I recall that in the not too distant past customer segmentation, in its many guises, was once a flavour of the times. Segmentation was (and still is) however, a greatly misused term, with organisations confusing the (correct) approach of offering a strategic view of a customer base with the more tactical initiatives of predictive modelling.
I have come to be aware that ‘true’ customer segmentation seems to be disappearing as an input from the planning cycle.
To recap, traditionally there have been a number of ways for organisations to segment their customer base. A few examples of how segmentation could be performed are by:
The choice of segmentation would always depend on the business application.
Behavioural segmentation will utilise a large number of behavioural related data fields to define a relatively small number of roughly homogeneous segments, each of which is distinct in terms of its dominant characteristics.
Such systems are quite different from traditional segmentation schemes which are largely intuition-led (rather than data led), and are defined in terms of very few fields (Recency-Frequency-Value is typical of this class).
Segmentation should always have been considered as a powerful tool within customer relationship management and its role is at the heart of customer relationship building.
As previously stated, a statement such as “derive segments for my next campaign” is completely at odds with what a ‘true’ customer segmentation should stand for. Customer segmentation should not be confused with specific campaign activity.
So what does segmentation stand for?
In my view, it should be to use available data or information to create natural groupings of customers or prospects which:
- Simplify the description of a large heterogeneous customer base or market.
- Suggest tailored marketing strategies, objectives, hypotheses and idea generation.
Importantly, it is worth remembering that there is NO UNIQUE solution and what is best will depend on the application.
Applications and benefits
Segmentation needs to be considered as a planning tool, usually for marketing, it would lend itself to:
- Improved relationship building through tailored customer management and marketing strategies.
- Segment-specific targets & performance monitoring.
- Cross-selling plans.
- Broad brush targeting.
- A new sampling frame.
- Framework to measure overall success of customer strategies, as opposed to campaign-by-campaign evaluation.
So the words “planning” and “strategy” are key to what segmentation is meant to deliver against. The reference to “targeting” has been prefaced by “broad-brush” as segmentation as an approach will deliver an inexact allocation of customers to segments.
Although historically segmentation systems have been derived through the use of complex multivariate statistical methods, a more sensible approach has been to combine logical rules with approaches such as clustering.
If segmentation is a planning and strategic tool then targeting and predictive models can be viewed as a series of “knitting needles” that cut through the segments selecting individuals for specific marketing activity. True, there may be more customers selected from certain segments but customers are likely to be selected from ALL segments.
There may be still be significant variations of customers within each segment; therefore communicate with individual customers and not segments.
Customer segmentation as a planning tool
This weapon in the marketing planners’ armoury appears to have fallen out of favour in recent times – more and more organisations appear to ignore this powerful strategic tool.
Why might this be the case?
- The term “customer centricity” for one thing might have steered organisations towards solely thinking about more tactical activity, focused at the individual customer level, and actioned through specific targeting criteria for a very specific action. However, that specific action should have been driven from a thorough understanding of the customer base, with a key part of that coming through identifying the customer segments that exist
- Organisations talk in terms of the “segment of one”; this is not an advancement on traditional segmentation applications, it is getting to know a customer as an individual, which of course requires investment in new technologies and advanced analytics. But it is not “segmentation” in the true meaning of the term
- The approach to planning has changed. Have marketing planners and strategists simply turned their back on segmentation as a tool to help them? This may be due to:
- Lack of understanding as to what segmentation is and how it can help
- Perceived other priorities, with the headlong rush to be reactive (to competitors) rather than be proactive and drive activity through segmenting the customer base and “knowing your customers”
- Lack of analytical support and skill to develop a tailor made segmentation system
Why is segmentation still important?
Customer segmentation as described here should still be considered an important part of the marketing planning process and will give organisations an enhanced ability to tailor marketing and management strategies.
Segmentation can deliver an even more powerful tool given the increase in the volume and type of data now available for analysis. The ability to incorporate unstructured, web and social media data, campaign response and channel data as drivers of segmentation systems, means that segments can be understood in even greater detail and hence are even more powerful inputs into the planning cycle
Historically it could be a difficult task for the analyst to explain segments and what constitutes the typical features of an individual segment and what makes a segment different from another.
With the advent of powerful visualisation tools on the market (for example SAS Visual Analytics) it is possible to easily demonstrate the key features and differences of and between segments. Additionally the ability the report on segment migration and membership through a range of specific segment reports can be viewed through such tools.
These will undoubtedly make the understanding of segments far easier and hopefully reinforce the value and acceptance of segmentation at the heart of customer relationship building.