The benefits of segment-level marketing can be quantified.
Posted Jul 1, 2007
Some customer segmentation approaches last, many don't. Some drive entire organizational structures, marketing strategy, and financial success, while others are barely actionable. What is the secret to segmentation success, and how can you avoid the pitfalls?
Clearly, there are many different ways to differentiate customers and therefore many different approaches you can take. Needs-based segmentation schemes are useful tools to help tackle brand strategy or product development issues. Behavioral segmentation provides a highly actionable framework for targeted customer development strategies. Experienced marketers learn over time to use and integrate multiple segmentation schemes to achieve various objectives. For our purposes, let's focus on behavioral segmentation and what steps will ensure your success.
Step 1: Clearly define the business needs
This may be the most important step. While high-level business goals, such as increasing sales, improving retention, or raising profits, are generally well understood, the key is to go one step farther. Push yourself and key stakeholders to address the question "How could segmentation get me there?" Think about what could practically and realistically be accomplished. For example, one way to increase sales may be to develop targeted cross- and upsell strategies. Understanding different customer groups, buying behaviors, and value potential through segmentation--and developing targeted strategies based on those insights--is an achievable way to reach broader sales goals.
Step 2: Identify the profit levers
Once you have clearly established goals and objectives, the next step is to identify the levers--the customer behaviors that drive business results and can be influenced by marketing actions. For example, your goal may be to drive profitability and there are several ways to do that: increase purchase frequency, shift purchases toward higher margin goods, cross-sell new products, or decrease costs. Come up with a short and manageable list of profit levers. The best segmentation solution is one where there are distinct differences in the profit levers across segments and there is real potential to improve on profit-producing performance.
Step 3: Determine a methodology
After devoting sufficient time to addressing business needs and segmentation drivers, it is time to identify the methodological approach. If at all possible, ignore any demands from the business to let the segmentation approach be entirely data driven or statistically based. Segmentation schemes must be directed at some level to ensure they have impact on the business. The best solution is an iterative process that starts with hypothesis-based EDA (exploratory data analysis), and allows the developer of the segmentation to identify key differences across groups that can be influenced and are actionable.
Step 4: Explore alternatives
Before arriving at a final solution, think broadly and test several possible alternatives. Identifying a solution early on and sticking to it without adapting as you learn is likely to result in a substandard compromise. Keep exploring for a while. Meeting a short-term deadline is much less important than finding the right long-term solution. If your solution is a good one, it will far outlast the next marketing campaign or board meeting.
Step 5: Vet multiple constituents
Another essential element for success is the right level of communication throughout the project. The user community and key stakeholders across the organization can provide invaluable perspective and insights. Their participation early in the project will ensure commitment and buy-in. It will also ensure that decisions are aligned with business needs and important details are not overlooked. Before the project even begins, outline a plan with project checkpoints and updates, along with an opportunity for stakeholders to contribute. This will ensure adoption.
Step 6: Bring the segments to life
Once the segments are defined, an absolutely critical step is running extensive profiles of the segments. This is the only way to bring the segments to life and explore all of the business potential that each group represents. Make sure to provide descriptive profiles that include demographics, such as life stage, age, income, presence of children, and life interests. Also include all of the key behavioral metrics, particularly customer value components and a summarized customer value measure. If possible, a future value projection for each segment is extremely useful at this stage.
Step 7: Create a more powerful segmentation
Segmentation becomes even more powerful when used in conjunction with other analytic tools. Predictive models are the most logical companion to segmentation. In most instances, models are the best tool choice for targeting, because they provide the most direct way to pinpoint customers with a desired behavior. Just think of the possibilities when you can first target customers through a model, and then split that group of customers by segment.
Step 8: Identify quick hits
If done right, the analysis leading up to the segmentation along with postsegmentation profiling will spark an abundance of marketing program ideas. Identify the high-impact, eas- to-implement programs where the segmentation will make a difference--either through refinement of existing programs or creation of new ones. Plotting the segments across a segment opportunity grid highlights priorities and differing levels of potential. Often, the number of marketing program ideas outpace the organization's ability to act on them all. In that instance, a business-case-driven approach should be employed to help prioritize the initiatives.
Step 9: Invest in a well-thought-out segment development and test plan
True segment-level marketing goes beyond one-off programs. An organization that is committed to customer differentiation through segmentation will follow a long-term segment development plan. In this case, segmentation provides the foundation to build customer relationships end to end across their life cycle. Remember, each segment represents diverse behaviors, interests, and opportunity. Different levers will be pulled for different segments at different times. A comprehensive plan for each segment should include segment-level objectives and tactics, unique value proposition development, targeting/tailoring/testing plans, and a longitudinal contact management plan.
Step 10: Proactively identify measures of success
As data-driven marketers, we thrive on the fact that our discipline is highly measurable. From the start, segment-level performance should be baselined against key success metrics, with goals established to improve above the baseline. Develop segment-level dashboards to communicate segment performance and track trends over time. Through a well-developed test plan, the benefits of segment-level marketing can be quantified and, ultimately, celebrated.
About the Author
Marcy Riordan is vice president, consulting services, at iKnowtion. Please visit www.iknowtion.com.
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