Why customer segmentation is important

Does your business apply customer value segmentation?  You probably do but without realising.  Consider the following scene…

The phone rings in the bar of a popular restaurant and the proprietor answers: “I’m sorry but I don’t have room for a party of 14 tonight”

Two minutes later – he turns to a man in the bar as he collects his cheque.

“If you need a table tonight, Peter – it’s no problem. There are customers and there are customers. You know what I mean?”

“Cheers, John. I need a table of 14” said Peter (the customer). Then he laughed. “Only joking”

Who are your customers

Most successful businesses are able to distinguish between customers and CUSTOMERS. They know who their VIP’s are, the future VIP’s and the also rans.  

Understanding the difference between these customers retains the business of profitable customers and also creates strong word of mouth within the social circles of the VIP’s and future VIP’s.

Q: So how can you apply this to your business?
A: It depends on your business – what you sell and who you sell it to.

If you know all of your customers personally, then you will know the difference. However, if you are an online business or a growing business, then you are unlikely to know your customers on a more intimate scale. You will therefore need a smart way of a) defining your customer, b) identifying your customer and c) marketing to your ‘customers’.

All link into each other, so let’s start with some examples…

Customer value segmentation example one: Defining a customer

For some businesses, a customer is not actually defined as a customer until they have purchased from you a few times, e.g. four times. They have found that people that buy from them less than four times, don’t tend to stick around for too long.

As a result, their marketing focus is to engage with the customer so they buy from them four times as quickly as possible. Their marketing process would be based around the following stages…

1. Sign them up.
2. Get them to buy
3. Get them to buy for the second time
4. Get them to buy for the third time
5. Get them to buy for the fourth time
6. Assign them as a customer.

How many purchases does someone need to make to be a customer of your business?  One, two, three?  Do you know?

Customer value segmentation example two: Are you a Fan of O2

In a recent seminar at Marketing Week Live. Jonathan Earle Head of Customer Strategy and Development from O2 gave a keynote speech about ‘Fans’. O2 define a customer as a ‘Fan’, and define a ‘Fan’ as someone who will forgive them when they f**k up.

O2 are customer centric. They wisely believe that no customers = no business. So focus should be on making customers happy, as a happy customer is a customer that will become a Fan.

Like most telecoms or subscription type businesses, a key performance measurement for O2 is retention. That is how many customers have agreed to remain a customer.

You may have heard of Priority Moments. It is a special programme of benefits that are exclusively available to O2 customers.

O2 measure how many of their customers are using Priority Moments and then whether or not users of Priority Moments agree to continue as an O2 customer when their contract is due for renewal.

O2 have found that the more a customer uses Priority Moments then they are more likely to become a ‘Fan’ of O2 and continue as a customer.

As a result, the majority of O2 advertising is now on Priority Moments. What special offers exist and how you can use them. They know that if you use Priority Moments then you are more likely to continue as a customer.

It’s simple and smart at the same time.

Customer Segmentation

Defining your customer will involve a review of the data you hold as part of ‘doing’ business – your sales data.

A review of this information will help you to define what makes a customer. Then customer segmentation will allow you easily identify how many ‘customers’ you have.

Here are some options…

segmentation by the customer end date

O2 have an advantage as they have a ‘date’ when a customer will no longer become a ‘customer’ so they can focus efforts and attention on the run up to this date.

Don’t worry. You can play this game too.

Hidden within your business, you will have sales information for a customer. This will include the date of the sale. Depending on what you sell and who you sell it to, you will have an ‘idea’ of what and how often a ‘good customer’ purchases from you.

It might be 90 days, it might be 7 days.  Whatever it is, this is your starting point.

customer lifetime value segmentation

Pareto analysis (or the 80/20 rule) suggests that 80% of your revenue is provided from 20% of your customers.

Now depending on your business, this may or may not be true. However, an understanding of your revenue by customer will help you to define what a ‘customer’ needs to look like to your business.

You can review this by customer lifetime value (the total amount of spend) or by customer value over a specific time frame.

This may sound complicated. A marketing platform such as Websand will make it easy (see the customer dashboard below).

However, a word of advice, when starting segmentation it’s best to start simple.

Segment first by time since purchase or customer value. Whichever is more appropriate to your business and your business objectives.

Get comfortable. Put some targeted marketing in place to ‘non customers’ and turn them into ‘customers’.

So to reference example one, this could be to see how many people who have bought 3 items, we can get to buy another one.

Eventually you can get more complicated and segment based by time since, value and product purchases. Even linking marketing behaviour to product lifecycles.

Get started, unlock value, and grow your business through segmentation

Whatever happens, as soon as you start a process of customer segmentation, things get a bit easier.

Business decisions are more aligned to customer understanding. Marketing becomes more targeted and more relevant and more opportunities are created. Your business becomes more customer centric.

And that can only be a good thing. After all. No customers = No business.