We present our tips on how to understand who your customers are, what value they bring, and what future value they could potentially generate. Most organisations are on a journey to treat each (worthy) customer as a unique individual. Scale makes this hard, and sometimes they act in ways that are very alike, so Segmentation is a practical compromise that allows you to progress on the 1to1 journey, to track interactions and transactions over time and to build a personalised relationship.
Although industrial scale customer segmentation is as old as direct marketing, our new, digital, always connected customers are allowing us to experiment with new dimensions of segmentation, perhaps segmenting them by the level of relationship they prefer and the intimacy of the service provided.
But first the basics...
The segmentation planning process will usually start with answering ‘who?’ : who are my customers, where do they live, what’s their income, what’s their family size, which media channels do they use, and so forth.
This is then followed by ‘what?’: what are my customers doing. For example, the classic RFV (or RFM) approach considers recency of their last purchase, frequency of purchase, and the monetary value of those purchases. Value-driven segmentations go much further, even to the point where computers can be programmed to observe customer behaviour, independently derive their own micro-segmentations through ‘machine learning’, and execute marketing activity based upon this learning, with minimal human interference.
There are some ‘rules of thumb’ that we also consider when planning action based on segmentation, they are helpful at kick-starting our planning. One is that it is more productive to market to increase frequency (get customers to shop more often) than to try to get customers to spend more each visit. The second is that timing is more important to marketing success than the content or richness of the offer, do in fact strike while the iron is hot.
It’s also important to understand the rhythm of your customers’ purchases, identify that group within each segment who are most regular in their inter-purchase timings then enrol them in a communications plan that matches their individual replenishment cycle. Include new customers who are behaving the same way as high value customers (what they buy, when etc.) as ‘high potentials’.
Combining the ‘who’ and the ‘what’
Ultimately, good segmentation frameworks combine the ‘who’ and the ‘what’, the art and the science, to build a rounded view of the customer. Why do we need both? Because fundamentally, segmentations need to do 2 things:
- To make the customer understandable to your management and staff – this is where the ‘who’ helps, talking in the everyday language of homes, jobs, families and lifestyles.
- To be useful in answering business questions that help the business grow – this is where the ‘what’ helps, identifying customers with high churn, looking for cross-sell opportunities, or coming up with ideas for new product development.
Combining the ‘who’ and the ‘what’ helps to build these rounded segments, often called customer ‘personas’. Even the best segmentations are still by their nature compromises – aggregations of customers into practical chunks to help our understanding and to shape our decisions.
Don’t forget to align each segment with a set of success metrics that are specific to your strategies and make sure you have the data sources and systems to deliver these measures regularly and accurately.
Remember, before jumping into the deep end of expensive data systems and analytics, to go back to fundamentals, and define the core business questions, challenges or gaps in customer understanding which you need your insights to resolve.