• November 8, 2000
  • By Nicholas Poulos, managing director, Chrysalis Marketing

Choosing Customers Through Needs-Based Segmentation: Part 1

Part 1 of a 2-part article

The most important set of decisions any corporation can make are those involving selection--of products and services to provide, of customers and of the channels through which it will market them. Since the resources of most firms are limited, selection decisions can make or break a company. A company targets those customers who allow it to earn the return it needs to grow and prosper, and the best fit occurs when the targeted buyers' needs and the way in which they want to buy align consistently with the product and service delivery your firm proposes.

When making selections, keep in mind one more variable: the return on each customer. As marketers, it is our responsibility to invest in customers in direct proportion to the estimated return they will afford our company. Under that assumption, targeted customer segmentation to promote selectivity within your existing customer file becomes the most valuable application for your CRM and marketing database efforts.

Segmentation is 80 percent artistry, with the balance made up of "scientific" analytics. But it's the company's most powerful tool with which to create a loyalty-focused enterprise. Traditionally, segmentation studies have been exhaustive analyses of fixed, targeted groups. But segments--clusters of customers with similar sets of needs and buying behavior--tend to change over time, a phenomenon known as "segment migration." The methodology outlined below presents a proven approach that can deliver actionable segmentation, which can track such segment migration in near-real time.

Needs-based Segmentation

Until recently, most business communication with customers (present and potential) tended to address them as a great, undifferentiated mass--because there was really no practical way to do otherwise.

But today, computer advances have made it considerably easier and economically practical to break down the targeted audience according to whatever factors you choose. Since not all customers are created equal, needs-based segmentation, when combined with an analysis of your customers, allows you to target the investment of your limited resources toward those customers who are most potentially valuable to you. It gives you a practical way to implement enterprise-wide customer relationship management (a.k.a., "one-to-one marketing").

Needs-based segmentation is, for many,
the strategy of choice, since it is needs that drive market behavior. Knowing how customers make their actual buying decisions can help marketers fine-tune their targeting efforts and make the most of their limited resources. Needs-based segmentation is the clustering of customers (and later, prospects) according to common sets of needs and purchasing behaviors--then dividing your customer list into one or more segments, each consisting of a group of customers who share a common set of needs and ways of doing business. In short: Select the target audience; identify the clusters of similar needs; apply a grading or valuation approach; and find a way to invest in your customer portfolio in direct proportion to the expected return on your customer investment.

Segmentation is a prerequisite to enterprise customer relationship marketing, which is a loyalty-focused, customer-based business design in which the enterprise manages "the point of contact" across multiple communications channels and integrates the customer experience across its entire organization. Segmentation-informed marketing uses ongoing, targeted, value-adding communication so as to create a highly satisfied, loyal base of long-time customers whose value grows over the years. The enterprise works with each segment separately, talking to each in terms of its specific hot buttons.

The goal throughout the segmentation process is to achieve alignment and focus across the customer-facing organizations. But no generic description of segmentation can hope to be comprehensive, because of the infinite variety of permutations the concept invites.

Let me repeat: segmentation is artistry.

There are, however, certain guiding principles that provide a framework for the segmentation process. The process includes anecdotal insights, qualitative and quantitative research, analytics and real-time monitoring. The synthesis of these steps yields an insight into the targeted set of customers and an organization that is focused on the right set of core customers--a company that is well on its way to becoming loyalty-based.

step 1: Identifying
your best customers

Earlier attempts at segmentation generally focused on certain demographic characteristics, such as company size, SIC code and sales volume. This was (and is) certainly a start, but compared to today's segmentation strategies, it was like wielding a meat cleaver rather than a scalpel. Two customers who look virtually identical according to these criteria may in fact buy from you according to very
different buying practices. One may be among your most loyal and profitable customers--while the other is hardly worth the effort.

