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

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How to unleash the power of context and turbo-charge your marketing

There are few more powerful insights you can generate than learning the main contexts in which demand for your product/product category arises. Having such knowledge will allow you to elevate your marketing and develop deeper, more profitable relationships with your customers.

------------

Step 1: identify the most frequent demand contexts
The first step in unleashing the power of context is to identify the different contexts in which demand for your product is triggered. Think of yourself as a detective attempting to answer the questions:

• Under what situations do people become interested in my product?
  
• What triggers their interest in my product? (Events, changing circumstances, etc.)
  

In sleuthing your way to an answer, you may find that there is a series of events that take place before demand is sparked. You will also likely learn that there are several distinct demand contexts for your product, some of which will occur with far greater frequency than others.

Your key objective in step 1 is to assemble a list of those demand contexts that account for at least 75%-80% of total demand for your product/product category.


Step 2: ask the 6 power-questions to elevate your marketing strategy
For each of the most frequently occurring demand contexts for your product, ask the below six questions:

1) How can I tweak or reconfigure my product to better meet the consumer need in the given context?

2) Are there complementary products or services I should consider offering, whether though my company or a partner?

3) How might I adjust my pricing to better reflect the value provided by my product within the given context?

4) How can I more effectively communicate & position the value provided by my product within the given context? Is there specific imagery, tonality & language I should use in my marketing communication?

5) Are there any changes I should make from a channel perspective, whether it be my channels for building awareness, for selling, or for servicing customers?

6) How can I detect when demand has been triggered for this given context? Can I actually identify these people with some degree of certainty? (Dig deep to answer this crucial question. There is almost always a way)
(Note that some of the questions may not be pertinent for certain product categories and demand contexts)


Let's make this pop! with a brief real-world example

Product du jour: Cars

Step 1: identify the most frequent demand contexts for cars
-The lease is expiring on the existing car
-The price of gasoline jumps and the person owns a gas-guzzler**
-The car is old & worn out (tail pipe tickling the pavement, etc.)
-The car died & resuscitating it would cost a whole lot of money
-The person is moving from the City to the ‘Burbs

Step 2: ask the 6 power-questions for each frequently-occurring demand context for cars
**Below I've answered the questions for the demand context in which the price of gasoline jumps and the person owns a gas-guzzler

1) How might we tweak our cars to better meet the needs of the owners of gas-guzzlers?
We could develop a fuel-efficient car or one that could run on cheaper types of fuel (given the long R&D cycle for new models, auto companies are always best suited to have such a model either always available for sale or one that can easily be ramped up for production)

2) Are there complementary products or services we should consider offering, whether though our company or a partner?
We could develop services or partnerships that would cheapen the price of gas - e.g., partner with credit card companies to develop attractive cash-back rewards on gasoline purchases

3) How might we adjust our pricing to better reflect the value that our cars provide to owners of gas-guzzlers?
Consumers who are feeling increasing pain at the gas pump are likely willing to pay more for a car that will significantly reduce their “gas pains”... Then again attempting consumer-level pricing can be tricky and a risky move from a brand perspective (not to mention the current distribution structure for cars does not readily lend itself to such a pricing strategy).

4) How can we more effectively communicate & position the value provided by our cars to owners of gas-guzzlers? Is there specific imagery, tonality & language we should use in our marketing communication?
We could position our cars as “fuel-smart” alternatives that could save them thousands of dollars, which could be put towards more enjoyable things than gasoline, such as a much-needed vacation in the Caribbean(!)

5) Are there any considerations we should make from a channel perspective, whether it be our channels for building awareness, selling, or servicing?
(Response not included to maintain brevity)

6) How can we detect when this demand trigger has been fired? Can we identify the owners of gas-guzzlers during a spike in gas prices?
Knowledge of rising gas prices is a layup - CNN & our local gas stations would make any major rise in gas prices abundantly clear. And, there are a number of ways to identify owners of “gas-guzzlers” with fairly good precision, starting with identifying the geographic distribution of SUV sales & SUV dealerships.


Your assignment
1) Select one of your products or services – especially one that you believe has the most “improvement potential” & could provide the most upside for your business.

2) With a pad & pen in hand, walk the product through Step #1. Also, ask colleagues and friends & family to complete Step #1. And, hold a brainstorming session if timing & calendars permit. (I’ve always found the collective IQ of a good group to be far greater than any one individual flying solo)

3) Take each of your top demand contexts and run through Step #2. For this step it is particularly valuable to hold a brainstorming session or two, as the collective brainpower of your colleagues in this step can be the difference between a $1mm idea and a $10mm idea.

4) Share your experience with us here on the blog, including any interesting things you learned from the process and, of course, any successes you have to-date.


A note on business strategy & demand context
In a future post I’ll be writing about the role that the demand contexts of your product should play in (re)designing your business strategy. Depending upon a number of factors including the economics of your business and the positioning of your brand, there are likely certain demand contexts that you would want to focus your efforts upon. More to come on this, so stay tuned...

And, as always, please feel free to leave a comment, question or shout-out.

Sources: car demand contexts based upon 2005 study by the American International Automobile Dealers (AIADA).

