Divide and Conquer A Primer on Needs-based Segmentation
Marketers often use the terms "grading" and "segmentation" interchangeably. That's unfortunate, since the distinction is important. The two are entirely different processes; together, they create a very powerful economic model for customer selection.
Grading is strictly an economic concept. It is done only within a segment, defining various levels of economic value within that segment. It temporarily sets aside the issue of customer needs or other characteristics, and can usually be accomplished using only data you already have in-house.
Grading is a means of analyzing the revenue currently and potentially available from that segment, and how it changes over time. This insight allows you to identify which groups are not only most responsive to what you have to offer, but can also help you to increase profits by targeting those segments to which you can deliver superior value in profitable manner.
Here's how grading works: Within each segment, divide all customers into seven "grades." Rather than settling for A, B and C tiers lumping disparate customers into similar classes, dividing into seven grades gives you the granularity required to truly understand your customer base. Grade based on the revenue you received form them over a given period of time. Think of it as sizing the market. The top 2 percent are rated XXXL; followed by 3 percent, the XXL's; the next 15 percent are XL; the next 25 percent are L; the following 25 percent, M; and S and XS completing the customer universe. This pyramid is adapted from The Customer Marketing Method by Jay Curry and Adam Curry.
You can fine-tune your grading system further by determining not just raw historic sales volume, but potential or projected Lifetime Value (LTV) of these customers to you—understanding that realization of that LTV has more to do with how you treat your customers after you've acquired them than with the method of acquisition.