• February 1, 2008
  • By Jessica Tsai, Assistant Editor, CRM magazine

The Smallest Slice

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Segmentation. Sounds like just another fancy word for knowing who your customers are and knowing what they want. But it's more important than that: Companies are expected to expand beyond a mere customer list, to take it a step further. The good news is that segmentation is inherent to almost every business. Just on intuition alone, any marketer can roughly determine her company's best customer -- a 35-year-old head of household with three kids, for example, is a perfect target for breakfast cereal. Even within the broadest category, though, there are subgroups of individuals who will respond differently to different campaigns. "There are very few people who just throw things against the wall and hope it sticks," says Richard Hren, director of product marketing at SPSS, a provider of predictive-analytics software. The fragmentation of the market today is so extreme that even if you wanted to target "mass" audiences, the task is literally impossible. Hren says that the average person is hit with approximately 5,000 advertising messages a day. Twenty years ago, an attempt to reach 80 percent of the American population could be covered by placing three advertisements on the three major television networks. Now, he says, it would take 150 to 200 advertisements to reach the same number of people. "Even if you mass market a product, you can't reach [consumers] in a mass way," Hren says. Instead, marketers end up buying just a portion of their intended audience. Making sure it's the right portion is the trick. Fragmentation has led to such market disarray that targeting is now a chore. (See "Oh, Behave!," January 2008, for more on the sorry state of behavioral targeting.) But this lack of efficiency has rubbed end users the wrong way, helping to explain why, for example, email blasts achieve such low response rates or never even reach the inbox. "Organizations have relatively low credibility with their customers these days," says Denis Pombriant, founder and managing principal of CRM consultancy Beagle Research Group. "It's the great American shoot-from-the-hip cultural thing: Shoot first, ask questions later." As a result, marketers often seem to lack authenticity. "The more you can rifle-shot your approach to your customers, the more authentic you're likely to seem -- and the more credible," Pombriant says. Once outside their mass-marketing comfort zone, marketers quickly recognize the value of segmentation -- some more than others. "Every business out there does some form of segmentation, it's just a question of sophistication," states Anthony Deighton, vice president of marketing at business intelligence software provider Qliktech. It can be money well spent. Segmented properly, a customer list can have significant shelf life and provide a significant return on investment. Matt Edmunds, general manager of collections at Massachusetts-based automated customer contact solutions provider SoundBite Communications, reports that analytics can help clients determine which customer segments want to be called when, and which variety of voice -- American female, British male -- they're most likely to respond to. These efforts have helped SoundBite clients achieve anywhere from a 15 percent to 200 percent lift in customer conversions. Segmentation leads to personalization -- or at least the appearance of it -- intensifying B2C communication to foster long-term relationships and, ideally, long-term profitability. "The idea here is to make that customer experience for that homogenous subset of people maximally impactful," Hren says. "Identifying those packets upfront allows you to really [spend] your marketing dollars in the best possible way." Despite clear benefits, however, successful segmentation remains the hallmark of the elite. Only 30 percent of SoundBite's clients, for example, utilize its analytics service, Edmunds says. Not surprisingly, these are most likely to be Fortune 500 companies, but Edmunds says he anticipates a rise in adoption soon. This belief also resonates in a recent Direct Marketing Association survey, in which 54 percent of direct marketing professionals -- a surprisingly high percentage -- report considering lifetime value in their marketing decisions. Also, your segmentation process should be consistently reevaluated. In the spirit of this month's cover story (see
"CRM Gets Serious"), we look at segmentation according to three levels of sophistication. The Novice: Hack Away Starting simple is always best. "If you're not doing anything, don't try to boil the ocean, or whatever bad metaphor you're looking for," Hren says. There's always time to get more complicated later, but jumping into it too quickly will only risk a corporate burnout. As Hren says, "It's much easier to build off of small successes than it is to recover from a massive failure." Successful companies are those that are able to realistically evaluate their needs and develop solutions that fit those needs. "You need to really identify the business problem and how you're going to use [segmentation] first," Hren says. Pombriant agrees: "It takes a little bit of time, a little bit of money, and mostly what it takes is creativity--the creativity to understand your customers and process and to build outreach programs that uniquely fit the process that you've identified." Quality segmentation goes beyond the marketing and sales departments, requiring the participation of senior management. Upper-level executives have to sit down and honestly answer these seemingly simple -- but crucial -- questions:
  • What do I sell and how do I sell it? (At retail? Through a direct/indirect sales force?)
  • What is the business process I need to support? What vehicle or tool do I need (e.g,. email marketing, paid search, etc.)?
  • How many segments can I really support?
