Divide and conquer: customer segmentation

Not all customers are the same. This fact is already widely known and accepted. However, after accepting this statement some questions remain. In which way do your customers differ? What are their characteristics and what is their value? Who is new, loyal, or prone to leave? Since understanding your customer is one of the most important steps to improve the relationship with the customer, these questions are of fundamental importance. All of these questions can be answered by using a simple, but reliable and effective method: customer segmentation.

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Why customer segmentation?

The outcome of customer segmentation are several actionable segments including customers with specific characteristics. By knowing exactly which characteristics and behaviour each segment has, these segments can be approached using tailored communications, avoiding the shotgun method of sending the same message to everyone. This will not only increase initial sales, it will also increase the engagement of your customer. In the end the customer will become more loyal with an increased customer lifetime value. All due to a quick-to-develop method.

Different types of segmentation

Marketing is based on countless customer attributes such as demographics and individual behaviour of customers. Based on these attributes even more distinct segmentations can be made. Think of old versus young customers, new versus existing, etc. However, these segmentations rely heavily on human decisions and would not help in answering your questions in many cases. How to decide on segmentation?

RFM analysis

The most used technique, the RFM analysis, is only based on three individual behavioural customer characteristics: the Recency of purchases, the Frequency of purchases, and the Monetary value of the purchases. This type of segmentation is data-driven and has a proven track record of being an effective aid for marketing efforts. Moreover, in contrast to other segmentations, there is a direct link with customer value.

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When looking at these three characteristics it is easy to answer business questions. For example, the valuable and loyal customers become easily visible: they purchase frequently and spend more. Since the past behaviour is the best predictor of future behaviour these customers should be cherished! For example by giving these customers an option for a pre-sale. Low, sleeping customers could be investigated. Previous campaigns proved to be especially successful in this part. A clear distinction in engagement and preferred channel between the segments has become apparent.

Campaigning

Some options for possible campaigns are already mentioned in the figure above, but a wide range of tailored campaigns is possible. Each situation might require a different approach. To start with the high valued customers: since these customers are strongly tied to the brand or the product they are perfect as promoters. Transforming this segment to ambassadors can lead to customer acquisition while the segment remains high valued. The customers in the second best segment are repeat customers, but with room for improvement. Their individual preferences are clear, since they are customer for a while already. Up- or cross selling can be done by using these preferences to develop (individual) campaigns.

The third segment are for example mostly new customers. These customers need to be developed into valuable repeat customers, for example by an engaging a welcome campaign after the initial sales. Teach them the value of your product and offer them entry products. The last segment are the customers that were not active for a long time: they are sleeping. Wake them up! Activate them with one-time offers, exclusively for this segment.

Quick wins and benefits

Customer segmentation is quick to develop, easy to interpret, and leads to immediately actionable marketing strategies. It’s the starting point for deeper customer insights and marketing campaigns such as predictive modelling (in Dutch), recommendable for all companies. Since each segment has different characteristics, they could be approached via their preferred channels. Where loyal customers might prefer e-mail, other segments might prefer other channels (e.g. direct mail). Using these insights will lead to maximizing your campaign ROI.

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