Share on facebook
Seven Principles for Actionable, Needs-based Segmentation E-mail


Targeting, Segmentation and Grading (i.e., the valuation of customers, prospects and the “universe” from which to choose) are the primary building blocks of CRM and customer experience management. These are conscious decisions based upon business intelligence, corporate memory, and the on-going strategy of the business plan. Among these decisions, the single most important set of decisions any business-to-business enterprise can make are those involving selection - of the products and services you will provide, of the customers for whom you will provide them, and of the channels through which you will market them.

Originally discussed in print 10 years ago, we wanted to reiterate the validity of this approach and present some simple tools with which to put these principles into action, while recognizing the need to incorporate the insight available to us today as a result of social media.

Accordingly, targeted segmentation to promote selectivity within your existing customer file becomes the most valuable application for your marketing database.



Until quite recently, most business communication with customers (present and potential), tended to address them as a great, undifferentiated mass…because there was really no practical way to do otherwise. It was the “We can be all things to all people” approach. Obviously, no business can survive and flourish if it attempts that approach. Limited resources: people, time, money need to be invested in direct proportion to the limited resources that can be applied – and accordingly, this is where targeting, segmentation and grading come into play.

Today, computer and business intelligence advances have made it easy and practical to break down the companies in your market universe just about as finely as you like, according to whatever factors you choose. Recognizing the fact that not all customers are created equal, it also allows you to target your limited resources toward those that are most potentially valuable to you. It gives you a practical alternative, and the next best thing, to one-on-one communication.

The technique is called needs-based segmentation – the segmentation strategy of choice, since it is needs that drive market behavior. This is the clustering of customers (and later, prospects) according to common sets of needs and purchasing behavior…as these relate to your organization’s external service values…then dividing your customer list into one or more segments, each consisting of a group of customers who share a common set of needs, and a way of doing business.

For simplicity’s sake, this discussion of segmentation will focus on end-user customer throughout this article. Note, however, that segmentation techniques can be equally effective for assessing potential relationships with dealers, distributors, and other channel partners.

Segmentation is a primary prerequisite to building a sustainable customer relationship marketing effort– using ongoing, targeted communication to create a loyal base of long-time customers whose value to you grows over the years. Its aim is let you work with each segment separately …talking to each in terms of their specific hot buttons.

This is by no means a cookie-cutter process. No generic description of segmentation can hope to be comprehensive, because of the infinite variety of permutations the concept invites. Just as each company is unique, so its segmentation plan will reflect that diversity – guided by your marketing imagination.

However, there are certain guiding principles that provide a framework for the segmentation process:

Determining bases for Segmentation:

Step 1: Identifying your best customers

Earlier attempts at segmentation generally focused on certain demographic characteristics, such as company size, SIC code, sales volume, and the like. This was (and is) certainly a start; but compared to today’s segmentation strategies, it was like wielding a meat cleaver rather than a scalpel. Demographic, firmographic and psychographic profiling, after all, tell you relatively little about a company’s specific needs, its interests, or its ways of doing business. Two customers, who look virtually identical, according to these criteria, may in fact buy from you for very different reasons. One may be among your most loyal and profitable customers – while the other is hardly worth the effort.

Today’s most successful customer relationship and database marketers begin at the other end of the equation – examining the needs that your most loyal customers meet when dealing with you. The starting point for this kind of analysis should be defining those customers – focusing on those who consistently give you their largest share-of-wallet, use the broadest range of your offerings, and provide the best profit margins.

Step 2: Identifying their needs and concerns

Your next challenge is finding out why these companies have chosen yours. Which of their needs have you been particularly qualified and willing to meet?

Before you go outside to acquire this information, ask those people in your own organization who know them best, such as account managers, sales reps, and dealers. Asking where you might improve your service to them can help you identify unmet needs, as well. You have a wealth of information right at hand; and its data that is unique to your company. Your competitors’ segmentation won’t look anything like yours.

In the process, find out as much as you can about how their business, and particularly their purchasing cycle, works. Are the company’s purchasing decisions centralized or decentralized? How long is the buying cycle, from initial identification of needs to purchase decision? Who (by job title) influences that decision, with what degree of clout, at what points in the cycle? What information do they need to do that, and when?

Next, check out what’s available in industry research – for instance, from trade journals, on-line communities of interest, blogs, Facebook, government sources or professional organizations in your customers’ fields. For additional “data overlay” information, or to validate the data you have, such firms as Dun & Bradstreet are a resource. In industries such as banking and agribusiness, there are very good syndicated reports available.

