Successful Segmentation for Creating Profitable Customers Carlos Soares Head of Customer Insight October 2008
1. Introduction 2. Renewing our understanding 3. Profiting through segmentation 4. Investing to action segmentation 5. Making it happen Contents
Renewing our understanding
What is segmentation really? And why do we use it?
Communicate the learning and drive understanding throughout the business
Profiting through segmentation
Understanding who our customers are? What drives and motivates their behaviour?
Understanding how to drive value for both parties. Determine risk and value.
Developing customer and targeting strategies. Strategic and tactical.
Investing to action segmentation
What tools and skills are necessary
What system implementations are there?
Making it happen
Demonstrating through action, testing and hypothesising.
The myth of the average customer
Segmentation is needed to drive higher profitability through understanding customer needs and delivering on those needs Meet Exceed Relationship Development Retain and develop Manage Customer Expectations Cherish and tailor Number of individuals Few Many Low High Value per individual Unprofitable Marginally profitable More profitable Very profitable Segmentation is an important tool in becoming customer-centric. It is a key enabler of CRM. “ Recognise me, remember me, value me.” Typically customers are not created equal ..and different “segments” need different customer strategies to exploit their value Renewing our understanding 20-30% 40-50% 20-30%
So, why are companies embracing CRM so rapidly? As the world evolves, companies failing to evolve with it will be left behind - the world is ever-increasingly consumer-driven
Positioning in a
pressure on margins
Provide for a 24:7
Retain & develop
Cost to serve reduction
& service improvement
Proliferation of choice
Internet reducing some
Products Renewing our understanding
Segmentation is an ongoing process for managing the customer base
A segment is a group of customers who display similar attributes to each other...
They may react similarly in a product/service offering
They may provide comparable values (profitability) to the company
They may bear the same needs or behave in alike ways.
There is no one right way to segment (not should there be)
Many different approaches and techniques
Choosing an approach requires a mix of art, science, common sense, experience and practical knowledge
Also depends on market, business needs, availability of data
The aim is not necessarily to build one holistic model to meet all needs, several models used in conjunction with each other can work well.
Renewing our understanding
There are many types of segmentation: Having one type will not meet all our needs How can we segment Transactional / value (RFV), LTV Attitudinal/ needs Loyalty / length of relationship Geography / demographics Behavioural Propensities Targeting / Selections Value Management Propositions Development Comments *** Nearly always useful ** Sometimes useful * Not that useful alone Renewing our understanding *** * *** *** * ** ** ** ** ** * ** * *** * Key for planning e.g prioritising marketing spend, setting segment strategies & objectives and prioritising spend & resource Predictive behavioural models are key for targeting customers for a behavioural change e.g. buying a product Overlays and geography can give insight of different regional profiles. Geography allows us to address specific competitor behaviour. Likelihood to take up of new products. Level of customer-led contact. Identifying customer needs and drivers can lead to new developments or product tailoring opportunities
(Not one for retention, one for propositions and another for marcomms)
Segments may be predictive of value, forecast responsiveness or help with acquisition modelling, however most are designed to be descriptive
Predictive modelling can be used in conjunction with descriptive modelling
Depending on type of segmentation, allocation code should be regularly refreshed
Segments should pass tests for good marketing AND good business - plus be statistically sound !
Segmentation should be built so as to be used across all functions of the business Renewing our understanding
From the data available
Segments should be different from each other
Big enough to warrant attention / resource allocation from business
Understandable by the business
No point having complicated mathematical solutions that only analysts can understand.
Use the right language, communicate with business
Attached to customer records so that action can be taken at a customer level
Yesterday: Today & Tomorrow: Targeting Mass customisation Focus Acquisition Approach How big is my list? Differentiation Retention Test and learn Company KPIs Volume targets Marketing KPIs Sales volumes Value targets Segment objectives (KPIs) Propositions Sell to all Customer-needs driven Using segmentation for a ‘Customer Driven Organisation’ Renewing our understanding
Profile segments with existing data and 3rd party data to understand each segment as far as possible
Sometimes retrospective analysis can provide useful insight
Previous mailing campaigns
Segment movement on roll-back code
How might customer knowledge affect current business as usual activities?
Set some objectives, create some tests
Test & learn
Share with everyone….create a business language Profiting through Segmentation Basic segmentation demographic criteria (income, assets) Customer needs (preferences) Profitability (customer lifetime value) Possible switch between the actual market segments
Some Strategic and Tactical uses for segmentation Transactional / value (RFV), LTV Attitudinal/ needs Loyalty / length of relationship Geography / demographics Behavioural Propensities Strategic Tactical Profiting through Segmentation
How can we grow the segments given our position in the market place?
Are there additional products or propositions we can develop to satisfy the customer segment needs?
Can we stretch the Brand in line with Corporate strategy to satisfy customer needs?
What is the ideal customer mix to deliver the strategic plan? How do we get from today’s customer composition to the ideal?
To reduce churn overall, what are the churn targets for each segment?
What are the growth targets for my customer segments? How will we achieve them?
Which channels and propositions should we use to sell more of product A to customer segment X?
Which customer segments have a high cost to serve and what can I do to reduce it?
Develop customer programmes based customer action or feedback (acquisition & retention)
Offer tailored propositions based on trigger events (e.g. reason to leave)
Develop your pricing strategies
Identify what support our people need & focus our systems and training on giving it
Remove blockages –PEOPLE MAKE IT HAPPEN … Technology enables it!
