Customer Segmentation: The Most Powerful Marketing Tool

Perhapsthemostpowerfulandunderusedmarketingtoolavailabletomedia,cableand telecommunicationscompaniestodayissegmentation:theabilitytoidentifyhighopportunity customergroupswithinyourmarketplace. Segmentationisbasedonthepreceptthatnotallcustomersareequal.Somecantlive withoutyourproductotherscouldntcareless.Somecustomersarehighlyprofitableothers areonlymarginallyprofitableorevencostyoumoney. Marketsegmentationallowsyoutofocusyourscarcemarketing resourcesandappealtopotentialcustomersinwaysthataremost likelytogetthemtobecomeloyalcustomers. Usingsegmentation,youcanspeaktotheneedsandinterestsof different groupsyoucandeterminewhetherthereisa product/servicefitinhighopportunitysegmentsyoucanweigh whetherproductenhancementsornewproductsmightappealto targetedgroups. Marketingtospecifiedsegmentsdoesntnecessarilymeanthatyou targetonebestsegmentandexcludeothers.Itmeansthatyou knowhoweachsegmentislikelytoreacttoanoffer,aprice,a promotionorproductenhancement,andwiththatknowledgeyoucancraftastrategythatgets thebestpossibleresponsefromeachsegment. Marketsegmentsprovidethebuildingblocksforlongtermgrowthandprofits.

Segmentation Defined
Thegoalofasegmentationsystemistoidentifygroupsinwhichthecustomersareasmuch alikeaspossibleandgreatlydifferentiatedfromcustomersinothersegments.Ifthe segmentationsystemiswelldesigned,membersofasegmenthavesimilarinterests,attitudes andbehaviors,andtheywillrespondsimilarlytoelementsofthemarketingmixsuchas pricing,promotionandsaleschannel. Allconsumermarketscontainmanysubgroupsofcustomersandprospectswhobehave differently,havedifferenthopes,fearsandaspirations,andhavedifferentpurchasing behaviors.Segmentationenablesacompanytocraftindividualmarketingplansthathit the hot buttonsofeachconsumergroup. Segmentscanbedevelopedfrommanyvariablesthatexplainandpredictconsumerbehavior: buyingorusagehabits,demographics,geodemographics,pricesensitivity,lifestylesand mediaconsumption.Mostcustomer surveyscontainawealthofdatathatcanbeusedto

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developasegmentationsystem.Yourcompanysowninformationinternalsalesdata,direct marketingdatabases,andcustomerrecordsareanothergoldmineofinformation. What isnt a segment? Subgroupsofthemarketarentnecessarilysegments.Forexample,thesubgroupofwomen aged25to45maynotbeamarketsegment.Asubgroupisconsideredamarketsegment only if it can be defined as different in needs, values or desires from other groups, and its members respond to particular marketing programs in ways that differ from responses by membersofothergroups Withoutgoodstatisticalresearchtoolssuchasclustering,CHAIDandCART,definingeffective segmentsisdifficult,ifnotimpossible.Segmentingconsumersonlybyageorincomeisoften misleading,particularlyifthereareothervariablessuchasfamilystatus,occupationandhome ownership that interact to play a role in determining purchasingbehaviors. Therealityisthatdifferentsegmentsofthemarketdohave differentinterestsandbehaviorsandwillhavedifferent responsestoofferings products,price,promotionandsales channels.Effectivemarketinglooksatsegmentsasbuilding blocks,witheachhandleddifferentlyinordertobuildthe entirecustomerbase.Itsfareasiertodealwiththeneeds andinterestsofsmallergroupsseparatelyinabuildingblock strategythantotrytoserveanentiremarketwithaone sizefitsallapproach.

