Booz co segmentation-customer-centric-operating-model


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Publish Date:
July 11, 2011

Yulinsky, Corey

Customer segmentation has become a critical capability for making sense of growing volumes of customer data to develop and drive successful go-to-market strategies. But a company will succeed only if its operating model is specifically designed to make use of segmentation results and insights.

Related Industries:
Consumer Products, Financial Services, Retail, Telecommunications

Related Expertise Areas:
Marketing & Sales

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Booz co segmentation-customer-centric-operating-model

  1. 1. Perspective Corey YulinskyMaking SegmentationDeliverLinchpin for a Customer-Centric Operating Model
  2. 2. Contact InformationBeirut MelbourneGabriel Chahine Simon GilliesPartner Partner+961-1-985-655 simon.gillies@booz.comChicago New YorkTom Nodine Edward LandrySenior Executive Advisor Partner+1-312-578-4565 edward.landry@booz.comCleveland David LevySteven Treppo PartnerPartner +1-212-551-6819+1-216-696-1570 Corey YulinskyFlorham Park, NJ PartnerRamesh Nair +1-212-551-6444Partner Shanghai John JullensLondon PartnerRichard Rawlinson +86-21-2327-9800Partner Tokyo Cosmo Takamatsu Partner +81-3-6757-8659 Booz & Company
  3. 3. EXECUTIVE Customer segmentation has become a critical capability for making sense of growing volumes of customer data to developSUMMARY and drive successful go-to-market strategies. But a company will succeed only if its operating model is specifically designed to make use of segmentation results and insights. Too often, companies develop segmentations that are based on conflicting business objectives, are not broadly understood or shared, or cannot be readily acted on. To avoid these problems, top executives must realize that a segment-based model will succeed only if it crosses the boundaries of all business units and functional departments, and if it produces clear and actionable guidance. We advise companies to take a four-step approach to segmentation: Define the objectives of segmentation clearly; design the segmentation around those objectives; blueprint the effects of the segmentation across the entire company’s decision processes; and carefully manage the necessary changes that segmentation will demand of the organization. The ultimate goal is to ensure that segmentation leads to well- defined processes and clear actions that produce improved performance.Booz & Company 1
  4. 4. THE in these industries feel that their segmentation efforts have be able to derive real value from the effort? (This analysis focusesSEGMENTATION failed to deliver anywhere near on multi-channel players, since thePARADOX the level of benefit they should. Yes, there are a handful of well- majority of digital pure plays have built their processes and systems known success stories—Charles around this capability.) In a world Schwab in investments, Capital in which most companies profess the One in credit cards, and Caesars/ need to be more customer-centric, Harrah’s in gaming. And yes, some the value of effective segmentation have developed very successful should be ever-increasing.There are few phrases with as much loyalty programs, while otherscurrency in business-to-consumer use segmentation to drive high- This Perspective highlights how B2C(B2C) companies as “customer- ROI direct marketing and online companies can resolve this paradoxcentric organization.” While campaigns. But many companies by identifying the lessons learneddefinitions vary widely, common to struggle with extending the insights by companies that have masteredmost is a reliance on some form of afforded by segmentation sufficiently the use of segmentation to actuallymarket segmentation, which has long to drive change in their operating improve their operating models andbeen a part of the marketer’s tool model’s business and marketing businesses. These companies tend tokit. It has been used by consumer processes and concomitant use segmentation as strategic contextproducts companies and others to performance improvement. in designing their business system, asfind attractive profit pools and to a touchstone for branding and valuedrive brand positioning, product This paradox—that companies with proposition development, and todevelopment, and marketing the most data about their customers guide business processes, includingcommunications activities. find it most difficult to operation- customer acquisition, development/ alize it—is likely to become more cross-sell, retention, and experi-More important, segmentation widespread as digital transformation ence processes. They avoid analysishas been foundational in attempts continues. The flow of online/trans- paralysis, segmentation for segmen-to build operating models in actional and social network informa- tation’s sake, and dueling segmenta-transaction-intensive industries tion provides increasingly rich data tion traps. Crucially, they know howthat capture substantial data about around which companies can build to simplify—how to mask the com-individual customer behavior—the compelling and actionable segmented plexity that segmentation inevitablycredit card, retail banking, retail, propositions and experience models. introduces to an organization—telecommunications/wireless, More and more B2C companies will while capitalizing on the insightsand airline sectors, to name a have the potential to build customer- it provides.few. Strikingly, many companies driven businesses—but will they Many companies feel that their segmentation efforts have failed to deliver the benefit they should.2 Booz & Company
