Customer Segmentation Principles

Slide 1: EVOLVING CUSTOMER SEGMENTATION IIR Telecommunications Conferences Customer Segmentation Customer Segmentation Strategies Principles of effective differentiation London November Vladimir Dimitroff 2005 Director PRISM Consulting http://www.prism-gb.com www.prism-gb.com The PRISM Organization

Slide 2: EVOLVING CUSTOMER SEGMENTATION 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 The PRISM Organization

Slide 4: EVOLVING CUSTOMER SEGMENTATION Slide 1 WHY FOCUS ON CUSTOMERS? THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS Product Excellence All three are important, but you can only excel in one - and should choose your focus: 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. Operational Efficiency Customer Intimacy It also results in added competitiveness in the other two dimensions see Treacy & Wiersema: ‘The Discipline of Market Leaders’ The PRISM Organization

Slide 6: EVOLVING CUSTOMER SEGMENTATION Slide 4 WHERE TO START Picket Fence Number of Customers Mass Marketing CRM Highest Value Customers Customer Value Source: Peppers & Rogers Group The PRISM Organization

Slide 7: EVOLVING CUSTOMER SEGMENTATION Slide 2 DIFFERENT CUSTOMERS BY VALUE Most Valuable Customers: Retain Most Growable Customers: Grow Marginal customers: Business as usual? ‘Below Zero’ Customers: Dismiss, or? Service costs Source: Peppers & Rogers Group Customer value segments Actual value Strategic value (potential share of customer) The PRISM Organization

Slide 8: EVOLVING CUSTOMER SEGMENTATION CALCULATING CUSTOMER VALUE • 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” The PRISM Organization

Slide 9: EVOLVING CUSTOMER SEGMENTATION 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’) The PRISM Organization

Slide 10: EVOLVING CUSTOMER SEGMENTATION Slide 6 WHY NEEDS? “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. The PRISM Organization

Slide 12: EVOLVING CUSTOMER SEGMENTATION Slide 7 WHY NEEDS? Fundamentals: The Link to Value: Any business In satisfying needs a business provides value. only exists if it has customers. Products and services represent value to the one Customers with needs (the Customer). have specific needs that (see Added Value concepts in economic theory, supply/demand concepts etc.). have to be satisfied. In the process of satisfying needs value ‘changes hands’. A business only (see Value Migration concept in strategy models and exists to satisfy theories). specific needs. The PRISM Organization

Slide 13: EVOLVING CUSTOMER SEGMENTATION Slide 8 THE WORLD OF PROXIES 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 PRISM Organization

Slide 14: EVOLVING CUSTOMER SEGMENTATION Slide 9 WHO THEY ARE 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. The PRISM Organization

Slide 15: EVOLVING CUSTOMER SEGMENTATION Slide 10 WHAT DO THEY DO 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. The PRISM Organization

Slide 16: EVOLVING CUSTOMER SEGMENTATION Slide 12 HOW ABOUT PREFERENCES? Product or service preferences are directly linked to needs. The Customers have chance that those are true needs is somewhat higher, although individual (and product preferences may often reflect perceived needs. group) preferences often exhibited in behaviour patterns, Attribute preferences also manifest needs, however those are sometimes secondary, ‘satellite’ needs accompanying the core need in a declared in dynamic ‘bundle’. The likelihood here is greater that they are dialogue with the perceived needs, particularly in the less tangible areas of taste, company, but fashion, peer influence etc. sometimes also withheld and/or For practical purposes of needs modelling and needs group unknown. management, explicit and implicit preferences can be considered a proxy for needs. The PRISM Organization

Slide 17: EVOLVING CUSTOMER SEGMENTATION Slide 11 THE 3 QUESTIONS TEST 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 PRISM Organization

Slide 19: EVOLVING CUSTOMER SEGMENTATION ALL KINDS OF SEGMENTATION Macro-segmentation: Used in defining market proposition/s, brand typically a market values, and in targeting mass marketing activities. segmentation view E.g. ‘Youth’, ‘Pre-paid’ or ‘Rural’ segments Strategic segmentation: Used in strategic planning, resource allocation, customer segmentation for Marketing/Sales/Service optimisation. long-term differentiation E.g. ‘High Value’, ‘Growable’ or ‘BZ’ customers, ‘Technos’, ‘Savers’ or ‘Status-symbol’ segments Micro-segmentation: a Used in day-to-day direct campaigns (cross- and tactical, action-oriented up-sell), targeted churn prevention, acquisitions. tool for immediate targeting E.g. ‘Seasonal roamers’, ‘Bargain hunters during competitor’s campaigns’, ‘Location patrons’ The PRISM Organization

Slide 21: EVOLVING CUSTOMER SEGMENTATION Slide 5 SEGMENT MANAGEMENT Acquisition Retention Segment 1 Business goals: Development Get customers Keep customers Acquisition Grow customers Segment 2 Retention Development Acquisition Overall objectives translate to different Segment 3 Retention priorities in each segment. Development The PRISM Organization

Slide 22: EVOLVING CUSTOMER SEGMENTATION Slide 3 RESOURCE OPTIMIZATION Allocating Most valuable customers communication channels according to e lu the value of segments P KEE va Most growable customers er m to re us sha r C OW me Marginal GR usto ost of c c ize inim Unprofitable m fit, Media ro ep iz E-channels im ax M Direct mail st e Div Telemarketer In-person service reps Dedicated service reps Source: Peppers & Rogers Group The PRISM Organization

Slide 23: EVOLVING CUSTOMER SEGMENTATION THE ‘HOW TO’ OF PRACTICAL STRATEGIC SEGMENTATION Evolving segmentation: V1 - From historic to predictive value and from revenue to profit-based individual customer value V2 Starting simple could mean few, expenditure-based value segments. Introducing any known costs leads to a better, profitability-oriented differentiation. Using non-linear V3 predictive models allows managing future, lifetime value. -From broad, proxy-based needs segments to precise, true need clusters V4 -Early needs-driven segmentation schemes often start from a market (macro) segmentation, using proxies like basic demographics or transaction behaviours. As V5 companies learn to interpret the true needs behind such proxies, more complex needs clustering replaces the N1 N2 N3 N4 macro segments and allows linking individual needs to value growth, retention and targeted, profile-based acquisition. The PRISM Organization

Slide 24: EVOLVING CUSTOMER SEGMENTATION ‘SO WHAT?’ (ACTING UPON THE KNOWLEDGE) 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) The PRISM Organization

Slide 25: EVOLVING CUSTOMER SEGMENTATION 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: vdimitroff@prism-gb.com www.prism-gb.com Austria • Czech Republic • Germany Hungary • Italy • Malta • Poland • Russia Spain • Switzerland • Turkey • UK The PRISM Organization

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