The Role of Segmentation in Creating Marketing Advantage

Linda More is now a business and technology journalist

In the real world there is no such thing as an average customer - each customer is an individual capable of adding their own value to a business relationship. Customer segmentation is the powerful marketing technique that divides a group of all customers into smaller subgroups that share a number of common properties in their relationship with the business.

Understand Customers to Keep Them

Segmentation is the first step towards customer understanding, which allows organisations to build healthy relationships with their customers. "Money is made by keeping customers, and the whole idea of segmenting customers in order to build customer relationships is to turn it into a mutually satisfying relationship," says Ovum analyst David Bradshaw.

There is no such thing as the average customer Customer segmentation is the first step to building a healthy customer relationship Correct segmentation can increase revenue, decrease costs and increase customer satisfaction Difficulties occur when companies segment according to their own desired outcomes ('the wish-list') rather than the customers' Both tactical and strategic segmentation strategies need to be employed for best results Medium-sized organisations with fewer resources should use CRM tools to enable customer segmentation

To build these relationships profitably depends on treating different customers appropriately in order to align their individual needs with the most appealing product or service offering a business has. The challenge for the mid-market sector is to stop viewing their customers as one entity and to start communicating with them as individuals and according to their distinct preferences. "There is only one place that businesses make money - from active customers. Today, despite the tools at hand, mass marketing is still the primary method of customer communication," states Clive Humby, chairman of customer management consultants, Dunnhumby. If you do it right, the benefits of segmentation are threefold – increased revenue, decreased costs and increased customer satisfaction, according to Ian Charlesworth, senior analyst at Ovum.

Painting the Customer Picture

The shopping and buying habits of highly profitable, high-revenue customers are different, as are the products they choose to purchase. A significant part of the value of performing customer segmentation is in providing a common language that the entire business can use to talk about its customers. However, there is a downside if you get it wrong, as Charlesworth explains, saying: “If you target or segment customers in a way that is inappropriate, you can alienate them. What you are really doing is putting your customers into labelled buckets based on your judgement of where they should fit. What happens if they don’t see themselves as belonging in that particular bucket?”

These difficulties in segmentation sometimes occur because companies often segment customers based on their own desired outcomes rather than those of their customers.

Painting the Customer Picture

The shopping and buying habits of highly profitable, high-revenue customers are different, as are the products they choose to purchase. A significant part of the value of performing customer segmentation is in providing a common language that the entire business can use to talk about its customers. However, there is a downside if you get it wrong, as Charlesworth explains, saying: “If you target or segment customers in a way that is inappropriate, you can alienate them. What you are really doing is putting your customers into labelled buckets based on your judgement of where they should fit. What happens if they don’t see themselves as belonging in that particular bucket?”

These difficulties in segmentation sometimes occur because companies often segment customers based on their own desired outcomes rather than those of their customers.

Tactical or Strategic Segmentation

Often segments are chosen on the basis of available data. For example, an organisation that has a lot of transactional data may opt for behavioural segmentation based on levels of spend, frequency of purchase or apparent loyalty. Another company with a wealth of customer preferences may choose to segment its customers based on the attitudes they display and the reasons why they choose to make their purchase

In order to segment customers in a way that serves the business the marketing needs of the organisation must be aligned to the most appropriate segmentation approach. “Organisations need to see value from segmentation and to do this they must understand the reasons why they are segmenting customers,” states Charlesworth. “To produce real value segmentation activity must be aligned with the business strategy and vision.”

According to Gartner analyst Gareth Herschel segmentation schemes tend to alternate between extremely granular tactical schemes, which can result in thousands of segments and very strategic segmentation with less than 15 segments. Tactical segmentation serves to address the immediate short-term issues of the business, such as deciding which customers get preferential customer service, additional mail shots or to drive business using a special offer. With the wealth of CRM (customer relationship management) tools available today, tactical segmentation is easily performed in-house using existing customer data.

Strategic segmentation is used to answer the big questions that the business has about market position and branding, competition and to identify new opportunities. It is used to pinpoint the type of customers a business wants to encourage, what image or brand is needed to attract them, how much they are willing to pay and what type of products they will need. Usually an outside specialist consultancy is called in to help with this process and the determination of the segments.

“Organisations require both tactical and strategic segmentation,” says Herschel. “They serve very different purposes and a big mistake that organisations make is to only operate in one dimension or the other.”

Conclusion

Segmentation is an effective part of a broader marketing strategy and should eventually include both tactical and strategic elements. The secret is to make a start using your existing data and tools and then keep refining your segmentation strategy focusing on the benefits that those segments really care about.

“Medium-sized organisation have the same needs as large ones – but with a lot fewer resources to address them with,” says Bradshaw, “so they need to use their CRM tools to maximum effect.”

Sources

Interview: Gareth Herschel, GartnerGartner Presentation – ‘Creating and Using Customer Segments to Balance Needs and Value’

Interview: Ian Charlesworth, Ovum

Interview: David Bradaw, Ovum

Interview: Clive Humby, Dunnhumby

Interview: Martin Hayward, Dunnhumby

Interview: Professor Adrian Payne, Cranfield University

source: http://www.microsoft.com/uk