  5. 5. WHAT’S THE Most organizations in the throes of implementing segmentation fall in a mass-market “one size fits all” fashion. Though continuing marketPROBLEM? into at least one of the following and media fragmentation is making situations: this less common, it still happens. Spot segmentation: In many organiza- Dueling segmentations: It is also tions, segmentation-related activities fairly common to find large compa-The issue that comes up again reside in a fairly compartmentalized nies developing a host of segmenta-and again is the gap between part of the marketing organization. tions. This can work, in principle:what segmentation promises to Sometimes segmentation sits with the Many successful customer-drivendata-intensive companies and branding team in conjunction with companies employ multiple linkedwhat actually occurs. In such its agency, or with the direct mar- segmentations. The problem occurscompanies, segmentation should keting team, which uses it to build when uncoordinated segmentationsenable reliable placement of each campaigns. While these very targeted end up working at cross-purposes. Incustomer in a segment that provides applications can be quite success- one case, a company was using threeinsight into that customer’s buying ful, they do not generally push the different segmentations to evaluateand service proclivities, thereby overall organization toward a more store performance and potential: Theincreasing the odds of success in a customer-centric operating orienta- marketing organization had its seg-variety of customer marketing and tion—if that is the company’s goal, mentation, the unit running the storesexperience management campaigns. this strategy will not get it there. had its own, and the finance depart-Additionally, this capability should ment was using a third. None ofhelp bridge the traditional strategy/ Segmentation in word, not deed: these models “spoke” to one anothertactic disconnect, as segment-based We have worked with companies without going through an elaboratestrategy should be more directly that believed they needed to have matching exercise. The degree oftranslatable to programmatic action customer segmentation but were confusion that resulted led not just to(readier identification of both what quite content to have it sit on a shelf. little impact but to a loss of faith into do and for whom to do it). Yet this They thought the insights would be the value of segmentation itself.often proves to be easy to say and interesting but were much more com-hard to do. fortable continuing to go to marketBooz & Company 3
  6. 6. Though these symptoms vary, made using segmentation data was eventually forced to backpedalcommon organizational issues tend to as input, how can actionable out- when it saw the unintended conse-underlie them all. The foundation for comes be ensured? quences, including highly “differenti-improving the odds of segmentation ated” (poor) treatment of low-profitsuccess lies in resolving these issues. “All God’s children want their own customers. Instead, the company took segments”: Organizational discipline the burden of analyzing the profit-Lack of clarity around objectives: It is is needed around segment develop- ability data off the shoulders of theessential that there be enterprise-wide ment and implementation. There are front line by performing all analysisclarity on the role that segmenta- often sound reasons for different “behind the scenes.” The front linetion will play and why the initiative organizational units to have their was much more willing to make useis being conducted. Does marketing own specific ways of looking at cus- of the scripts of prescribed actions itsee it as a strategic initiative while tomer groups, but this then demands was given than to deal with the rawthe rest of the company sees it as a that a “translation” code exists. If analytic tactic? Does the business not, the organization collapses intohead see it as an organizing principle the dueling segmentation problem. Large organizations find it difficult towhile operations sees it simply as manage complex solutions: Segmentedan additional source of complexity? Technology gets ahead of frontline programs are more complex thanThese issues cannot be left implicit. execution capability: In many orga- mass-market solutions. This creates nizations, the IT team will build the organizational and cost challenges.Limited/non-actionable segmentation: means to send detailed segmentation Precise understanding of whichThough many varieties of segmenta- information to the stores or branches elements of the business system cantion can be helpful, B2C companies before those entities know what to manage or mask complexity, whichshould insist on results that define do with it. The result is confusion, cannot or should not be asked to, andactionable levers; purely descriptive the misuse or non-use of the infor- how to work the interfaces amonganalysis in the digital era dramati- mation, and ultimately apathy or them is a critical skill mastered by thecally devalues the power of segmen- hostility toward the very concept of most successful segmentation users.tation. This is an up-front design segmentation. In one case, a company Obviously, this issue is most criticalissue that should be engineered once that began providing its frontline as frontline teams put segment-basedthe objectives of segmentation are teams with customer profitability solutions into action.determined. Given the decisions to be data before the teams were ready4 Booz & Company
