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Squeezing customers together with segmentation

15th Nov 2007
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Peeling back the layers of customer information can give you some fascinating insights into who you should be targeting with new products. But, as Louise Druce discovers, using segmentation to bind them all together can lead to even sweeter strategic success.

Do you know your customers? Do you really know the kind ofo people they are? It could be vitally important when your latest product is about to hit the market - what if only a select number of your customers will actually want it?

Basic information databases will give you a rough idea of who’s who but segmentation gets to the core of what customers want by their value, behaviour, lifestyle, geographical location and, well, pretty much however you wish to identify them.

Like any kind of data analysis, segmentation is often seen as being a long and arduous task that uses up time that could be better spent getting the products out there in the first place. However, a hit and miss approach equally means wasting time and resources on customers who aren’t remotely interested in your new offerings, and could be put off by the fact you are bombarding them with irrelevant information.

Segmentation can be as basic as grouping customers together by age or postcode, but it is more successful when you delve deeper into what they do and how they think. “Companies are often forced to resort to vague segmentation based on age and geography because they don’t know how to analyse the data they hold about the interactions companies have with them,” says Andy Hindson, a consultant at intelligent marketing experts smartFOCUS.

A framework he suggests is RFV: recency, frequency and value analysis. As it suggests, recency is a measure of when the last customer engaged with the business, frequency looks at the customers demand for products, and value looks at spend – as Hindson points out, frequent shoppers aren’t necessarily the big spenders or the most profitable.

Shopping channel QVC UK uses RFV analysis to define 16 segments reflecting its customers’ buying behaviour. Implemented using smartANALYZER software, the segments run from ‘QVC super loyals’ to ‘one and dones’ and are constantly tracked and refreshed. This also takes into account customers who haven’t bought any products for a while or ‘lapsed’. “We are looking at the individual customer’s spending pattern as opposed to looking at the group the customer is in,” explains Sue Leeson, director of marketing at QVC. “We can then target customers with the right message at a time that is suitable for them, as opposed to what band they happen to be in.

“The problem with direct marketing is that you band it in large groups but as a result, you could be sending inappropriate lapse messages to customers who do not feel that they’ve lapsed yet.”

Attention to detail

M and M Direct, an online and catalogue provider of discounted name-brand sports and leisurewear, has also used this approach to identify its key customers at an individual and household level, something that has led to cost-savings. “We typically have 1.3 customers per household, so we need to ask whether we need to send a catalogue to each customer or just to each house,” says Chris Harle, M and M Direct’s finance director. “If we don’t have to mail that extra 0.3 customers a brochure, that’s an immediate saving in production and mailing costs that will have an immediate impact on the bottom line."

Even the US Army is using segmentation to support advertising leads to help the army accessions command “fill boots”. The unit is structured similarly to a typical sales organisation, including 41 sales territories, over 1,600 recruiting offices, 7,200 recruiters, and 1,620 instructors.

They are also responsible for initial training at five primary locations. Using a system from software vendor Claritas, the accessions command geocodes all applicant records to identify their lifestyle segment, with every US household classified into one of 66 unique market segments based on demographic, lifestyle, socioeconomic, buying, media and behaviour characteristics.

This was a particular success during the launch of a recent multi-million dollar advertising campaign which subsequently generated over 600,000 leads. An estimated four percent are passed directly to an army recruiter but, typically, only four of every 100 leads end up signing a contract. To increase this ratio, the accessions command used the segmentation system to determine the most effective method to prioritise the quality of a lead in terms of enlistment. Using the model, recruiters now only need to contact 20 leads to get two to three signed contracts, potentially saving 60 percent of their manpower.

“When communications are poorly targeted, they waste marketing resources and sap at the customer’s attention span,” says Hindson. “Customers notice if you waste their time and will be more likely to defect. By understanding your database, you can tailor your message and use your communications to build a closer and more profitable relationship with customers."

DAMAS segmentation:

Differential: it must respond differently to a different marketing mix.
Actionable: you must have a product for this segment to be accured.
Measurable: size and purchasing power can be measured.
Accessible: it must be possible to reach it efficiently.
Substantial: the segment has to be large and profitable enough.

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