Customer Segmentation Principles

EVOLVING CUSTOMER SEGMENTATION

The PRISM Organization

www.prism-gb.com

Customer SegmentationPrinciples of effective

differentiation

Vladimir DimitroffDirector

PRISM Consultinghttp://www.prism-

gb.com

IIR Telecommunications Conferences

Customer SegmentationStrategies

London

November2005



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








Nu

mb

er

of

Cu

sto

mers

Customer Value

CRM

Picket Fence

Mass Marketing

Highest Value Customers

WHERE TO START

Slide 4

Source: Peppers & Rogers Group



Customer value segments

Most Valuable Customers: Retain

Most Growable Customers: Grow

Marginal customers: Business as usual?

Service costs

Actual value

Strategic value (potential share of customer)

‘Below Zero’ Customers:

Dismiss, or?

DIFFERENT CUSTOMERS BY VALUE

Slide 2




• 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

Segment 1

Segment 2

Segment 3

Acquisition

RetentionDevelopment

AcquisitionRetentionDevelopment

AcquisitionRetention

Development

Overall objectives translate to different priorities in each segment.

SEGMENT MANAGEMENT

Slide 5



Most valuable customers

Most growable customers

Marginal

Unprofitable

KEEP

GROW share

of customer

Maximize profit, m

inimize cost

Divest

Media

E-channels

Direct mail

Telemarketer

In-person service reps

Dedicated service reps

Cust

omer

val

ue

Allocating communication channels according to the value of segments

RESOURCE OPTIMIZATION

Slide 3




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

Vladimir DimitroffDirector

PRISM Consulting (UK) Ltd 6 Priors CourtNewark StrReading RG1 2SRUnited KingdomPhone: +44 (0)7947034944 E-Mail: [email protected]

www.prism-gb.com

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THANK YOU

Documents

Customer Segmentation Principles