Five Key Elements of a Powerful Customer Segmentation Strategy
Most companies know that they must develop better customer segmentation capabilities in order to remain competitive. Less obvious to many are the key issues and questions related to customer segmentation that must be initially addressed and which directly impact the value derived from such an exercise. Put simply, customer segmentation is the grouping of customers according to similar characteristics or behaviors.
Customer segmentation can be used to inform resource allocation, marketing, pricing, and other customer-oriented strategies. A dramatic increase in customer segmentation initiatives is being driven by increased consumer expectations for personalized products, services, communications, and promotions across all industries.
StrategyWise Managing Director Nathan Black has led numerous customer segmentation initiatives for companies operating in the healthcare, insurance, utilities, manufacturing and retail industries, both for B2B and B2C customer segments. He suggests organizations prepare for a customer segmentation analysis by reflecting on five key questions:
What business case are we addressing?
An organization must begin a customer segmentation analysis with a clear view of the business use for the segmentation. Mr. Black says that when an organization decides “We want to do segmentation,” this decision is akin to going to a restaurant and telling the server “I want to eat.” Much thought needs to go into the type of customer segmentation needed.
Customers may be segmented into groups by, for instance, business value, lifestyle and behavior across the “customer journey”. And these grouping-characteristics may be considered at various levels of granularity, down to the individual level. Before choosing such characteristics and granularities, StrategyWise advises clients to define exactly what customer segmentation means to their organization. We ask: “What are you segmenting? Why? Using what criteria? And to what degree?”
Often, when companies say, “We need to segment our customers,” they are thinking in terms of demographics. But there are better ways of grouping customers. StrategyWise has developed geographic, behavioral, psychographic, social, cultural and customer-lifetime value grouping-characteristics. These allow customers to be grouped according to each business use-case—raising the value that a customer segmentation project will bring to the organization.
What resource constraints exist?
In an ideal situation, a company has all the resources it needs for its marketing strategy. It would not need to segment customers to determine how best to allocate resources as it could provide personalized goods and services to all customers at all times.
In the real world, companies are resource-constrained and cannot meet all customer-specific needs all the time—and doing so would not optimize business value. Data-driven customer segmentation lets a company meet customer-specific needs to the extent that limited resources allow. “Through segmentation, companies are addressing the ‘three M’s of marketing’ – what market, what media, and what message,” Black says.
In marketing, there are degrees of customization. At one end of the spectrum is mass marketing, which requires few resources, but it is not very effective or customized. At the other end of the marketing spectrum, a company communicates in a personalized way with each customer in the exact media channel they want, at the exact time they want. This is highly effective but requires enormous resources. Companies need to find a balance between mass marketing and one-to-one marketing by segmenting customers at a level appropriate to available marketing resources
What data are available to facilitate customer segmentation?
All too often, data availability rather than business logic drives customer segmentation. To avoid this, StrategyWise performs research to recommend data collection changes and to identify useful external data stores. Only when all potential data sources have been identified and tapped can a customer segmentation exercise be designed.
How ready is our IT infrastructure?
If a company wants to make best use of customer segmentation, it must have the required IT infrastructure: IT systems should support segmentation and the implementation of subsequent strategies in real time.
Rarely is customer segmentation a static task. Customers shift in and out of different groupings over time for many reasons (e.g. due to lifestyle changes). These shifts then require operational changes. Companies must determine what level of dynamic customer segmentation their IT infrastructure permits.
StrategyWise helps companies assess their IT capabilities related to customer segmentation. We then recommend IT infrastructure changes and set appropriate master data management goals.
What operational changes drive customer segmentation?
“Segmentation is a means to an end, not the end in itself,” says Mr. Black. Customer segmentation succeeds when project managers understand and are committed to the operational and resourcing changes suggested by the analysis. In StrategyWise’s experience, 60–70% of data-science project failures are due to company management not fully appreciating such changes. So start thinking about these changes early!
No matter how the above questions are answered, a company is wise to be thinking about customer segmentation. StrategyWise likens segmentation to managing an individual relationship. Information that a company gains by segmenting its customers helps it adapt and strengthen relationships with individual customers—the goal of customer segmentation.
Most companies think of customer segmentation and related analytics as the breaking down of customer information into small pieces to be analyzed at a granular level. Our segmentation projects use computational power to synthesize, rather than break down, massive amounts of customer data. Aggregating silo-based customer information, combining customer typologies and synthesizing these into a holistic view of a customer—this is the value of StrategyWise’s approach to customer segmentation. Its results demonstrate the power of big-data analysis.
Nathan Black is the Managing Director at StrategyWise, where he leads the team in planning and implementing end-to-end data science solutions. Mr. Black has extensive experience in applying data science to solve challenging business problems, primarily in retail, healthcare, and energy utilities. He has implemented projects ranging from customer and market segmentation models, machine-learning behavioral forecasting models, to designing full-scale recommender engines.
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