Your best sources of data, however, are your customers themselves. You can initiate ongoing two-way dialogue directly with current customers, via such techniques as offering an inbound 800 number or a help line, establishing users groups, publishing a market – or segment-specific customer newsletter and interviewing customers for articles, scheduling advertising or direct mail with a response mechanism, querying visitors to your trade show booth, and conducting surveys or focus groups.

But keep in mind that unless you also have a mechanism of getting all this information into your database, no single person – even the individual at the top – will have more than a few pieces of the total jigsaw puzzle. When a player leaves, so does his portion of the puzzle. And so each of you will be making critical strategic decisions that are based on only fragmentary information. (Is it any wonder that American business is a wash in endless meetings, trying to bring as much of that knowledge as possible together in one room?)

A well-designed, well-implemented database serves as the repository of corporate memory. And every customer-contact person in your company, from your service people to your telemarketers, should understand that part of their job is enhancing the resolution of the images – making sure each pertinent insight is logged into the corporate database, through whatever processes you devise.

 
Step 3: Compare their needs to your strengths

If you’re typical, 80% of your customers buy from you for one or more of just a handful of reasons – usually, no more than four to six. What are they? And how well do they coincide with the external service values you consciously have worked at developing?

You may find that for some customers, the differential value you create may consist of quick response time, or quality of the product, or how often your rep calls on them (or conversely, how easy you make it for them to order via E-mail, minimizing disruption of their day).

In other words, one customer’s perception of the value you add may be another’s disincentive to buy from you; and it’s important to know which is which and for whom. The more you work with your database, the more leery you’ll become of single, anecdotal comments – that is, the tendency we all have to think that if one customer feels this way or that, it must be true of all.

In the course of the research, you may well have the pleasant experience of discovering strengths you didn’t recognize you had – or at least which didn’t seem as important. What matters, however, is what your best core customers think. If something is important to them, then it’s important, period. You should be nurturing it, refining your ability to deliver it and capitalizing upon it.

For most organizations, the great “a-ha!” occurs when you overlay the external service values you have deliberately cultivated, in which you know that you excel, over the matrix of your customers’ needs that you can begin to see where your marketing emphasis should be.

Step 4: Develop segments based on customer needs

You’re hunting for other current or potential customers who “look” as much as possible like your best, core, customers, those whose needs best coincide with your strengths – because it is within their ranks that you’re most likely to be able to develop still more loyal, profitable customers.

You may identify only one segment, your full universe of target customers and prospects – or to be able to recognize several clusters who share similar acts of unfulfilled needs and buying behavior. The process can be enhanced with the addition of complex basis variables. In either case, there are two key questions:

Who are those most loyal customers, those most interested in those service values that best differentiate you from your competitors? And what differentiates them from the mass of customers? When you have those answers, you’ll be halfway home.

Critical to effective segmentation is making each segment as unlike any other as possible. And this is the point at which the process becomes more of an art (of interpretation) than a science (of data analysis). A well-constructed database, however, with its ability to slice and dice customer characteristics many different ways, gives you a wealth of tools to turn data into information.

To be of value to you, that information must be actionable. That means it must include a customer profile (most often consisting of firmographics, unfulfilled needs and buying behavior) that enables you to assign customers – not just your selected “best” customers, but all your customers, and perhaps prospects – to one or another of your defined segments.

You now have a good sampling of your best customers; each identified by the needs that are most important to them. (Keeping in mind that a customer, in business-to-business marketing is an individual who buys on behalf of an organization. Furthermore, recognizing that a customer is someone who buys x-$’s of y-products over z-duration). They are also tagged by firmographic data. Is there a relationship between needs and firmographics? Your database program can let you mine the information to find out.

Start with a list of identified needs and buying behaviors. Then query your database as to how many customers cluster into groups that care about each of various combinations of those needs. Where you find larger numbers, you have identified “need clusters” that are common to particular segments of your marketing universe. And that’s the raw material for needs-based segmentation.

Now, what easily identifiable characteristics do the customers in each cluster have in common, in addition to those needs? Here’s where firmographic data comes into play. You may, for instance, discover that many of them share geographical, SIC code, company size, or some other combination of characteristics.

In other words, it permits you to define very specific need-based market segments – into which you can divide your entire customer universe, present and potential.

Step 5: Grade customers within each segment

Marketers often use the terms “grading” and “ segmentation” interchangeably. And that’s unfortunate, since the distinction is important. The two are entirely different processes; together, they create a very powerful economic model for customer selection, in order to achieve an optimal mix.

Grading is strictly an economic concept. It is done only within a segment, defining various levels of economic value within that segment. It temporarily sets aside the issue of customer needs or other characteristics, and can usually be accomplished using only data you already have in-house.