Has your organization defined "a
customer"? Or is your enterprise attempting to be all things to all people? Simply put, a customer needs to be defined as someone, or an organization, who buys X-dollars of Y-products over Z-duration. The enterprise cannot serve every customer profitably. Instead, the firm will want to invest its limited resources in those customers and prospects who bring the most value. The firm should invest in direct proportion to the expected return on marketing dollars spent.

Today's most successful database marketers begin at the other end of the equation, examining the needs their most loyal customers want met when dealing with them. The starting point for this kind of analysis should be finding those customers who consistently give you their largest share-of-wallet, use the broadest range of your offerings, purchase on a regular, repeating basis and who provide the best profit margins.

step 2: Identifying
customer needs and concerns

Next you must determine why these customer companies have chosen your product or service. Which of their needs have you been particularly qualified and willing to meet?

Before you go outside to acquire this information, ask those people in your own organization who know your
customers best, such as account managers, sales reps and dealers. You have a wealth of information right at hand; and it's data that is unique to your company. Your competitors' segmentation won't look anything like yours.

In the process, learn how your customer's business, and particularly its purchasing cycle, works. Are purchasing decisions centralized or decentralized? How long is the buying cycle from identification of needs to purchase decision? Who (by position) influences that decision, and where in the cycle? What information do they need to do that and when?

Next, do your industry research--check the trade journals, government sources or professional organizations in your customers' fields. For additional "data overlay" information, or to validate the data you have, such firms as Dun & Bradstreet or Harte-Hanks, as well as industry-specific publishers can be valuable resources.

To add true depth-of-insight to your identification of the ideal customer, you must add the outside-in perspective. Your best sources will be your customers themselves. There are a number of ways to learn why and how customers and prospects buy. You can initiate ongoing two-way dialogue directly with current customers by offering an inbound 800 number or a help line. Other proven methods include establishing users' groups, publishing a market- or segment-specific customer newsletter and interviewing customers for articles, scheduling advertising or direct mail with a response mechanism, querying visitors to your trade-show booth and conducting surveys or focus groups.

But unless you also have a mechanism of getting all this information into your CRM platform (the marketing database), no single person--even the individual at the top--will have more than a few pieces of the total jigsaw puzzle. And so each of you will be making critical strategic decisions that are based on only fragmentary information.

A well-designed, well-implemented database serves as the repository of corporate memory. Every customer-contact person in your company, from your service people to your telemarketers, should understand that part of their job, and a great deal of the value that they deliver to their employer, comes from enhancing the resolution of the images. Managing the point of contact requires that each pertinent insight is logged into the corporate database, through whatever contact processes, or communications media you devise.

step 3: Compare customer needs to your strengths

If you're typical, 80 percent of your customers buy from you for one or more of just a handful of reasons--usually, no more than four to six. What are they? And how well do they coincide with the external service values you consciously have worked at developing? (And, how well are they aligned with your core competencies?)

You may find that for some customers, the differential value you create may consist of quick response time or quality of the product or how often your rep calls on them (or conversely, how easy you make it for them to order via e-mail, minimizing disruption of their day).

In other words, one customer's perception of the value you add may be another's disincentive to buy from you. It's important to know which is which, and for whom. The more you work with your database, the more leery you'll become of single, anecdotal comments--that is, the tendency we all have to think that if one customer feels this way or that, it must be true of all.

In the course of the research, you may have the pleasant experience of discovering strengths you didn't recognize you had--or at least which didn't seem as important. What matters, however, is what your best core customers think. If something is important to them, then it's important, period. You should be nurturing it, refining your ability to deliver it and capitalizing upon it.

For most organizations, the great
"a-ha!" occurs when you overlay the external service values in which you know that you excel over the matrix of your customers' needs and buying behavior so that you can begin to see where your marketing emphasis should be.

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Choosing Customers Through Needs-Based Segmentation: Part 2

eLoyalty VP Nick Poulos discusses needs-based segmentation strategies for acquiring and retaining customers based on what they want and how they buy.