Benefits of Segmentation
Awelldesignedandefficientsegmentationsystemprovidesacommonmarketingframework fortheentirecompany.Managersinalldepartmentscananalyzeandunderstandthe marketdowntotheindividualhouseholdanddevelopcoordinatedplanstoimprovethe companysperformanceinthemostvaluablesegments.Thekeyelementsofsegment performanceincludemarketshare,acquisition,retention/churn,profitabilityandcustomer satisfaction.Segmentationhasfourmajorbenefitsfororganizationsthatwanttoimprove marketperformance: 1) Identifyopportunitiesineachsegmentusinggapanalysis 2) Improveaverageretentionandprofitabilityofcustomersonasegmentbysegment basis. 3) Implementindividualmarketingplansforeachtargetedsegment 4) Enhanceproduct/servicefitintargetedsegments. 1) Identify Opportunities with Gap Analysis Theabilitytoaccuratelydeterminethesizeofamarketandthenbudgetsalesisafundamental benefitofaneffectivesegmentationscheme.Aneffectivemarketingtechniqueiscalledgap analysis.Gapanalysismeansasking,Howmanycustomersdowehavetoday,andhow
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manymorequalifiedprospectsareavailableineachrelevantconsumersegment?Qualified meansprospectswhosecharacteristicsmakethemlikelycandidatestobecomeandremain customers. Usingsegmentation,acompanycancalculatehowmanysubscribersareineachsegment, andhowmanymorelookalikesexistineachsegmentthegap.Oncethegapineach segmenthasbeendetermined,theorganizationcantakeactionstoclosethegap. Byusingthesegmentationsystemtotakesnapshotsofthecustomerdatabaseatregular intervals,acompanycanquicklydeterminewhichsegmentsaregrowing,remainingstaticor declining. Gapanalysisalsoprovidesafactbasedmethodtosetrealisticcustomeracquisitiongoals.It canleadtoabudgetbasedonspecificassumptionsaboutthesizeandopportunityineach segmentthatsrealisticandachievable. Gapanalysisalsocanbeusedtoidentifyunderpenetratedbutpotentiallyprofitablesmall geographicareassuchasZipCodesandCensustractsandblockgroups.Segmentcodes canbeattachedtothesegeographiesusingatechniquecalledgeocoding.Thenthe companycanidentifygeographicareaswithgoodpurchasing demographics,butrelativelylow penetration. 2) Improve Customer Retention and Profitability Asecondpowerfuluseofsegmentationistheabilitytolookattheloyalty,oraverageretention, ofeachconsumersegment.Usingnewinformationtechnologies,suchasmultidimensional analysis,acompanycancalculateretentionbyweeksormonthsforeachsubscriberina segmentandthenidentifywhichsegmentsareveryloyal,marginallyloyal,orlikelytochurnor notpay.Acompanysmarketing department canidentifythevarious componentsofchurntofindoutwhat operationalormarketingfactorsare workingagainstloyalty.Itisalsopossible tocalculatechurnonanindividual segmenttosetmoreaccuratenew customeracquisitionbudgets. Understandingthedynamicsofloyaltyisa majorcomponentforbuildingrevenuesandprofits.Formanycompaniesafivepercent improvementinaverage52weekretentioniscanincreasethenetpresentvalueofthe customerbasebymorethan80percent. Mostcompaniescouldreapmajorbenefitswithamarketingstrategyfocusedonretention. Measuringandtrackingretentiononasegmentbysegmentbasisopensupgreat opportunitiesforcrossdepartmentalefforts,suchasmoreeffectivemarketingactionsand productenhancements,todramaticallyimproveacquisitionandretentionperformance. Thecombinationofpenetrationgapanalysis,propensitytopurchaseindexesandretention indexescanandshouldguidetargetingstrategies.Itslogicaltofirsttargetsegmentsthat haveahighprobabilityofbecomingacustomerandalsohaveaninherentdegreeofloyalty.

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Othersegmentscanbetargetedinorderofopportunitytoachieverequiredacquisition numbers. 3) Use Marketing Strategies Tailored to the Segment Oncethetargetingplanisdeveloped,thethirdmajorbenefitofsegmentationkicksin:the companygainsanunderstandingofthecharacteristicsofconsumersineachsegment demographics,lifestyles,purchasingbehaviors,mediaconsumptionandattitudestowardthe companysproductsandservices(ifavailablefromsurveyresearch). Theknowledgeofeachsegmentscharacteristicsenablesacompanytotailoroffersand promotionsthathavethebestappealprospectsinindividualsegments.Thebasicelementsof themarketingmixprice,promotion,place(saleschannel),andproductcanbevariedtosuit theneedsofeachsegment.Acompanycancraftmessagesandcommunicationsthatare tailoredtotheneedsanddesiresofeachsegment. Segmentationsystemsdevelopedusingacompanysown dataandresearchcanalsobelinkedtosyndicated researchsuchasScarborough,NFOorGallup.For example,Scarborough,availableinthetop64MSAs,has awealthofinformationaboutconsumerbehaviorsfor shopping,mediaconsumption,leisuretimeactivities, travelandentertainment.Combiningproprietaryresearch withsyndicatedresearchinasegmentationsystemallowsthecompanytocreatevividand detailedprofilesofconsumersineachsegmentandthentailorthemessagesandoffersto thoseprofiles. 4) Enhance Product/Customer Fit Highratesofchurnandpoorretentionmaybesymptomsofaproductorservicethatisnt completelymeetingcustomerneeds.Thefourthmajorbenefitofsegmentationcoupledwith effectivesurveyresearchistoidentifyopportunitiesforproductenhancements. Surveyquestionsrelatedtoproductattributes,customersatisfactionandpropensityto purchasecanbeprofiledviaindexes(aboveorbelowthemarketaverageof100)toclearly indicate thedegreetowhichproductenhancementsarelikelytoimprovecustomeracquisition andretention. Individualswithinpoorlyperformingsegmentscanbeinterviewedviafocusgroupsorprimary researchtoidentifypossibleproductimprovementsornewservicesthatwouldbettersuit customerswithinthesesegments.Marketingbestpracticecompanieswillactivelyinvolve customersinthedesignofnewproductsandserviceenhancements.Segmentationenables thecompanytoidentifythoseindividualsmostlikelytopositivelyrespondtoproduct improvements.

Putting It All Together

Ascompetitionheatsup,companiesmustgetsmarterabout whom theyaretargetingfornew acquisition,product/serviceupgradesandretention.Theuseofmarketsegmentationshould

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beafundamentalstrategyforcompaniesthatwishtoimprovetheirsalesandprofit performance. Effectivesegmentationisoneofthekeystoimprovingcustomerretention. Targeting therightprospectsinthefirstplace thosethathaveahighpropensitytopurchase andstayloyal willhaveadramaticeffectonretentionandincreasecashflow.

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