Article on fundamental and emerging alternative dimensions for customer segmentation. Published in the Bulleting of the CRM Institute (Turkey), Nov-09

1. Y ÖNETİM ANSİ KLOPEDİSİ
Segmenting in different
ways
A look at traditional and some alternative
dimensions.
Vladimir Dimitroff is a director
of PRISM Consulting, an inter-
national firm specialising in
Vladimir Dimitroff
customer strategies, customer
experience and stakeholder Segmentation is considered an essential sonally, therefore segmentation is per-
relationships. He has helped component of the customer-centric busi- formed on (often large numbers of) dis-
dozens of blue-chip companies ness models and is widely practised in tinct, identifiable individuals.
achieve competitive market In early stages (start-up, post-launch)
both business (B2B) and consumer
positions through the adoption while a business is building a meaningful
(B2C) contexts. The logic of differentiat- customer base, decisions are supported by
of customer-centric business
models and practices. He is ing customers and applying differenti- macro-segmentation, dealing with very
also a popular conference ated approaches to each group is well large groups and similar to market seg-
speaker, author and lecturer on understood and, almost everywhere, rou- mentation. This supports primarily very
these subjects. In Turkey he has tinely supports strategic, operational and long-term strategic and business planning
delivered customer-centric decisions.
tactical business decisions. While the
programmes to Turkcell In normal operations, decisions are
discipline of customer segmentation has
(winning the CRM Oscar and mostly based on „proper‟ customer seg-
the Gartner CRM Excellence become mainstream and well estab- mentation, most often value- and needs-
Award), Digiturk, and most lished, there are continuing develop- based, and aware of the place of each in-
recently to Avea. He can be ments that enhance the insight and en- dividual customer in a certain segment.
reached through the CRM In-
rich the application possibilities of seg- As this kind of segmentation drives the
stitute or directly at
mented customer views. development of distinct approaches
vdimitroff@prism.ch
(„segment strategies‟) for each segment, it
FUNDEMANTAL SEGMENTATION is referred to as strategic customer seg-
mentation, but the decisions it supports
Types and purposes of Segmentation are of more operational nature, with long
We assume there is a clear understand- - and medium-term time horizons.
ing of the difference between market and As customer data becomes richer and in-
customer segmentation, and are hereby sight - more profound, everyday tactical
focusing on the latter. Segmenting mar- decisions are increasingly supported by
kets ignores the individuals that populate micro-segmentation.
them or only sees those as anonymous, A large part of segmented activities hap-
in aggregate entities. Customer-centric pen in the domain of strategic customer
businesses (or those aspiring to become segmentation, which always develops
customer-centric) seek to identify each around two key dimensions: Value and
individual customer uniquely and per-
Needs.
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2. YÖNETİ M ANSİ KLOPEDİ Sİ
FUNDEMANTAL SEGMENTATION
Value Segmentation many to be a far more reliable predictor
By far the oldest and most widely used of customer Needs. They are supple-
(and abused) segmentation dimension, mented by attributes that motivate behav-
this reflects the economic benefit of the iours, such as attitudes, possible pre-
customers‟ presence. Historically the dicted behaviours (propensities), as well
easiest to apprehend and estimate, cus- as non-transactional behaviours outside
tomer value also provides a very clear the given business, often combined with
business logic for differentiation, and demographic attributes and studied as
enables resource allocation decisions lifestyles.
(„we will spend more time, effort and All th ese customer attributes (and, where
budgets on the customers that produce possible - the true Needs behind them)
more value for our business‟). enable differentiated proposition and
The concept of „Value‟ has evolved both product management, segment-specific
historically, and within each company‟s offerings and campaigns and, not least -
maturity journey: from a revenue-based differentiated customer experience man-
model to a profit-based one (deducting agement.
known costs to better approximate
shareholder value), and from historic Multi-dimensional Segmentation
value (sum of past revenues) to predic- While each of the above dimensions is
tive, future value (estimate of future fully applicable and very useful on its
profits). The popular term Customer own, a far better customer view is created
Lifetime Value is best interpreted to by combining them in a single Segmenta-
mean predicted future value for a relia- tion scheme. The first level is a two-
bly expected tenure as a customer. dimensional matrix of the core dimen-
sions Value and Needs. Even while
Needs and various proxies Needs are represented by a „proxy‟ (e.g.
