customer segmentation principles 22963
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EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
www.prism-gb.com
Customer SegmentationPrinciples of effective
differentiation
Vladimir DimitroffDirector
PRISM Consultinghttp://www.prism-
gb.com
IIR Telecommunications Conferences
Customer SegmentationStrategies
London
November2005
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Product Excellence
Operational Efficiency Customer Intimacy
Competitive edge based on cost (and price competition) is not sustainable in the long term.Product leadership is short-lived, too. Technology moves fast and even products that are not overtaken are easily replicated. Customer centricity is about long-term relationships, therefore provides sustainable advantages. It also results in added competitiveness in the other two dimensions see Treacy & Wiersema: ‘The Discipline of Market Leaders’
WHY FOCUS ON CUSTOMERS?
THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS
Slide 1
All three are important, but you can only excel in one - and should choose your focus:
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Nu
mb
er
of
Cu
sto
mers
Customer Value
CRM
Picket Fence
Mass Marketing
Highest Value Customers
WHERE TO START
Slide 4
Source: Peppers & Rogers Group
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customer value segments
Most Valuable Customers: Retain
Most Growable Customers: Grow
Marginal customers: Business as usual?
Service costs
Actual value
Strategic value (potential share of customer)
‘Below Zero’ Customers:
Dismiss, or?
DIFFERENT CUSTOMERS BY VALUE
Slide 2
Source: Peppers & Rogers Group
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• From revenue to profitability– Pure spend-based models: straightforward and easy– Introducing cost elements: allocation methods– Detailed individual customer costing
• From past to future value– Historic value: recent history– Historic value: total cumulative history (‘lifetime’)– Future (potential)value: different predictive methods– Net present value (NPV): discounted future value
• Lifetime Value (LTV) or CLV (customer lifetime value)
“The net present value of all future profit streams from an individual customer’s relationship with the company”
CALCULATING CUSTOMER VALUE
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• Predictive techniques– Regressions (linear, multiple, logistic)– Trees (classification, decision)– Advanced techniques (neural networks, genetic algorithms)
• Definitions of ‘lifetime’– Strictly referring to a future period– Need for consistent predictability and actionable/manageable– Techniques to calculate LOS (length of service); survival analysis
(LIFEREG, PHREG procedures in SAS)
• Alternative models and techniques– the RFM (recency, frequency, monetary value) model as a
segmentation tool– Rapid identification techniques (‘golden questions’)
CALCULATING CUSTOMER VALUE
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
“Man has almost constant occasion for the help of
his brethren, and it is in vain for him to expect it
from their benevolence only. He will be more likely
to prevail if he can interest their self-love in his
favour, and show them that it is for their own
advantage to do for him what he requires of them.”
Adam Smith, The
Wealth of Nations, 1776.
WHY NEEDS?
Slide 6
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Fundamentals:
Any business only exists if it has customers.
Customers have specific needs that have to be satisfied.
A business only exists to satisfy specific needs.
The Link to Value:
In satisfying needs a business provides value.
Products and services represent value to the one with needs (the Customer).
(see Added Value concepts in economic theory, supply/demand concepts etc.).
In the process of satisfying needs value ‘changes hands’.
(see Value Migration concept in strategy models and theories).
WHY NEEDS?
Slide 7
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customer Profiles (Who they are?)
Sets of (static) attributes allowing reasonable
assumptions, e.g. “families with babies need
nappies”, “teenagers need bright-coloured mobile
phones” or “companies with vehicle fleets need motor
insurance”…
Customer Behaviour (What they do?)
Based on assumptions like “beer drinkers are more
likely to choose beer over wine” or “once a gambler,
always a gambler”.
THE WORLD OF PROXIES
Slide 8
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Demographic profiles: Grouping people by gender, age, marital status, education, occupation etc.
Geo-demographic: Adding the spatial dimension in one or more ways: absolute (North, South, Wales, Leeds), relative to population concentrations (urban, suburban, rural) or based on economic regions (Thames Valley).
Psycho-demographic: Introducing attitudinal and emotional affiliations (nerds, lads, anoraks) – often hard to distinguish from pure demographics (e.g. education, occupation) or from behaviour types (see below).
In B2B environments the equivalents are vertical sectors and sub-sectors, company size (employees and core business metrics, e.g. turnover), location(s), target market(s) etc.
WHO THEY ARE
Slide 9
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Transaction (purchasing) behaviour: Frequent shoppers/ flyers, bulk buyers, occasional shoppers, declining custom etc.
Motivation-based behaviour: Impulse buyers, early adopters, bargain hunters, status seekers.
Lifestyles: Often mixed with demographics, indicate needs through preferences manifested in everyday behaviour (a number of popular templates and commercial databases of pre-scored population).
