Finding Profit in Customer Behavior
Chasing market share is yesterday's strategy. We're all painfully aware that market share no longer guarantees profitability. Customer share--also known as share of customer or share of wallet--is the metric to watch.
Companies win customer share by investing in customer development and customer management strategies. But these strategies are neither cheap nor easy. So it's imperative to determine which customers are worth developing and managing. Remember, not all customers have equal value to your organization. Some will spend a lot, pay their bills on time and never call your customer care center. Others will spend the minimum, wait 90 days to pay their bills, and tie up your customer care reps for hours. And then there are customers who probably would buy more services, but need just the right nudge at just the right time to act.
Marketing strategists Don Peppers and Martha Rogers have described three basic types of customers:
Most Valuable Customers (MVCs)
Most Growable Customers (MGCs)
Below Zeros (BZs)
As a marketer your job is to retain the MVCs, to grow the value of the MGCs, and to either convert the BZs to MGCs or convince them to defect to a competitor.
But how do we predict customer value? How do we know with any reasonable certainty which customers to keep, which customers to grow, and which customers to lose? That's where customer segmentation methodology proves especially valuable to the marketer.
Many industries already use geographic and demographic segmentation techniques to identify potentially valuable customers. In markets where there is little competition, essentially passive strategies such as these can deliver adequate results. But in markets where competition is intense and churn rates are high, passive strategies won't improve the bottom line.
Behavioral DNA
So what type of segmentation should the competitive marketer select? On the horizon are various forms of attitudinal segmentation and transactional segmentation. But these types of segmentation, though promising, are likely to require too much raw data and too much processing power to meet the real-time needs and real-world budgets of most marketers in the near term.
Behavioral segmentation, however, offers meaningful insight and actionable business intelligence at reasonable cost.
Most important, from the marketer's perspective, is that behavioral segmentation makes it practical to develop extremely cost-effective and highly targeted marketing campaigns. Behavioral segmentation and behavioral modeling technologies will enable many marketers to know their customers as real people with real needs and real preferences for the first time.
Unlike other measures of customer value, behavior tends to evolve very slowly over time. Behavior is like a fingerprint or a DNA signature. It's highly stable. Once you've painted an accurate picture of a customer's likely behavior, the picture is unlikely to change for quite a while. This gives you, the marketer, a virtually infinite series of opportunities to cost effectively and unobtrusively market new services to this customer.
Once you know who your customers are and understand their desires, you stop throwing away money by marketing to people who aren't interested in what you're offering. You stop running campaigns to acquire customers who wind up costing you more to serve than you will ever earn from them.
On the other hand, you know which services your most valuable and your most growable customers want and which services they need. You know when they prefer to be contacted. You know from which touch point they prefer to receive communications. You possess the knowledge to create a credible dialogue with customers that opens the door for selling new services.
As most of you know it costs significantly less to sell a new service to an old customer than to acquire a new customer. That's why it almost always makes sense to retain good customers. Loyal customers tend to be your most profitable customers. And they're a great source of information you can leverage to create new and innovative services that keep you ahead of the competition.
Several experienced vendors offer prebuilt, customizable segmentation products that give marketers the ability to create more accurate customer segments and predict customer behavior. This in turn gives organizations the power to create better-targeted product offers, product communications, and bundled services.
Ideally, behavioral segmentation products should include:
A segmentation analytical data and process model
Customer profitability analysis and reporting
Billed services behavior analysis and reporting
Unbilled services behavior analysis and reporting
Customer and product analysis and reporting
The segmentation analytical data and process model considers billing patterns, credit risk scores, loyalty, profitability, length of time as customer, and more. Segments indicated by the model go beyond geographic and demographic segmentation to include a range of profitability designations, as well as predictions of future profitability.
Whichever segmentation product you choose, it should work smoothly with your marketing automation processes. If you haven't implemented marketing automation, I urge you to start. Marketing automation gives you the capability to:
Plan the most effective marketing campaign with a top-down strategic focus.
Target campaign activities to tightly defined customer segment and manage each target cost-effectively.
Optimize those plans to increase campaign velocity, flexibility, and ROI.
Learn by measuring campaign results and integrating new knowledge into refined strategies and future campaigns.
An industry on the cusp of change
The U.S. cable television industry is a prime example of an industry poised for conversion to customer centricity. To be sure, the CRM tidal wave that's about to sweep over the nation's cable providers has already swept over a dozen or so other industries. Certainly, the impact of CRM has left those industries greatly changed, and for the better.
Think of financial services, automotive, travel, telecom, and even manufacturing. They've all transformed themselves radically to compete in the era of customer-centricity.
Now it's time for the $49 billion-a-year cable industry to undergo a similar transformation. It's not a secret that many cable providers are struggling to segment their customers effectively, often because they have difficulty sorting through the huge volumes of customer data that exist throughout their organizations.
Consider the aggregate numbers and you'll see the problem: Nationwide, 9,947 cable systems provide services to 71,897,250 basic cable customers and 54,000,000 premium cable customers.
That's a very large base of customers for an industry trying to wrap its arms around the notion of customer-centricity. Cable executives will need to see fast, consistent results from CRM implementations.
Welcome to the bundled universe
The importance of segmentation heightens as cable providers assemble increasingly complex bundles of service offerings for their customers. As these bundled services grow in potential value, they also increase the level of risk assumed by the cable provider. For cable marketers, this can be a real headache. Bundled services are clearly the future, but they're expensive to market, sell, and maintain.
Here again, behavioral segmentation proves a blessing. Your understanding of customer behavior enables you to tailor the most attractive--and most profitable--bundles from your existing portfolio of services and micromarket them to the customers most likely to say yes.
Bundled services--and especially customized bundles--also offer the best defense against churn, because they tend to entangle the customer in a web of services that they genuinely desire.
For example, broadband connections are driving home-networking adoption, according to a new study by the Cable and Telecommunications Association for Marketing (CTAM). The CTAM study "Home Networking: New Connections for the Broadband Household" polled 1,010 randomly selected U.S. households with personal computers. CTAM discovered that broadband households comprise 74 percent of all those with a home network.
CTAM also found that awareness of home networking among adults with broadband connections is 70 percent and that 40 percent of all broadband households who are aware of home networking have one, compared with 18 percent of all households who are aware of home networking.
Clearly this represents a huge opportunity for cable providers that have the capability to deliver bundled services and the commitment to develop behavior-driven marketing campaigns. But it also provides a clear lesson for marketers in other maturing industries.
In every customer-centric business marketing should be driven primarily by customer behavior. The good news for marketing executives is that the technologies necessary to develop behavior-driven marketing strategies are available and rationally priced. Now's the time to invest in the future of your marketing strategy. It's like your third-grade teacher said: Behavior counts.
About the Author
Jeanette Hansen Slepian is president of BetterManagement.com, an online business management information resource based in Beaverton, OR. Contact her at jeanettes@bettermanagement.com
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