Customer Needs is the only other impor- demographics) , such a matrix is a very
tant dimension for strategic segmenta- practical instrument for customer plan-
tion, based on the fundamental principle ning, process management and perform-
that value is created or increased in the ance measurement. In a tabular represen-
process of satisfying needs. Understand- tation, columns will typically be different
ing customer needs is a challenge, espe- Needs segments, while rows represent
cially at the level of unique identifiable Value segments (from high to low). Each
individuals. During the days (entire 20th cell (cross-section) of this matrix contains
century) of predominant mass marketing, a group of customers with a unique
it was found more practical to segment Value/Needs combination, which merits a
by indicators or „predictors‟ of Needs. different approach from those in adjacent
The earliest proxy variables that could be cells.
acquired at individual level were Demo- Having mastered such a matrix as a cus-
graphics and associated attributes like tomer management tool, a progressive
g eo - d e mo g r a p h ic s a n d so c io - company can start adding more variables
demographics. These attributes are rela- and developing a multi-dimensional
tively static (change slower than the cor- model for customer differentiation.
porate planning/reporting cycle) and re-
flect who the customers are. For many
marketers this is still the leading dimen-
sion for differentiation, but in the 21st
century this is rather outdated.
With the ability to observe record and
analyse transactions, Behaviours became
another popular proxy. They reflect what
the customers do and are considered by
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3. YÖNETİ M ANSİ KLOPEDİ Sİ
SEGMENTATION EVOLUTION AND REASONS TO ADD DIMENSIONS
Customer data availability and quality Operational executives make decisions
Customer segmentation is a discipline every day that require some form of cus-
highly dependent on data: one can only tomer differentiation, one customer at-
analyse what is reliably known (and tribute or another is selected to apply a
documented) about customers, and avail- different process step, make a different
able in forms and formats susceptible to offer, provide a different experience.
quantitative analysis. This partly explains Many of the online personalisation and
the predominance and popularity of value recommendation engines use real-time
segmentation, as transactional data has data and literally differentiate every in-
been historically available since earlier teraction with every customer, at a
times. „segment of one‟ level.
“Operational effi- In the late 20th century the explosion of This requires ever-growing numbers of
ciency and product information technologies and ubiquity of customer views and levels of micro-
excellence are no applications and databases made cus- segmentation.
longer unique com- tomer data a much more practical and
petitive differenti- meaningful asset to work with. Continu- Evolution of business models
ators.“ ing developments in most recent years, Last but not least, the differentiations
both business and technology - are allow- good enough in the age of mass produc-
ing unprecedented levels of volume and tion and mass marketing, are simply no
detail in capturing, storing and analysing longer enough. Direct marketing is mov-
individual customer data. ing into new degrees of personalisation
As large customer databases were be- and levels of precision. Value chains are
coming ubiquitous during the 90-s, a ma- re-shaped beyond recognition by com-
jor challenge turned out to be data qual- plex supply and distribution develop-
ity: due to the aggregation from multiple ments, outsourcing trends and increasing
(often incompatible) sources, the data customer engagement.
collection process imperfections, data- Operational efficiency and product excel-
base structures - there were many incon- lence are no longer unique competitive
s is t e n c i e s , d a t a r e d u n d a n c ie s differentiators. They are becoming com-
(duplications) or gaps (missing data ele- moditised industry standards, an
ments, blank fields). Poor data quality „existence minimum‟ prerequisite, but no
was making databases nearly useless, success guarantee. Customer centric
which led to the development of meth- models are proving sustainable long-term
ods, processes and tools to improve and growth and value creation paths.
sustain high data quality. Nowadays, Powered by information and communica-
while there are still challenge spots, over- tion technologies (e.g. digital networks)
all data quality is much improved and social business models are coming to the
allows far more efficient and diverse data scene and even becoming mainstream.
usage. From a mere communication environ-
ment, social media are becoming a co-
Granularity of decision support creation and engagement vehicle. Stake-
Long gone are the days when manage- holder convergence is wiping boundaries
ment information systems would only between customers, shareholders and em-
produce annual, quarterly and monthly ployees (all of which need to be seg-
reports - and that was about all the mented - and treated differently - in very
„decision support‟ available, apart from similar ways).
the odd SQL query into transactional da-
tabases. Today even „plain‟ financial per-
formance measurement involves large
amounts of variables, sophisticated
scorecards and multi-dimensional views -
and all that is updated daily or even in
near-real time.