Grading is a means of estimating the revenue currently and potentially available from that segment, allowing you to identify which groups are not only most responsive to what you have to offer, but can also help you to increase profits – and are therefore really key to the success of your business. This, in turn, allows you to make intelligent decisions about investment choices and resource allocation to acquire and nurture more of this kind of business by targeting those segments to which you can deliver superior value in profitable manner.

Here’s how it works:

Within each segment, divide all customers into five to 7 “grades,” based on the revenue you received from them over a given period of time. The top 5% are rated XL; the next 15%, L; the next 25%, M; the following 25%, S; and the bottom 30%, XS.

You can fine-tune your grading system further by determining not just raw historic sales volume, but potential or projected Lifetime Value (LTV) of these customers to you – understanding that realization of that LTV has more to do with how you treat your customers after you’ve acquired them that with the method of acquisition. Given what it costs you to acquire, supply, and service this customer … the anticipated length of time you’ll retain its loyalty … and the revenue that this will generate … how much profit will it bring to you over the expected duration of the relationship, (expressed in terms of Net Present Value)?

It’s not unusual to find substantial surprises in an LTV analysis. A demanding customer who buys primarily on price, for instance, on condition that you shave your margins paper-thin, may be less than profitable to serve – no matter how high its purchase volume. On the other hand, a smaller, relatively low-purchase-volume customer, who ranks high relative to the other criteria above, may be significantly more profitable per dollar you invest. Understanding his priorities may will point you toward other companies with similar needs, but much larger budgets. In short, it’s critical to use your marketing imagination to manage the LTV of your customer.

Even in isolation, grading can be a significant productivity tool. Not only does it allow us to direct our investments more effectively – it also serves as a foundation of better field sales force effectiveness planning and a targeted communications strategy, rather than treating everyone as the same or “throwing spaghetti at the wall”.


Step 6: Validate your Segmentation Model and your Hypotheses

Suppose that as a result of your segmentation analysis, you’ve developed such hypotheses as this: “Quick response, combined with a limited number of face-to-face visits, supported by telephone support for the account management combined with E-mail ordering capability, order tracking, and greater use of electronic media for information summary are top priorities for our decentralized customers in the automotive aftermarket in the northeast with annual sales volumes of $50-$150 million.”

Before you take action, you’ll want to validate your conclusions. The segmentation model you’ve devised should, first of all, make intuitive sense based on your marketplace experience – and especially on that of your sales and customer service people. Where findings are at issue, you may want to see if customer focus groups, closed on-line communities, or direct contact with the people in your Customer Management Centers confirm them. Timely and rigorous vetting of data hygiene and knowledge transfer come directly into play here. Clearly a great deal rides on having accurate information from which to work.

This would be a wonderful opportunity to make sure that you are incorporating that valuable insight now available to us through “social media.” An additional source of insightful wealth on this topic was published in Forrester’s Groundswell. For B2B marketers, their “social technographics profile” provides a superb tool that allows us to map their characteristics into our actionable model and affords us, through the on-going assimilation of knowledge available from the social media, the opportunity to monitor the substantive issues affecting our segmentation and to the course correction every CRM effort expects to need to make – only that much more quickly.

Step 7: Target your marketing resources in proportion to potential return

The reason we are combining targeting, segmentation, and grading is to optimize our “market-coverage strategy”. We want to invest our limited resources in inverse proportion to the return we expect. This mindset goes back to the fact that we cannot be all things to all people. Essentially, we are trying to identify our best core customers and to add more of the same kind, while solidifying our relationship. Unless you’re ready and able to use the results of all this effort to alter your marketing strategy, your money is probably better spent elsewhere. Segmentation is not designed to be an intellectual exercise. This work is to be actionable and to be fine-tuned, almost on the fly, as we learn new facts during our interaction with our customers. Actionable, Needs-based segmentation pays off only if you then apply it to fine-tune your marketing program.

At this point, your grading results take center stage. Especially if you’ve factored in the Lifetime Value of each segment, you can now make a very scientific assignment of resources to customer groups. You can surely be selective in this process, if you choose, focusing on just a few segments – or even one. The important thing is that you do use the information to catalyze marketing action and to create an integrated marketing plan to support the segmentation and grading exercise.