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Marketing warriors, fight for thy customer!

Whenever I need a little marketing pick-me-up, I turn to this guy, The Ultimate Warrior (the nice-looking gentleman pictured to the right). A beacon of strength, courage & determination, Ultimate fought his way to the top of the World Wrestling Federation during my youth, despite the greater popularity of Hulk Hogan. Sure, much of his energy was likely derived from illicit muscle-enhancers pumping through his body, but that's beside the point.

Much the way The Ultimate Warrior fought his way to the top through his courage & determination, I am calling on all marketers to reach into their "inner Warriors" and fight for the single most important long-term success factor of any company, your customers. It's up to you to ensure that your customer remains king within your organization.

To pull a couple of quotes from the modern-day Plato of business, the late Peter Drucker, everything begins & ends with the customer:

"The purpose of a business is to create a customer"

"The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself"

Battling product-centric thinking
While the business world purports to live in the age of customer-centricity, I am convinced that we still live in an era of product-centered thought. There are numerous factors that underlie this, from organizational structure to the science of human cognition & our inability to hold onto abstract concepts such as needs (vs. far more concrete concepts like products or services).

While I find such topics fascinating, this post in not about exploring what cognitive science can tell us about business thinking. It's about making one thing clear to all marketers, and that is that within your organization you are the ultimate champion of the customer. And without your strong voice, your organization's long-term future may be put in jeopardy. It's a heck of a responsibility to have, which makes it all the more rewarding.

What I have attempted to do in previous posts is to introduce concepts to help us become more customer-centric in our thinking, and in our approach to business. Whether it be through the help of tools such as the purchase journal, talking to your mother, or the cultivating of your inner consumer voice, developing fluency in customer-centric thought is key to great marketing as well as successful business outcomes.

In closing, a few wisdoms for us to keep in mind

• We think about about our products 100x more often than our customers ever do. The inverse is likely true with respect to their needs.
  

• Our products are tools used by our customers to satisfy their given needs, problems or desires. Our products are a means to an end for our customers, not ends in themselves.
  

• Deep insights about consumers is the foundation upon which great new products are built. The Field of Dreams approach (i.e., "build it and they will come") generally only works in the movies.

• As humans (& marketers), we're wired in such a way that makes it easier for us to think about the concrete (i.e., our products) than the abstract (i.e., our customers' needs). Given this, we need to continuously work-out our customer-centric "muscles" to battle against our tendency to shift back to thinking about our products.
  

As always, please post your comments, questions or thoughts, or feel free to send me an email. Happy marketing, fellow Warriors.

read more

Marketing warriors, fight for thy customer!

Whenever I need a little marketing pick-me-up, I turn to this guy, The Ultimate Warrior (the nice-looking gentleman pictured to the right). A beacon of strength, courage & determination, Ultimate fought his way to the top of the World Wrestling Federation during my youth, despite the greater popularity of Hulk Hogan. Sure, much of his energy was likely derived from illicit muscle-enhancers pumping through his body, but that's beside the point.

Much the way The Ultimate Warrior fought his way to the top through his courage & determination, I am calling on all marketers to reach into their "inner Warriors" and fight for the single most important long-term success factor of any company, your customers. It's up to you to ensure that your customer remains king within your organization.

To pull a couple of quotes from the modern-day Plato of business, the late Peter Drucker, everything begins & ends with the customer:

"The purpose of a business is to create a customer"

"The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself"

Battling product-centric thinking
While the business world purports to live in the age of customer-centricity, I am convinced that we still live in an era of product-centered thought. There are numerous factors that underlie this, from organizational structure to the science of human cognition & our inability to hold onto abstract concepts such as needs (vs. far more concrete concepts like products or services).

While I find such topics fascinating, this post in not about exploring what cognitive science can tell us about business thinking. It's about making one thing clear to all marketers, and that is that within your organization you are the ultimate champion of the customer. And without your strong voice, your organization's long-term future may be put in jeopardy. It's a heck of a responsibility to have, which makes it all the more rewarding.

What I have attempted to do in previous posts is to introduce concepts to help us become more customer-centric in our thinking, and in our approach to business. Whether it be through the help of tools such as the purchase journal, talking to your mother, or the cultivating of your inner consumer voice, developing fluency in customer-centric thought is key to great marketing as well as successful business outcomes.

In closing, a few wisdoms for us to keep in mind

• We think about about our products 100x more often than our customers ever do. The inverse is likely true with respect to their needs.
  

• Our products are tools used by our customers to satisfy their given needs, problems or desires. Our products are a means to an end for our customers, not ends in themselves.
  

• Deep insights about consumers is the foundation upon which great new products are built. The Field of Dreams approach (i.e., "build it and they will come") generally only works in the movies.

• As humans (& marketers), we're wired in such a way that makes it easier for us to think about the concrete (i.e., our products) than the abstract (i.e., our customers' needs). Given this, we need to continuously work-out our customer-centric "muscles" to battle against our tendency to shift back to thinking about our products.
  

As always, please post your comments, questions or thoughts, or feel free to send me an email. Happy marketing, fellow Warriors.

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)
  
  

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