Set segment strategic objectives
Identify key business activities to influence
Provide Management Information & Monitoring
Life events (Home move, family, etc.)
Customer Contact (Complaints are a gift, opt outs, service)
Customer Data (Demographics, Life stage / style, region)
Behaviours (Channels preference, propensities to purchase, loyalty, value)
Profiting through Segmentation Understand who our customers are Segmentation & Overlays Develop Customer / Targeting Strategies
Using Segments to understand our Customers Profiting through Segmentation
Developing Customer Strategies: Driving Value 1. Retain high value customers 2. Cross sell valuable customers 3. Broaden the relationship 5. Improve the margin of value destroying customers 4. Acquire the right customer THE BUSINESS CHALLENGE Understand me and provide me with reasons to stay (e.g. Next Best Action, Loyalty recognition – discount) THE CUSTOMER ISSUE Provide me compelling reasons to purchase again (e.g. VFM - account review for best ‘package) Understand me & make relevant, competitive offers (e.g. Exclude high defectors, debt risk, relevance to customer type) Understand my needs & make more competitive offers (e.g. Use customer feedback – research & response to tailor props) Can I be satisfied more cost effectively (e.g. Intercept & Communicate) Profiting through Segmentation
Retain high value
2. Cross sell valuable customers 3. Broaden the relationship 5. Improve the margin of value destroying customers 4. Acquire the right customer THE BUSINESS CHALLENGE Profiting through Segmentation Recognise & Reward Increase Value Leverage Benefits Increase Value / Manage costs Drive Engagement / Target the right customer STRATEGY Set objectives for each segment. Remember you are managing a customer P&L, not products. OBJECTIVES Developing Customer Strategies: Driving Value
Developing Customer Strategies: Applying segments to Sales and Marketing What movements in customer segment would we ideally like to influence? How can we achieve that? What objectives can we set ourselves in order to test our hypotheses? Profiting through Segmentation
Isn’t it my choice about what I want? I will sell product B at a discount to get a sale of my product You can’t do that, it will hit my P&L and I won’t get a bonus this year Product Manager Product Manager Customer
Needs / desires
Ability to pay
Working together Developing Customer Strategies: We need to be customer centric and not just product centric
Customer-centricity drives revenue and profit, but for offers to work a business must align both its marketing strategy and resources with customer opportunities rather than product-driven goals
CHANGE is required in the CULTURE - working together as one is necessary because it enables a more bottom-up and customer focused approach to marketing
Profiting through Segmentation
Customer Value Churn Risk High High New kit £XX offer Sample premium Free Product Free Product Product deal Service DD migration On-line Extra kit Full price Service Service Service Service Tenure Based offer Service Service Tenure Based offer Tenure Based offer Service Service Sample premium Sample premium Product deal Extra kit Full price Extra kit Full price Extra kit Full price Sample premium New kit £XX offer New kit £XX offer New kit £XX offer On-line Product upgrade Extra kit offers Pay up front 3,6 months Free content Replace Old equipment Optimised upgrade offer 2 Optimised upgrade offer Optimised upgrade offer 3 Free content (14 days, free) Free content Weekend (free) BOGOF content Sample DVD Mid tier Sample CONTENT £5 for x months CONTENT £5 for x months Extra kit offers Extra kit offers Free Product Free content Product upgrade Existing proposition New – product based New – Sample based New – pre payment New – anniversary Low Sample DVD BOGOF content BOGOF content Free content Free Product Optimised upgrade offer 2 Optimised upgrade offer Optimised upgrade offer Optimised upgrade offer 2 LTC Bundle Fairly well covered, but only with introduction of new propositions (green) Illustrative only Developing Customer & Targeting Strategies: Identify proposition weaknesses & design propositions to make them effective Profiting through Segmentation
Bundling or offerings can make customer targeting very complex without the right targeting systems and methodology
Event trigger Enquirer Life-stage Competitor Product Renewal Market inflection Optimisation can solve the difficulty of targeting customers with many different product combinations Developing Customer & Targeting Strategies: Which proposition? Which channel? What time? Profiting through Segmentation
Developing Customer & Targeting Strategies: Key messages for bundles or offering strategies Put the customer and not the product first Pricing and proposition is critical and can take several months to get right Make sure there are no proposition gaps in your portfolio, otherwise your offers or bundles will be weak Remove the business silos and work together. The common goal is the customer Bundles can pose a significant risk to your P&L as well as offer many benefits Understand your different business objectives and use different varied offers or bundles strategies to suit 1 2 3 4 5 6 Profiting through Segmentation
If you have customer data, you CAN have segmentation…
Access to data
Start small and learn as your customer knowledge grows
... HOWEVER …
Garbage in = Garbage out !!
To ensure segmentation is actionable, certain capabilities need to be in place
A truly integrated approach takes a greater investment
Investments to action segmentation Investing to action Segmentation
An integrated approach to segmentation Total CRM would include an integrated approach to segmentation Business knowledge - what is the strategy? What is the current product portfolio? Data knowledge - availability and limitations Statistical / Analytical skills - inhouse or outsourced. Knowledge transfer Usage of segments Marketing database to provide data Analytical tools and platforms to create single customer view Decisioning tools, channel implementation capability Regular feeds of data from operational systems Ongoing process to update and refresh segments once built Processes to operationalise segments - providing customer data at the customer touchpoints Communication of insight Investing to action Segmentation
Segmentation is just a part of the customer insight process
There must be a balance to maximise business value: