Customer Segmentation Principles

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

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

WORKSHOP AGENDA

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:

WORKSHOP AGENDA

Number of Customers Customer Value CRM Picket Fence Mass Marketing Highest Value Customers WHERE TO START Slide 4 Source: Peppers & Rogers Group

Customer value segments Service costs Actual value Strategic value (potential share of customer) DIFFERENT CUSTOMERS BY VALUE Slide 2 Source: Peppers & Rogers Group Most Valuable Customers: Retain Most Growable Customers: Grow Marginal customers: Business as usual? ‘ Below Zero’ Customers: Dismiss, or?

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

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

“ 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

WORKSHOP AGENDA

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

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

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

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

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

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

WORKSHOP AGENDA

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’

WORKSHOP AGENDA

Business goals:

Get customers

Keep customers

Grow customers

Overall objectives translate to different priorities in each segment. SEGMENT MANAGEMENT Slide 5 Segment 1 Segment 2 Segment 3 Acquisition Retention Development Acquisition Retention Development Acquisition Retention Development

Allocating communication channels according to the value of segments RESOURCE OPTIMIZATION Slide 3 Source: Peppers & Rogers Group 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 Customer value

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.

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)

contact details THANK YOU Vladimir Dimitroff Director PRISM Consulting (UK) Ltd 6 Priors Court Newark Str Reading RG1 2SR United Kingdom Phone: +44 (0)7947034944 E-Mail: [email_address] www.prism-gb.com Austria • Czech Republic • Germany Hungary • Italy • Malta • Poland • Russia Spain • Switzerland • Turkey • UK