Fundamentals of segmentation: reasons (business case), value and needs, types of segmentation, using segmentation.
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Customer Segmentation Principles
1.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
www.prism-gb.com
Customer Segmentation
Principles of effective differentiation
Vladimir Dimitroff
Director
PRISM Consulting
http://www.prism-gb.com
IIR Telecommunications Conferences
Customer Segmentation
Strategies
London
November
2005
2.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
3.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
4.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Product Excellence
Operational Efficiency Customer Intimacy
Competitive edge based on cost (and price
competition) is not sustainable in the long term.
Product leadership is short-lived, too.
Technology moves fast and even products that
are not overtaken are easily replicated.
Customer centricity is about long-term
relationships, therefore provides sustainable
advantages.
It also results in added competitiveness in the
other two dimensions
see Treacy & Wiersema: ‘The Discipline of Market Leaders’
WHY FOCUS ON CUSTOMERS?
THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS
Slide 1
All three are important, but you can only excel
in one - and should choose your focus:
5.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
6.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
NumberofCustomers
Customer Value
CRM
Picket Fence
Mass Marketing
Highest Value
Customers
WHERE TO START
Slide 4
Source: Peppers & Rogers Group
7.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customer value segments
Most Valuable Customers: Retain
Most Growable Customers: Grow
Marginal customers: Business as
usual?
Service costs
Actual value Strategic value (potential share of customer)
‘Below Zero’ Customers:
Dismiss, or?
DIFFERENT CUSTOMERS BY VALUE
Slide 2
Source: Peppers & Rogers Group
8.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• From revenue to profitability
– Pure spend-based models: straightforward and easy
– Introducing cost elements: allocation methods
– Detailed individual customer costing
• From past to future value
– Historic value: recent history
– Historic value: total cumulative history (‘lifetime’)
– Future (potential)value: different predictive methods
– Net present value (NPV): discounted future value
• Lifetime Value (LTV) or CLV (customer lifetime value)
“The net present value of all future profit streams from an individual
customer’s relationship with the company”
CALCULATING CUSTOMER VALUE
9.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• Predictive techniques
– Regressions (linear, multiple, logistic)
– Trees (classification, decision)
– Advanced techniques (neural networks, genetic algorithms)
• Definitions of ‘lifetime’
– Strictly referring to a future period
– Need for consistent predictability and actionable/manageable
– Techniques to calculate LOS (length of service); survival analysis
(LIFEREG, PHREG procedures in SAS)
• Alternative models and techniques
– the RFM (recency, frequency, monetary value) model as a
segmentation tool
– Rapid identification techniques (‘golden questions’)
CALCULATING CUSTOMER VALUE
10.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
“Man has almost constant occasion for the help of his
brethren, and it is in vain for him to expect it from their
benevolence only. He will be more likely to prevail if he can
interest their self-love in his favour, and show them that it is
for their own advantage to do for him what he requires of
them.”
Adam Smith, The Wealth of Nations, 1776.
WHY NEEDS?
Slide 6
11.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
12.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Fundamentals:
Any business
only exists if it
has customers.
Customers
have specific
needs that
have to be
satisfied.
A business only
exists to satisfy
specific needs.
The Link to Value:
In satisfying needs a business provides value.
Products and services represent value to the one
with needs (the Customer).
(see Added Value concepts in economic theory,
supply/demand concepts etc.).
In the process of satisfying needs value ‘changes
hands’.
(see Value Migration concept in strategy models and
theories).
WHY NEEDS?
Slide 7
13.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customer Profiles (Who they are?)
Sets of (static) attributes allowing reasonable assumptions, e.g.
“families with babies need nappies”, “teenagers need bright-
coloured mobile phones” or “companies with vehicle fleets
need motor insurance”…
Customer Behaviour (What they do?)
Based on assumptions like “beer drinkers are more likely to
choose beer over wine” or “once a gambler, always a
gambler”.
THE WORLD OF PROXIES
Slide 8
14.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Demographic profiles: Grouping people by gender, age, marital
status, education, occupation etc.
Geo-demographic: Adding the spatial dimension in one or more
ways: absolute (North, South, Wales, Leeds), relative to population
concentrations (urban, suburban, rural) or based on economic
regions (Thames Valley).
Psycho-demographic: Introducing attitudinal and emotional
affiliations (nerds, lads, anoraks) – often hard to distinguish from
pure demographics (e.g. education, occupation) or from
behaviour types (see below).
In B2B environments the equivalents are vertical sectors and sub-
sectors, company size (employees and core business metrics, e.g.
turnover), location(s), target market(s) etc.
WHO THEY ARE
Slide 9
15.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Transaction (purchasing) behaviour: Frequent shoppers/ flyers,
bulk buyers, occasional shoppers, declining custom etc.