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4. YÖNETİ M ANSİ KLOPEDİ Sİ
NEW DIMENSIONS - EXAMPLES
Tactical attributes and micro- by selecting high „F‟ and „M‟ values,
segmentation combined with low „R‟ values.
Opportunities for such segmentations (Describes a behaviour: “shopped fre-
occur in the search for Needs predictors. quently and bought a lot, but hasn‟t vis-
Some demographic or behavioural ited us for quite a while”)
„proxies‟ (especially the latter) have It is increasingly possible to run such tac-
been discovered as useful filters on their tical initiatives „ad hoc‟ and even in real
own for specific purposes. Most of the time, combining observed (behavioural)
time these are temporary „special offers‟ propensities, or deducted ones (from
or narrowly targeted campaigns. demographics and other personal data) -
A simple example is a reward campaign, with real-time input during customer in-
where only some customers can receive a teractions at touchpoints. The term RTI
free gift. Instead of having a lottery-like (real-time intelligence) is sometimes ap-
draw, the company decides to make it a plied to such models and tools that enable
„Happy Birthday‟ campaign. Recipients them.
are not randomly drawn, but the DoB The Loyalty dimension
(date of birth) field is used from the data- The concept of segmenting customers
base and each day during the campaign according to their loyalty has the clear
period people born on that date are sent a business case for differentiated treatment
freebie with greetings. and appropriate resource allocation. To
A little more complex but still very prac- make such differentiation possible, a pre-
tical micro-segmentation is based on a requisite is to have a definition and a
„basket affinity‟ (A+B product pairing measure for customer loyalty, which is
analysis), individual purchasing propen- applied across the customer base to each
sity and a triggering event: individual customer.
 Traditional „beer and nappies‟ analy- A loyalty metric is relatively simple once
sis is performed on all products sold loyalty is unambiguously defined:
to identify pairs of products occurring whether it is simply tenure (for how long
most frequently in the same basket. they have remained our customer), or a
Imagine that, in a office stationery e- more complex „loyalty index‟, or the re-
commerce site, printer paper and ink cently popular NPS (net promoter score -
cartridges top the list as most frequent as long as it‟s not a statistical sample but
combination. captured for each single customer) - this
 Customers with a history of regularly allows a sorting and segmenting of the
ordering both products are identified „population‟ by this particular metric.
and extracted as a target list (but no As always with Segmentation, the „So
spamming takes place :) what?‟ question is critical. It is not
 A conditional business rule (trigger) is enough to know how customers are dif-
set: if a customer belongs to the above ferent from each other, but to have a ra-
list and makes an order only for paper tional segment-specific policy or strategy
(or only for printer ink) - a cross- for different treatment. In the case of
selling „special offer‟ is triggered, of- Loyalty - no prizes for suggesting that the
fering a „now only‟ discount for the top (most loyal) should be rewarded with
co mplimentary product that‟s bonuses, discounts or privileges, this is
„missing‟ in the basket too obvious. But what can we do for the
Another behaviour-based micro- other segments? The „medium-loyal‟, or
segmentation can be derived from the the promiscuous/disloyal ones? (Or
popular RFM model (recency - fre- „detractors‟ in NPS parlance?) Every
quency - monetary value). One retailer, segmentation only makes sense if it re-
who was identifying customers using a sults in business decisions that lead to
„club‟ card, ran a „win-back‟ campaign positive change. Even if the policy for a
approaching „lost‟, (formerly) good cus- given segment is „Do nothing‟ - it has to
tomers. The micro-segment was filtered be rationally justified.