  7. 7. DELIVERING ON There are four steps that will dra- matically improve the odds of success to be a shared understanding of the answer. The first major decision THE PROMISE in making segmentation deliver involves defining the difference impact: Define the objectives clearly; between “strategic” and “tactical” design around objectives; prepare segmentations (see Exhibit 1). a blueprint for operationalizing the segmentation; and under-promise and Strategic segmentation is used for over-deliver. While these steps are broad enterprise-wide purposes— incredibly obvious at one level, the operating model design, branded impact-oriented mind-set that unifies customer experience, and overall them is not always present. value proposition development. It often becomes the basis for 1. Define the Objectives Clearly the design of the organization. The most important question to Schwab’s approach to segment- answer is this: What is the purpose ing investors by assets and desired of segmentation? There then needs support level is one example; many Exhibit 1 Capturing Value with Strategic and Tactical Segmentations Acquisition Marketing Service Retention Strategic Segmentation - Single segmentation S1 - Holistic customer view - Relatively static (renovated every 2 to 3 years) S2 - Insights focused on enterprise-level decisions - Value proposition design S3 - Resource allocation and strategic priority development - Channel management/customer experience design S4 - Branding/brand promise delivery - Developing, measuring, and managing segments across large, diverse S5 organizations is a key challenge Tactical Segmentation - Typically multiple, model-driven segmentations - Highly dynamic and learning-based (refreshed often) - Coordinating customers’ actions and sharing customer insights - Functionally driven with targeted objective(s) - Key decisions/insights are program-focused across functions are implementation - Program optimization - Cross-selling opportunities challenges - Behavioral modeling - Targeting and tailoring - Database scoring - Pricingketing Source: Booz & Company analysiskkei Booz & Company 5,800
  8. 8. retail banks group their customers ness purpose—aptly applies here. two dimensions drove segmenta- into income/asset classes such as Understand clearly which decision tions, leading to, for example, affluent, mass-affluent, and mass- processes will be affected and heavily attitudinal segments that market, while others combine these which business partners need to could not be identified, or heavily with more behavioral or channel be involved. behavioral segments that provided usage insights. no insight into the causes of behav- 2. Design Around Objectives iors or the ways to influence them. Tactical segmentation is used for a Based on the above, the segmenta- New methodologies such as latent much more specific purpose such tion research itself must be reverse- class analysis allow the synthesis as new customer acquisition, an engineered to ensure that it will of these different types of data up-selling campaign, or channel be insightful (tell us things we do (including pooling of both transac- migration. Among the successful not already know about customer tional databases and surveys) and, implementers, the tactical segments needs and behaviors), actionable if designed properly, yield action- map to the strategic segments in an (identify levers that will move able and identifiable segments that explicit way. In fact, combining the behavior), and identifiable (able can address the business problem strategic and tactical segments in to tag individual customers on the at hand. The key to effective design campaign modeling produces sub- database with reliable segment is working back from the business stantial uplift; one bank was able membership). This implies that decisions that need to be made. to triple the profitability of a home multiple dimensions—behaviors, equity line of credit (HELOC) attitudes, demographics, channel One detail to consider is how to cross-selling campaign by tailoring use and preferences, and profit- treat customer profitability in its HELOC acquisition model and ability—must be incorporated to the process. Some companies use offer to a specific strategic seg- develop a full picture. profitability-based segmentation, ment. The notion of “horses for others incorporate profitability courses”—designing the segmen- Historically, difficult choices had into the segmentation as a dimen- tation around the specific busi- to be made about which one or sion, and still others use it as a The key to effective segmentation design is working back from the business decisions that need to be made.6 Booz & Company