Motivation-based behaviour: Impulse buyers, early adopters,
bargain hunters, status seekers.
Lifestyles: Often mixed with demographics, indicate needs
through preferences manifested in everyday behaviour (a
number of popular templates and commercial databases of
pre-scored population).
B2B: Order consolidators, end-of-quarter (end-of-year) buyers
etc.
WHAT DO THEY DO
Slide 10
16.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customers have
individual (and
group) preferences
often exhibited in
behaviour patterns,
sometimes
declared in
dialogue with the
company, but
sometimes also
withheld and/or
unknown.
Product or service preferences are directly linked to needs. The
chance that those are true needs is somewhat higher, although
product preferences may often reflect perceived needs.
Attribute preferences also manifest needs, however those are
secondary, ‘satellite’ needs accompanying the core need in a
dynamic ‘bundle’. The likelihood here is greater that they are
perceived needs, particularly in the less tangible areas of taste,
fashion, peer influence etc.
For practical purposes of needs modelling and needs group
management, explicit and implicit preferences can be considered
a proxy for needs.
HOW ABOUT PREFERENCES?
Slide 12
17.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Give me … (speed, safety, confidence, a positive
experience, success-personal or corporate).
Help me to … (get to a destination, connect to a
person/organisation, enhance my life).
Save me … (time, money, hassle, risks or hazards, negative
experiences).
THE 3 QUESTIONS TEST
Slide 11
18.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
19.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
ALL KINDS OF SEGMENTATION
Macro-segmentation:
typically a market
segmentation view
Strategic segmentation:
customer segmentation for
long-term differentiation
Micro-segmentation: a
tactical, action-oriented
tool for immediate targeting
Used in defining market proposition/s, brand
values, and in targeting mass marketing activities.
E.g. ‘Youth’, ‘Pre-paid’ or ‘Rural’ segments
Used in strategic planning, resource allocation,
Marketing/Sales/Service optimisation.
E.g. ‘High Value’, ‘Growable’ or ‘BZ’ customers,
‘Technos’, ‘Savers’ or ‘Status-symbol’ segments
Used in day-to-day direct campaigns (cross- and
up-sell), targeted churn prevention, acquisitions.
E.g. ‘Seasonal roamers’, ‘Bargain hunters during
competitor’s campaigns’, ‘Location patrons’
20.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
21.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Business goals:
Get customers
Keep customers
Grow customers
Segment 1
Segment 2
Segment 3
Acquisition
Retention
Development
Acquisition
Retention
Development
Acquisition
Retention
Development
Overall objectives
translate to different
priorities in each
segment.
SEGMENT MANAGEMENT
Slide 5
22.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Most valuable customers
Most growable customers
Marginal
Unprofitable
KEEP
GROW share
of customer
Maximize profit, minimize cost
Divest
Media
E-channels
Direct mail
Telemarketer
In-person service reps
Dedicated service
reps
C
ustom
ervalue
Allocating
communication
channels according to
the value of segments
RESOURCE OPTIMIZATION
Slide 3
Source: Peppers & Rogers Group
23.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
THE ‘HOW TO’ OF PRACTICAL STRATEGIC SEGMENTATION
N1 N2 N3 N4
V1
V2
V3
V4
V5
Evolving segmentation:
- From historic to predictive value and from
revenue to profit-based individual customer value
Starting simple could mean few, expenditure-based value
segments. Introducing any known costs leads to a better,
profitability-oriented differentiation. Using non-linear
predictive models allows managing future, lifetime value.
-From broad, proxy-based needs segments to
precise, true need clusters
-Early needs-driven segmentation schemes often start
from a market (macro) segmentation, using proxies like
basic demographics or transaction behaviours. As
companies learn to interpret the true needs behind such
proxies, more complex needs clustering replaces the
macro segments and allows linking individual needs to
value growth, retention and targeted, profile-based
acquisition.
