Customer Segmentation

Customer segmentation is essential to successful database marketing. Segments are groups of customers with similar interests in your products or services which you have created based on their behavior, demographics and lifestyle. Your messages to customers in each segment should reflect these differing interests if you want to find a receptive audience.

The goal of customer segmentation is to develop database marketing action programs that lead to measurable increases in retention, cross sales, up sales and referrals.

An ideal segment is one which:

• Has definable characteristics in terms of behavior and demographics.
  
• Is large enough in terms of potential sales to justify a custom marketing strategy with appropriate rewards and budget.
  
• Has members who can be motivated by cost-effective rewards to modify their behavior in ways that are profitable for your company.
  
• Makes efficient use of available data to support segment definition and marketing efforts.
  
• Can be measured in performance, with control groups
  
• Justifies an organization devoted to it. There should be someone definite in your company who “owns” each segment.
  
  

One clothing retailer developed segments by asking the following questions:

• Who are my best customers?
• What percent of sales do they generate?
• How big is their clothing budget and the chain's share of their wallet?
• What are their demographic characteristics?
• When and what do they buy in our category?
• Who buys full price versus only items on sale?
• When and what do they buy from the competition?

They went through four steps to create the segments:

• Determine the behavior that drives each segment
• Identify naturally occurring clusters of customers with a unique buying pattern
• Enhance these clusters with lifestyle data and demographics
• Conduct an in-depth survey of each cluster for competitive information and fashion attitudes
  

The chain ended up with nine customer segments. The bottom three segments had 52% of the customers and 10% of the sales. The chain allocated only 5% of the marketing budget to these three segments. The top three had 14% of the customers but 55% of the sales. These received 60% of the marketing budget. Result: increased retention and increased sales from the top segments compared to controls.

Arthur Middleton Hughes is Vice President / Solutions Architect of KnowledgeBase Marketing. He is the author of Strategic Database Marketing 3^rd Edition. (McGraw-Hill 2006).

source: http://www2.kbm1.com/