  9. 9. criterion for choosing among them with affected business part- more meaningful than “We need potential segmentations based ners, and formulate and discuss to be more segmented in how we on their ability to discriminate revised metrics that reflect the are going to market.” Building on among profitable customers. Each new capabilities. For instance, it the tangible helps in configuring has its benefits and costs, but it is essential to work with the front informed decision processes. is important to recognize that line to define how it will modify a pure profit segmentation may today’s sales and service protocols 4. Under-Promise and Over-Deliver not be very actionable because in to incorporate greater customer Making segmentation deliver is some industries, such as financial knowledge and targeted pitches. ultimately more a change manage- services, there are multiple routes One large bank linked its strate- ment challenge than a technical/ to profitability. gic segments to targeted lead lists marketing one, but this is over- focused on explicit behaviors— looked too often. The tool kit3. Prepare a Blueprint for cross-sell leads, at-risk/retention of managing change—targeted Operationalizing the leads, and acquisition leads—and and tailored communications, Segmentation instituted a new and more pow- sequenced to engender under- Begin to map out how the decision erful sales pipeline management standing, engagement, and processes that will be incorporat- discipline. It will be necessary to acceptance—needs to be utilized ing segment data will do so. How craft very practical methods of fully. Expectations must be man- is segmentation going to be used delivering the required segmenta- aged from the start; too often these to influence the major value levers tion results that effectively conceal efforts begin with a “big bang” in your business? Will it underpin their analytic complexity from orientation that misstates the a redesign of the brand and the end-users, thus enabling produc- nature of the change required to value proposition, or of frontline tive face-to-face interactions with capture the performance benefits sales and service? Will it ulti- customers in real time. of segmentation. Most important, mately result in more tailored and of course, is the clear statement of dynamic online and direct market- There is a subtle timing bal- how moving to a more segment- ing? How are the organizations ance to manage in this—business focused set of business processes responsible going to access the partners need to be engaged and makes each group more effective information and use it on a day-to- prepared in advance but not so far and/or more efficient. Crisply day basis? in advance that requisite changes answering the questions “What do are too theoretical or abstract. you want me to do differently and As soon as the outline of the “We need to talk to Segment X why?” and “What’s in it for me?” segmentation permits, begin to about 529s and Roths and in the will dramatically enhance progress. define these process changes, share context of their family” is muchBooz & Company 7
  10. 10. FROM INSIGHTS At a time of increasing competition and the growing ability to capture model that can convert this flood of data to useful information in order toTO ACTION immense amounts of data about make better go-to-market decisions customers, every company must raise will be critical. Companies that are its customer-centric game—its ability able to develop, put into practice, to anticipate and respond to customer and embed in their organizations needs and wants. Segmentation will segmentations that meet the three be essential to the process of manag- touchstones of insight, action, and ing the complexity of continually identification will have a substantial evolving and fragmenting customer advantage in making customer- groups and their different demands. centricity more than a slogan and Creating a company-wide operating reaping the economic benefits.8 Booz & Company
  11. 11. About the AuthorCorey Yulinsky is a partnerwith Booz & Company basedin New York. He has servedmultiple leading providers ofconsumer financial serviceson customer-driven growth,capabilities development, andrevenue improvement issues.In addition, he has worked asa senior executive for a majorbank and a major retailer.Booz & Company 9
  12. 12. The most recent Worldwide Officeslist of our officesand affiliates, with Asia Middle Eastaddresses and Beijing Brisbane Helsinki Abu Dhabi Detroittelephone numbers, Delhi Canberra Istanbul Beirut Florham Parkcan be found on Hong Kong Jakarta London Cairo Houstonour website, Mumbai Kuala Lumpur Madrid Doha Los Seoul Melbourne Milan Dubai Mexico City Shanghai Sydney Moscow Riyadh New York City Taipei Munich Parsippany Tokyo Europe Paris North America San Francisco Amsterdam Rome Atlanta Australia, Berlin Stockholm Boston South America New Zealand & Copenhagen Stuttgart Chicago Buenos Aires Southeast Asia Dublin Vienna Cleveland Rio de Janeiro Auckland Düsseldorf Warsaw Dallas Santiago Bangkok Frankfurt Zurich DC São PauloBooz & Company is a leading global managementconsulting firm, helping the world’s top businesses,governments, and organizations. Our founder,Edwin Booz, defined the profession when he estab-lished the first management consulting firm in 1914.Today, with more than 3,300 people in 60 officesaround the world, we bring foresight and knowledge,deep functional expertise, and a practical approachto building capabilities and delivering real impact.We work closely with our clients to create and deliveressential advantage. The independent White Spacereport ranked Booz & Company #1 among consult-ing firms for “the best thought leadership” in 2010.For our management magazine strategy+business,visit to learn more aboutBooz & Company.©2011 Booz & Company Inc.