There are 3 tools we have deployed which can help support this chance:

1. a cost-to-serve, or contact matrix
2. Communications Calendar by channel by contact type or application served
3. a visualization Pyramid

Tool #1 can be created using a tool such as excel and the analysis of ABC costing. Your goal is to communicate in the method your client prefers and with the right content and correct frequency of contacts by media. For example, the cost of a face-to-face visit can be as high as $1,600 a visit. If your company currently sends the direct sales person out to a client 12 times a year, your firm could reduce the cost to serve by cutting down the # of face-to-face visits while increasing the number and frequency of say phone, direct mail, email,    

Catalog and trade show communications:

If done according to your customers’ preferences, we have found that the results can be dramatic along these points:

1. Increased customer satisfaction
2. Increased account penetration
3. Increased loyalty at both customer and employee levels
4. Decreased cost-to-serve
5. Increased sales
6. Increased profits

Tool # 2 would create a multi-dimensional communications calendar showing all the contact points inside the targeted accounts – e.g., management, finance, sales, service, etc  - with whom your company communicates. The issue is to provide relevance and value in your communications and to not over-communicate or communicate with the wrong person or provide the wrong message. The ability to create a tool with which to visualize the communications frequency, content and audience is straight-forward. Using this tool can prevent some outrageous mistakes, reduce irritation customers feel about non-valuable contact, and help ensure that your communications are meaningful, delivered and absorbed.

Tool # 3 is a pyramid that allows everyone in your company to visualize the universe in which you do business. The power this tool possesses should not be underestimated. For example,
We often hear complaints about senior management pronouncements that dictate, for example, an increase in sales and profit of 10% over last year. The pyramid provides a tool which can help locate those accounts and customers where growth can be found – since it will not come equally from all.

   

These tools help establish a common vision for all employees. The tools are flexible and allow for easy course-corrections or modifications to the segmentation strategy with relative ease. Additionally, now you can redeploy dollars previously spent in pursuit of unprofitable business – because you can now recognize it for what it is. Perhaps there was a time when “everyone is my potential customer” was a viable strategy. But the simple fact is that we can no longer be all things to all people, if we ever could; and those who try to be are seldom able to provide superior service to anyone. Screening out can be as important as targeting.

You can assign a percentage of your marketing budget to each segment that merits pursuit, echoing the percent of potential profits that segment can generate. You may want to look at lower
Grades within a well-defined, profitable segment as an area of opportunity: It’s already been established that companies with this particular set of needs and buying behaviors can be attracted to your offerings and way of doing business; all that remains is to focus on expanding your penetration. The goal is to raise the level M accounts to L’s, the L’s to XL’s and so on.

Because you understand the priorities of each segment so well, you’ll have the inside track on the right message to deliver, and the media that can do it most effectively, within a given segment’s allotted portion of your budget. Managing the integration of contacts across all media, you will be able to leverage the higher cost contact media such as face-to-face visits with the lesser-cost media such as direct mail, e-mail, or the Web while effectively managing the investment at the grade level.

Ultimately, most of your dollars will be invested where the profit potential for developing loyal customers is the greatest – a strategy that appears to be self-evident, but too seldom is practiced in real-life decision-making, since quantification of Lifetime value and contribution margin potential by segment is sadly lacking.

This is not just about purportedly naïve and unsophisticated businesses. Consider, for instance, the millions, hundreds of millions of dollars this nation’s leading long-distance carriers paid out to obtain the wrong type of customers – relying upon the lowest common denominator, price competition.  It would be sage to guess that many these customers, in the long run, cost far more than they were ever worth.

It has been our experience that, as a result, effective data-based, loyalty-focused, business-to-business marketers escape that kind of tunnel vision. And, in the process, they find that they are investing a lot more of their budgets in highly targeted communications to the segments most likely to become loyal customers, rather than through more traditional mass-media attempts to send one watered-down message to their entire, undifferentiated universe.

They have the tools to become more active managers of relationships with both dealers and end-users –educating their organizations about the needs of individual segments, enhancing the delivery of products and services, developing targeted offers more likely to draw response, and better allocating resources in the design of sales territories.

And, since they’re talking to each customer in terms specific to their own concerns, a dialogue is established; relationships are formed; satisfaction, growth and profits follow; and, with them employee performance and morale are increased. A reinforcing feedback loop which leads to sustainable competitive advantage.

CRM Compass ™ is published by: Chrysalis Marketing

CRM Compass™
Crafting Loyalty In Business

 
More Info

CRM Management

Customer Relationship Management.
Customer relationship management (CRM) is
a business strategy achieved through a customer-
based and customer-focused alignment of people,
processes, and data.  Our compass is set directionally
along a roadmap guaranteed to build loyalty and
profitability
across the value chain with the right
core customers.

A Proven System

Chrysalis Marketing Provides a Proven Roadmap.
We guide your business to success in understanding
and using CRM to its fullest potential.  Whether you
are looking for incremental improvements in your
customer relationships or a comprehensive CRM
program, we are here to help you meet your
business goals.