That's a lesson Cynthia Clark, chief information officer of restaurant franchise Thomas & King, realized only in hindsight. What her segmentation efforts really required was a transformation in how to problem-solve. Restaurant-industry products are highly commoditized and competition is fierce. "People have so many choices," Clark says. She had to confront individual differences instead of treating everything as a whole. For instance, Thomas & King's restaurants are nationwide, making them susceptible to regional market trends: The price of Arizona's produce is different than Ohio's; demographics are different; Phoenix was suffering from a high rate of home foreclosures when Cleveland wasn't. Every element affects business strategy -- and looking at national averages presented an inaccurate and ultimately useless assessment. "The good news is that it's never been easier to do this kind of thing," Pombriant says. Affordable, on-demand technology has enabled firms of all sizes to launch segmentation efforts without cost- or labor-intensive investments. Yet there's still cause for concern: "The surefire way to be unsuccessful is to put in a [segmentation] tool which is very difficult to implement, takes a long time to implement, and then is hard to change," Qliktech's Deighton says. Easy or not, the time for segmentation is now. Data is flowing into enterprises by the truckload and as the volume increases, intuition isn't going to cut it, and neither is mere manpower. "Just because you have the information doesn't mean you're using it properly," says Dennis Rheault, a partner at Bridge Strategy Group. When testing out possible software solutions, customers must request to see their own data in the tool. "If you're working with a software vendor and they won't show you your data with their tool, kick them out of the office," Deighton says. Many software-as-a-service business intelligence vendors have free trials that can be downloaded straight from their Web page. Further evaluation requires two simple, straightforward questions:
  • How long will it take to have this tool in production for all users?
  • How long will a necessary change take?
"If the answer to [either of] those questions is measured in months or years, that's not acceptable," Deighton says. He believes customers should settle for nothing longer than days, minutes -- or even seconds. But start-up speed isn't everything: Any segmentation tool also needs to be as flexible as a marketing department's campaigns. The biggest mistake is thinking that one system can be applied to another (e.g., expecting a segment tailored for an email blast to be useful for a magazine-advertising campaign). "You've got to think ahead of time," Hren says. "Make sure you have all the hooks necessary so that you can actually make those bridges [later on]." So how do you decide what you need before you need it? Map out your business processes to the best of your ability, think about how you're going to use your segments, and then take it slowly. "It's going to break [companies] if they go in one step," Rheault says, "So we say, 'Why don't we design the first step? Let's categorize your customers into just two groups.'" Set it up so that you leave room to build additional levels of granularity: Don't create a closed system that has no flexibility, Rheault warns. Companies eventually realize they can't stay in this phase any more than they can continue to mass market. Hren's dose of reality is bracing: "Sometimes 'simple' works out well because the cost is low to maintain, but sometimes it's a really competitive marketplace -- and 'simple' loses." The Intermediate: Cut Carefully You've identified the needs of your business, established the basic levels of segmentation, battled the software-selection process -- now what? "Sales and marketing has changed," Pombriant declares: Further segmentation is no longer a luxury, it's an imperative. The key to being more sophisticated is determining whether or not new segments can justify the effort required to identify them. There is such a thing as too much. The goal is to have the greatest amount of difference between groups and high similarities within them. To avoid unnecessary complexity, frequent test-and-learn implementations help to reveal whether your efforts are being compromised by the law of diminishing returns: Does creating this other segment have, as Hren puts it, an "incremental impact"? Here are some questions to help gauge your segmenting situation:
  • Are response rates going down?
  • Are some segments doing better than others?
  • Is the competition segmenting? If so, how?
  • What can I learn from those efforts?
  • Am I doing better, and how can I stay ahead?
  • Is it more efficient to keep these segments apart or, even though they look different, will they both benefit from the same treatment?