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5. YÖNETİ M ANSİ KLOPEDİ Sİ
NEW DIMENSIONS - EXAMPLES
The Social dimension Few in number (which makes it easier to
The last few years have been marked solicit their permission to receive market-
with a tremendous change of the mean- ing communication), they are a powerful
ing of the word „social‟ in business. „channel‟ to reach much greater numbers
From the „socially responsible‟ and so- of consumers. To the latter the communi-
cially conscious‟ meaning (still highly cation is not unsolicited, because it comes
important), the term more and more im- from someone in their social network (a
plies the interconnect between customers trusted source), and therefore even has
and stakeholders in social networks. A greater effect.
formerly academic discipline, SNA Many more examples can be found, and
(social network analysis) has entered the are created every day - where the social
business arsenal of methodologies and dimension for differentiating customers
technology enabled tools. can be turned into competitive advantage
Viewing customers as „nodes‟ in a net- and shareholder value. Best practices are
work, it is obvious that some nodes are only just emerging and evolving, there-
„more connected than others‟, i.e. there fore we would strongly encourage experi-
are clear differences between the degree mentation and creativity in this.
of connectedness of each individual, the
nature and strength of their relationships.
This easily becomes (yet another) di-
mension for segmentation. People with
different types and sizes of personal net-
work obviously merit different treat-
ment; also specific business propositions
and offerings can be targeted differently
based on this dimension.
One popular customer category, result-
ing from SNA studies is that of Linking to core dimensions
„influencers‟. They are seen as highly All the alternative examples of dimen-
valuable to the business, as they can be sions are tactical, at best - operational,
not only a powerful communication dynamically changing (therefore short-
channel, but also invaluable company term) and only secondary, auxiliary to the
advocates and PR „agents‟. Social Mar- main strategic dimensions of customer
keting has already taken such concepts Value and Needs. On closer examination,
on board and many companies are now however, it is obvious that they are not
routinely identifying and engaging the entirely separate and are strongly linked.
„better connected nodes‟ and the The link to Value is most explicit in the
„influencers‟ in their customer networks. top segments of dimensions like Loyalty
One simple behavioural propensity (see or Social connectedness. It is only logical
the micro-segmentation above) can be that more loyal customers (by any defini-
based on network behaviours, like the tion of loyalty) are more valuable. Also,
transmission of information. Digital „more connected‟ network nodes and
communications provide a means of „influencers‟ are more valuable than other
tracking and analysing such network pat- customers. This value is independent on
terns. For example, e-mail server data their position in the Value segmentation
can be analysed for forwarding patterns. derived from purchasing behaviour and
People exhibiting a propensity to fre- profitability. But if they add value to the
quently forward e-mails to other recipi- business, this should apparently change
ents (especially those who forward to our perception of their profitability. They
multiple recipients) become a valuable are „profitable‟ in other ways, not just
target for seeding viral marketing cam- from their purchasing transactions.
paigns.
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6. YÖNETİ M ANSİ KLOPEDİ Sİ
NEW DIMENSIONS - EXAMPLES
It makes sense, therefore, to incorporate communicate in hard copy). Understand-
these scores as pre-calculated variables ing such niche needs and adding them to
within a more complex LTV or CLV the bigger picture of Needs segmentation
(customer life-time value) model. In- can enrich our understanding of custom-
deed, some of the best recent CLV mod- ers and also make the strategic segments
els we have seen do incorporate elements more accurately defined, with more con-
of loyalty and social behaviours. sistent compliance to relevant criteria.
As already mentioned, some of the tacti- As a practical guideline it is always good
cal micro-dimensions are effectively to develop new dimensions separately,
proxies for needs. (The person regularly but to seek their integration into a main
buying printing supplies, in the example
segmentation scheme for the longer term.
above, apparently needs to document and
Customer Segmentation, nowadays an essential business discipline for every company,
large or small - is well established but also constantly evolving. While every executive
involved in managing customer strategies and operations is encouraged to study the
principles and best practices and apply them in their work, it is also advisable to moni-
tor trends and keep adapting and improving the deployed segmentation schemes. And
the companies that want to be market leaders are encouraged not to follow, but to set
trends and pioneer new dimensions, methods of segmentation and roll out innovative
decision-making on that basis.
Customers are different: treat them differently!
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