Guide To Segmentation

Using customer segmentation to deliver measurable benefits A short guide January 2009

1 segment based on consumption 3 segments based on needs & drivers NACE: 3039 Fabrication of furniture FTE: 6 Revenues: 1.7 Mio € DMU: Production leader + owner Products: 1 an Gas + 1 ean Electricity Consumption: xxx NACE: 155 Dairy products FTE: 3 Revenues: 1.2 Mio € DMU: Owner Products: 1 an Gas + 1 ean Electricity Consumption: xxx NACE: 82 butcher FTE: 1+1 Revenues: < 1 Mio € DMU: Renter Products: 1 an Gas + 1 ean Electricity Consumption: xxx

Needs & drivers:

Understands market evolution

Growth mode, risk of churn

Not willing to pay an additional fee

for convenience

 Segment 1: loyalty program, lock-in

Needs & drivers:

Does not understand market evolution

Willing to pay an additional fee

for convenience & follow up

 Segment 2: Up-selling opportunities

Needs & drivers:

Does not want a contract

Does not have time to meet a sales person, even when it might turn out to be cheaper

 Segment 3: No campaigning, loyal

“ All customers are not created equal” Example in the Energy industry

Segmentation is the first step to a customer centric approach

Customer segmentation aims to:

Identify, describe and quantify in the market,

segments of customers with similar needs, behaviors, expectations, DMU structure and purchasing criteria

that require the development of a specific value proposition (product & service offering, purchase process & experience, pricing, customer benefits…)

and an adequate go-to-market strategy (relationship building, communication, sales approach, channel management…)

in order to improve the targeting and the ROI of marketing communication and sales activities

“ If you’re not thinking segments, you’re not thinking”

A segmentation is only healthy if it allows you to answer the following questions:

Which are your most profitable customers?

What makes you special for customers – what are the key criteria they have used in appointing you or purchasing from you?

Which of your customers are most loyal?

What are the most effective and convenient methods to target your customer groups with new propositions?

Can everyone in your organization describe and understand the segmentation in the context of how they are delivering customer experience ?

Segmentation is a “must have” as 89% of companies use market segmentation Source: THoM Yearly Marketing Survey 2008 Overall Proportion of company using market segmentation 11% 10% 17% 11% B2B industries B2C industries B2B & B2C industries Yes – using market segmentation No – not using market segmentation Legend:

However, most companies still use the most basic segmentation method, being socio-/firmo-graphics Net Adjusted Index (%) Company Specific Statistics Psychological Customer Profile Internal Financial Results B2B B2C B2B & B2C Geography Customer Behaviour Demographics Operational Elements Characteristics of Purchasing Department 77,9% 50,8 % 46,2 % 29,4 % 24,8 % 30,5 % 31,7 % 20,6 % 44,7 % 58,2 % 58,2 % 76,5% 51,2 % 21,8 % 20,0 % 9,4 % 76,1% 63,4 % 47,9 % 53,5 % 28,2 % 40,8 % 32,4 % 16,9 % Frequency of occurrence of criteria used amongst respondents using segmentation Source: THoM Yearly Marketing Survey 2008

Four main types of segmentation methods can be used in parallel Sociodemographic & life style / Firmographic segmentation Value-based segmentation Needs-based segmentation Usage-based segmentation 1 2 3 4

Segments based on behaviors, needs and drivers, indicating how they think about the features of a product/service, what they prefer and for which reasons

Segments based on:

B2C: Age, gender, interest and other aspects of their lifestyles

B2B: Sector, number of employees, turnover, geographic location…

Segment based on past and current customer’s usage of channels and products

Segment based on current/potential profitability-value and describes what kind of actions can be taken to maximize customer profitability by using quantitative criteria What the customer needs and wants How much value the customer delivers Who is the customer What, where and how the customer purchases

Selecting the appropriate segmentation method(s) must be done in function of the business objectives Alternative segmentation methods USAGE SOCI-DEMO- / FIRMO-GRAPHICS Behavior Historical purchase behavior Products purchased Region Preferred channel Industry sector # employees Blue vs. white collar Procurement methods and patterns NEEDS & DRIVERS

MARKET POSITIONG:

Define position of company and its offering

SALES GENERATION:

Increase acquisition, up-selling and retention

SALES EFFICIENCY:

Set up a more efficient/effective sales organization, decrease communication costs

PRODUCT/SERVICE VALUE

PROPOSITION:

Adapt product, service, pricing, channel and communication

Sell the same offering with different speech to fulfill specific customer benefits

DMU expectations Turnover and profit VALUE Activity-based costing Lifetime value Profit Sales revenues Business objectives Purchasing frequency

CUSTOMER SERVICE:

Differentiate the service level

INNOVATION:

Create new products and services

DEMOGRAPHIC age income gender marital status occupation education household size ethnic BCB B2B

The House of Marketing’s approach for developing an integrated segmentation method In function of the business objectives Understand business issues and define strategic objectives

Elaborate integrated segmentation models

in function of strategic objectives

Macro-level segmentation

Micro-level segmentation

Integrated segmentation approach

Develop value propositions per segment Quantify campaign ROI and evaluate impact of segmentation with regard to strategic objectives Conduct targeted marcom & sales initiatives 1 2 3 4 5

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