Another crucial component to effective testing? A good baseline comparison. It's the difference between decision by intuition and decision by data. Consider the anecdote shared by author Tom Davenport at an SPSS conference last October: Gary Loveman, chief executive officer of casino operator Harrah's, reportedly fires his employees for any of the following violations: 1) stealing; 2) harassing women; or 3) failing to use a control group. Katrina Lane, vice president of channel marketing at Harrah's, likely passes the test. Every marketing program, she says, is measured by its impact on both profit and the customer. Similarly, Thomas & King's Clark says a new value menu recently launched in several test restaurants will sink or swim based on analytics done by QlikTech's business intelligence product, gauging success in each of several customer segments. By constantly evaluating the return from each segment, you can systematically and confidently execute your marketing strategy. In addition to regular testing, there are more overt corporate changes that would signal the immediate need for segment evaluation or modification: new products or price points; a new acquisition or new competitor; or an expanded distribution network. In the end, though, how many segments can you realistically support? Although segmenting enables you to personalize a message to a greater number of people, keep in mind that abandoning some might be just as important. "Each customer has a cost associated with it," Pombriant says. "If you can identify someone who is not a buyer and select them out, you're going to be ahead of the curve even just budgeting-wise." One SoundBite client, a satellite radio provider, steered away from the one-size-fits-all approach, reducing its marketing spend by 30 percent, simply by not calling those who didn't want to be called. Hren says that, even within a still-viable segmentation framework, modification can be useful: You may want to encourage the discount shopper, for example, to occasionally pay full price. And customers themselves often change: They'll marry, have children, or perhaps alter their online behaviors or purchase differently. Even with simple segmentation based on recency and frequency measures, it's critical that you're increasing the value of individuals within and across segments, rather than letting them simply drop out because you don't think they fit anymore. Virginia-based financial services firm Capital One, for example, realized the importance of staying in step with -- if not ahead of -- its customers. "Over time, the various factors in a credit model evolve as the economy and competitive environment evolve," said Chief Risk Officer Peter Schnall at the company's Annual Investor Conference last November. "So one of the tricks of [segmentation] success is keeping the models well tuned." Many firms are neglecting what Bridge Strategy's Rheault calls "strategic segmentation." Most segmentation is based on demographic information; the more sophisticated need-based segmentation compares the needs of different types of customers. But neither of these takes segmentation to the strategic level of introducing a competitive dimension. Decide what you do uniquely well relative to your competitors--focus on what makes you stand out from the rest. (See "Fix What Works," January 2008, for more about focusing on your company's strengths.) The Elite: Slice Surgically For the few who have eaten their cake but want to have it as well, another slice is never too far away. "I hate to say it, but you can always be better," Hren says. There's an old logic problem about always walking half the distance to the finish line -- no matter how often you cut the margin in half, you'll never reach the end. Some companies pursuing segmentation, Hren says, are "very sophisticated and doing some incredibly fine micromarketing, microstrategies, and microtargeting." The path has an air of inevitability to it, he says: "We haven't gotten to nanotargeting yet, but I'm sure that's down the street." Segmentation is a key strategy for all. Even those firms doing exceptionally well on sophisticated segmentation systems can never sit back and relax because the competition is just around the corner. The overall market, though, still has a long way to go before being truly customer-centric. "I think there's still a division between, 'Lets figure out how much money we can extract from them,' and making sure that you understand what a customer needs and bringing products to market that fit the need," Pombriant says, adding that even industries doing relatively well with segmentation have a lot more work ahead. And those best at customer segmentation recognize the work is never done in a vacuum. Since segmentation tries to deliver the best possible customer experience, it makes sense that the best advice would come from customers: Conduct research, do surveys, and gather feedback, Rheault says. Put yourself to the test and ask your customers what you do well, how they perceive you relative to your competitors, and how they most want to interact with you. "Get some really solid customer perception and get out of the mode of just presuming that you're something," he says. Moreover, be sure to include an objective (third-party) viewpoint to offer constructive criticism. A Crumby End? What will differentiate when the world is beautifully segmented? Experts chuckle at the Utopian thought. Segmentation will never quite be a finished project. "It really gets back to the results," Hren says, stressing the benefits of continual reevaluation. Firms that leverage that assessment and balance it with the needs and capabilities of the business will inevitably come out on top. "Don't take anything for granted," Pombriant says: Look at the data, make the comparisons, learn from the analytics -- and you've got the makings of a long-term relationship. What better time to start? After all, February means Valentine's Day -- and you might learn which segment of your customer base "hearts" you the most. SIDEBAR: Marketing Segmentation of B2B Versus B2C In the grand scheme of things, segmenting B2B and B2C customers involves the same general concept: Cater to your customer. However, Dennis Rheault of Bridge Strategy Group offers some basic differences that could influence your segmentation strategy: Consumers:
  • Care deeply about brands -- so focus on the image your brand creates
  • Buy small quantities
  • Make many small transactions
  • Will respond to pushed-out feedback surveys because of volume
  • Require more sophisticated segmentation tools because of the mass of data they produce
  • Care more about value proposition when it comes to brand than they do about how you're trying to make them feel
  • Make fewer transactions
  • Are relatively large accounts -- often at the thousand- or million-dollar level
  • Can be well segmented without sophisticated technology tools because there isn't as much data
  • Can be hit up for feedback more directly (e.g., via in-person meetings)
Although the B2B model may seem like less work, "the segmentation and getting it right [are] just as important," Rheault says. "I don't think it's any easier, just different." Contact Editorial Assistant Jessica Tsai at jtsai@destinationCRM.com.
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