24.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• Customer Plan (operational efficiency through customer intimacy)
– Developing differentiated treatments for each intersection of a
needs cluster with a value segment (customer community with a
unique combination of value and needs)
• differentiated marketing and sales
• differentiated service levels and approaches
• differentiated communications: message and channel
• all above differentiated consistently across touchpoints
• embedding in the company’s goal-setting, planning and resource
allocation
• Product development (product excellence through customer intimacy)
– Re-defining the mission (and often the primary industry sector) of a
company as ‘the business of satisfying customer needs’)
– Intimate needs understanding at the core of new product
development and existing product improvement
– Managing product capabilities around needs (and value)
‘SO WHAT?’ (ACTING UPON THE KNOWLEDGE)
25.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
contact details
Vladimir Dimitroff
Director
PRISM Consulting (UK) Ltd
6 Priors Court
Newark Str
Reading RG1 2SR
United Kingdom
Phone: +44 (0)7947034944
E-Mail: vdimitroff@prism-gb.com
www.prism-gb.com
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Hungary • Italy • Malta • Poland • Russia
Spain • Switzerland • Turkey • UK
THANK YOU
Editor's Notes
Operational efficiency companies compete on price, but there is a limit to how much you can reduce costs – below that (when everyone learns cost management and reaches that bottom level) cutting prices is suicidal. Product excellence doesn’t last long, as technology has shortened development cycles and everyone comes up with the same or better-performing products. Products can also be copied. Customers cannot be copied, and relationships are long-term, therefore this competitive direction is sustainable. When you treat different customers (segments) differently according to their value you optimise resource allocation,i.e. reduce costs – achieving Operational Efficiency. When you intimately understand customer needs you are best positioned to develop the right product for them, achieving Product Excellence – this dimension gives you the other two as a ‘free bonus’
Before a full-scale segmentation is established in a business, a good idea is to identify the high-value customers (e.g. top 10% segment by value) and focus on them. They are a minority in numbers, therefore easier to apply differentiated treatment and to get to know them closer. The objective is to maximise satisfaction and eliminate churn (these contribute the bulk of your profit, you can’t afford to lose them!) but also to understand their profile better, so that in acquisition efforts you target similar prospects to enrich your high-value base. As you get more advanced in managing this segment, you move the barrier and start treating differently the next, lower value segments untill you develop a differentiated strategy for each one, even the bottom segment.
Some customers have fully reached their potential and are of high value: those you cannot afford to lose; others are still of lower value, but have high potential – they must be grown, developed. A great number have marginal potential and their value isn’t of critical importance – they don’t need special attention; at the very bottom some are contributing even less than the cost to serve them – some experts advise to ‘fire’ them (cancel relationships) but we would suggest to minimise the cost of doing business with them, so that you don’t incur losses – but still keep them ‘in the family’
The second dimension of segmentation is by Needs – but that only comes after a company has good VALUE segmentation in place. The following few slides briefly explain Needs Segmentation.
Every business has three key objectives for its customers: to get some (as many as possible!), to keep them (for as long as possible), and to grow them (as much as possible). Let’s examine a simplified model, focussing on the ‘keeping’ part (in line with the theme of this conference).
For each of three value segments, a business has a ‘portfolio’ of objectives that include all three: acquisition, retention and growth. They are not, however, present in equal measures! (see font sizes used).
For the high-value segment, for example, retention is a top priority (lose a few customers here and you lose significant revenue). This justifies corresponding investment in achieving loyalty: from the choice of communication channels (live reps, even face-to-face meetings), through appropriate service levels (the higher – the more costly), to the rewards for loyalty.
The medium-value segment has retention as a second priority (in this example – your segment objectives maybe different). This company will spend more on acquisition, yet sufficient resources will be allocated to protect outflow of revenue through churn. Service levels will still be excellent (just not exceptional), and the mix of communication channels may include less of the most interactive (and expensive) ones like face-to-face and outbound reps.
The low-value segment has a top priority to stop losing money form the least profitable customers: not by deliberately losing them, though. Migrating them to a higher segment by encouraging usage is a high priority. Needless to say, retention (especially of loss-causing customers) is a low priority. There may be little or no dedicated spend towards this end. A basic service level still doesn’t mean bad service, but self-service is encouraged as cost-effective. Exclusion fro direct marketing of the least profitable customers saves a lot of costs and helps a break-even or small profit there. What if this approach leads to lower satisfaction and (God forbid!) defection by some of these customers? This should be a planned probability, and if it does happen, the effect may not necessarily be negative (it will be negative in the higher segments).
Anecdote (real-life example from a client):
Call centre receives inbound call from a customer tagged as the lowest value segment. He wants a handset upgrade, but is uncomfortable with the bundles on offer. ‘Can I have that colour model with the pictures, but still pay my old tariff?’, he asks. No, he can’t – is the answer, as his minimal tariff is only offered with economy handsets. After several minutes of polite explanation by the agent, the customer persists. The agent has a time limit and is getting frustrated with the situation; he says: ‘What you are asking is impossible – at least I cannot help you; but I will give you a number to call where they may help you’ – and he gives the customer the sales number of a competitor.
Moral1: Sometimes we don’t necessarily have to be afraid to lose a customer.
Moral2: This can only happen with an empowered employee (in this case he was not, and risked punishment). It will never happen with an outsourced offshore call centre ;o)
More valuable customers at the top of the pyramid deserve more personalised (and more expensive) service; going down the value scale, cost-effective channels become more appropriate; lowest value customers only get mass media communication and self-service