B2B: Order consolidators, end-of-quarter (end-of-year) buyers etc.
WHAT DO THEY DO
Slide 10
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Customers have
individual (and
group)
preferences
often exhibited
in behaviour
patterns,
sometimes
declared in
dialogue with
the company,
but sometimes
also withheld
and/or unknown.
Product or service preferences are directly linked to needs. The chance that those are true needs is somewhat higher, although product preferences may often reflect perceived needs.
Attribute preferences also manifest needs, however those are secondary, ‘satellite’ needs accompanying the core need in a dynamic ‘bundle’. The likelihood here is greater that they are perceived needs, particularly in the less tangible areas of taste, fashion, peer influence etc.
For practical purposes of needs modelling and needs group management, explicit and implicit preferences can be considered a proxy for needs.
HOW ABOUT PREFERENCES?
Slide 12
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Give me … (speed, safety, confidence, a positive
experience, success-personal or corporate).
Help me to … (get to a destination, connect to a
person/organisation, enhance my life).
Save me … (time, money, hassle, risks or hazards,
negative experiences).
THE 3 QUESTIONS TEST
Slide 11
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
ALL KINDS OF SEGMENTATION
Macro-segmentation: typically a market segmentation view
Strategic segmentation: customer segmentation for long-term differentiation
Micro-segmentation: a tactical, action-oriented tool for immediate targeting
Used in defining market proposition/s, brand values, and in targeting mass marketing activities. E.g. ‘Youth’, ‘Pre-paid’ or ‘Rural’ segments
Used in strategic planning, resource allocation, Marketing/Sales/Service optimisation.
E.g. ‘High Value’, ‘Growable’ or ‘BZ’ customers, ‘Technos’, ‘Savers’ or ‘Status-symbol’ segments
Used in day-to-day direct campaigns (cross- and up-sell), targeted churn prevention, acquisitions. E.g. ‘Seasonal roamers’, ‘Bargain hunters during competitor’s campaigns’, ‘Location patrons’
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation
Value Segmentation Principles and Techniques
Needs Segmentation Methods
Strategic, Macro- and Micro-segmentation
Differentiated Customer Planning and Resource Optimisation
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Business goals: Get customers
Keep customers
Grow customers
Segment 1
Segment 2
Segment 3
Acquisition
RetentionDevelopment
AcquisitionRetentionDevelopment
AcquisitionRetention
Development
Overall objectives translate to different priorities in each segment.
SEGMENT MANAGEMENT
Slide 5
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
Most valuable customers
Most growable customers
Marginal
Unprofitable
KEEP
GROW share
of customer
Maximize profit, m
inimize cost
Divest
Media
E-channels
Direct mail
Telemarketer
In-person service reps
Dedicated service reps
Cust
omer
val
ue
Allocating communication channels according to the value of segments
RESOURCE OPTIMIZATION
Slide 3
Source: Peppers & Rogers Group
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
THE ‘HOW TO’ OF PRACTICAL STRATEGIC SEGMENTATION
N1 N2 N3 N4
V1
V2
V3
V4
V5
Evolving segmentation:
- From historic to predictive value and from revenue to profit-based individual customer value
Starting simple could mean few, expenditure-based value segments. Introducing any known costs leads to a better, profitability-oriented differentiation. Using non-linear predictive models allows managing future, lifetime value.
-From broad, proxy-based needs segments to precise, true need clusters
-Early needs-driven segmentation schemes often start from a market (macro) segmentation, using proxies like basic demographics or transaction behaviours. As companies learn to interpret the true needs behind such proxies, more complex needs clustering replaces the macro segments and allows linking individual needs to value growth, retention and targeted, profile-based acquisition.
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
• Customer Plan (operational efficiency through customer intimacy)
– Developing differentiated treatments for each intersection of a needs cluster with a value segment (customer community with a unique combination of value and needs)
• differentiated marketing and sales• differentiated service levels and approaches• differentiated communications: message and channel• all above differentiated consistently across touchpoints• embedding in the company’s goal-setting, planning and resource
allocation
• Product development (product excellence through customer intimacy)
– Re-defining the mission (and often the primary industry sector) of a company as ‘the business of satisfying customer needs’)
– Intimate needs understanding at the core of new product development and existing product improvement
– Managing product capabilities around needs (and value)
‘SO WHAT?’ (ACTING UPON THE KNOWLEDGE)
EVOLVING CUSTOMER SEGMENTATION
The PRISM Organization
contact details
Vladimir DimitroffDirector
PRISM Consulting (UK) Ltd 6 Priors CourtNewark StrReading RG1 2SRUnited KingdomPhone: +44 (0)7947034944 E-Mail: [email protected]
www.prism-gb.com
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