each win-back mailer you want to identify those attributes which the high-ROI attritors have in common, essentially creating a profile for "high-ROI attritors" for each mailer.

Step 3: The final step is to operationalize the three profiles you've created so you can use them to determine which of the 3 mailers, if any, to send to future attritors. This essentially entails implementing a process in which new attritors are matched up against the 3 profiles to determine which, if any, best describe them.

A more sophisticated approach would be to build predictive models that would calculate the expected ROI for each mailer for each attritor, and then send out the mailer with the highest expected ROI to the attritor. And, for those attritors in which all 3 mailers have negative expected ROIs you might choose not to send any win-back mailers.

Closing thoughts on segmentation
In closing, segmentation can be tricky and complex, and no doubt requires a great deal of expertise & experience. Putting in place flawed segmentation strategies can be far more detrimental to a business than not having them at all. However, when designed the right way, segmentation strategies can provide tremendous returns relative to one-size-fits-all approaches.

In future posts I will tackle some other types of segmentation strategies, including those involving new product development and portfolio management. As always, feel free to email me with any of your questions, comments or thoughts.

As always, feel free to email me if you have any questions about segmentation and how to most effectively use it within your business.






More posts on segmentation & marketing strategy:

• Segmentation and targeting
• Using the 5Ws for segmentation & marketing innovation
• Using segmentation to develop your marketing strategy
• Marketing Strategy Framework to hang on your wall
  

Great books & articles on segmentation:

• Market Segmentation: How to do it, how to profit from it
  
• Counterintuitive Marketing: Achieving Great Results Using Common Sense
• Managing Customers as Investments: The Strategic Value of Customers in the Long Run
• Making Segmentation Work - (Monitor Group article)
  
  

read more