Divide and Conquer A Primer on Needs-based Segmentation
By Nick Poulos
Selection is the single most important set of decisions any business-to-business enterprise can make. The most successful firms consciously select the products and services they will provide, the customers to whom they will provide them, and the channels through which they will market them.
Running parallel to the selection process is one of the biggest challenges facing business today: how to invest the limited resources at our disposal—time, money and human resources.
Accordingly, targeted segmentation to promote conscious selectivity within your sales, marketing and service database becomes the most valuable prize of your business intelligence and customer knowledge management activity.
Recognizing the fact that not all customers are created equal, allows you to target your limited resources toward those who are most potentially valuable to you. It gives you a practical alternative: to invest your limited resources in direct proportion to your expected return.
I call this approach needs-and buyer-based segmentation. This is the segmentation strategy of choice, since it is needs that drive market behavior; and the simple knowledge of knowing when and how buyers act puts you leagues ahead of your competition. This approach is characterized by the clustering of customers—and later, prospects—according to common sets of needs and buying behavior.
Segmentation is a primary prerequisite to successful customer relationship marketing.
However, this is by no means a cookie-cutter process. Just as each company is unique, so its segmentation plan will reflect that diversity—guided by your marketing imagination.
The Basis for Segmentation
Seven guiding principles provide a framework for the segmentation process:
Step 1: Identifying your best customers
Earlier attempts at segmentation generally focused on certain demographic and firmographic characteristics, such as company size, SIC code, sales volume, and the like. This was—and is—certainly a start; but compared to today's segmentation strategies, it was like wielding a meat cleaver rather than a scalpel.
Today's most successful database marketers begin at the other end of the equation—examining the needs that are met for your most loyal customers when dealing with you. The starting point for this kind of analysis should be defining those customers—focusing on those who consistently give you a healthy portion of their share-of-wallet, who use the broadest range of your offerings, and who provide the best profit margins.
Step 2: Identify their needs and concerns
Your next challenge is finding out why these companies have chosen yours. Which of their needs have you been particularly qualified and willing to meet?
Before you go outside to acquire this information, ask those people in your own organization who know them best, such as account managers, sales reps, and dealers. Asking where you might improve your service to them can help you identify unmet needs, as well. You have a wealth of information right at hand; and it's knowledge that is unique to your company. Your competitors' segmentation won't look anything like yours.
In the process, find out as much as you can about how their business, and particularly their purchasing cycle, works.
*Are the company's purchasing decisions centralized or decentralized?
*How long is the buying cycle, from initial identification of needs to purchase decision?
*Who—by job title—influences that decision, with what degree of clout, at what points in the cycle?
*What information do they need to do that, and when?
Next, check out what's available in industry research; make use of "data overlay" information and constantly keep refining it.
Validate your hunches. Your best sources of data are your customers. You can initiate ongoing two-way dialogue directly with current customers using any number of techniques. But keep in mind that unless you also have a mechanism of putting all this information into your marketing/knowledge management database, no single person—even the individual at the top—will have more that a few pieces of the total mosaic.
A well-designed, well-implemented database serves as the repository of corporate memory. And every customer-contact person in your company, from your service people to your telemarketers, should understand that part of their job is enhancing the resolution of the images contained inside that knowledge-base—making sure each pertinent insight is logged into the corporate database, through whatever processes you devise.
Step 3: Compare customer needs to your strengths
If you're typical, 80 percent of your customers buy from you for one or more of just a handful of reasons—usually, no more than four to six. What are they? And how well do they coincide with the external service values you consciously have worked at developing?
You may find that for some customers, the differential value you create may consist of quick response time, or quality of the product, or how often your rep calls on them—or conversely, how easy you make it for them to order via the internet.
In other words, one customer's perception of the value you add may be another's disincentive to buy from you; and it's important to know which is which, and for whom. The more you work with your database, the more leery you'll become of single, anecdotal comments—that is, the tendency we all have to think that if one customer feels this way or that, it must be true of all.
In the course of the research, you may well have the pleasant experience of discovering strengths you didn't recognize you had—or at least which didn't seem as important. What matters, however, is what your best core customers think. If something is important to them, then it's important, period. You should be nurturing it, refining your ability to deliver it and capitalizing upon it.
Step 4: Develop segments based on customer needs
Your best, core customers are those whose needs best coincide with your strengths—because it is within their ranks that you're most likely to be able to develop still more loyal, profitable customers.
You may identify only one segment, your full universe of target customers and prospects—or to be able to recognize several clusters who share similar acts of unfulfilled needs and buying behavior. In either case, there are two key questions:
* Who are those most loyal customers, those most interested in those service values that best differentiate you from your competitors?
* What differentiates them from the mass of customers?
When you have those answers, you'll be halfway home.
Critical to effective segmentation is making each segment as unlike any other as possible. And this is the point at which the process becomes more of an art (of interpretation) than a science (of data analysis). A well-constructed knowledge-base when analyzed with a strong business intelligence tool yields you a wealth of actionable information. Actionable is the operative descriptive. That means it must include a customer profile that enables you to assign customers to one or another of your defined segments.
Start with a list of identified needs and buying behaviors. Then query your database as to how many customers cluster into groups that care about each of various combinations of those needs. Where you find larger numbers, you have identified "need clusters" that are common to particular segments of your marketing universe. And that's the raw material for needs-based segmentation.
Now, what easily identifiable characteristics do the customers in each cluster have in common, in addition to those needs? Here's where firmographic data comes into play. You may, for instance, discover that many of them share geographical, SIC code, company size, or some other combination of characteristics. In other words, this approach permits you to define very specific need-based market segments—into which you can divide your entire customer universe, present and potential.
Step 5: Grade customers within each segment
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.
Even in isolation, grading can be a significant productivity tool. Not only does it allow us to direct our investments more effectively, it also serves as a foundation of optimizing the coverage plan for your marketplace: it yields a better field sales force effectiveness plan, a targeted communications strategy and a service coverage model based again on the wisest investment of your limited resources, rather than treating everyone the same.
Step 6: Validate
Suppose that as a result of your segmentation analysis, you've developed this theory: "Quick response, combined with Internet ordering through a customizable portal, are top priorities for our decentralized customers in the automotive aftermarket in the northeast with annual sales volumes of $50-$150 million."
Before you take action, you'll want to validate your conclusions. The segmentation model you've devised should, first of all, make intuitive sense based on your marketplace experience—and especially on that of your sales and customer service people. Where findings are at issue, you may want to see if customer focus groups or telephone surveys confirm them—your customer service/telemarketers can easily add a meaningful question or two to their call guides and gather invaluable information to add to your knowledge-base.
Step 7: Target marketing resources in proportion to potential return
Unless you're ready and able to use the results of all this effort to alter your market coverage strategy (i.e., sales, marketing, service and channel partners), your money is probably better spent elsewhere. Segmentation is not designed to be an intellectual exercise. It pays off only if you apply it to fine-tune your marketplace coverage strategies.
At this point, your grading results take center stage. You can now make a very scientific assignment of your limited resources to customer groups. You can surely be selective in this process. The important thing is that you use the information to catalyze sales, marketing, and service actions and to create an integrated marketing plan that supports the segmentation and grading exercise.
Perhaps there was a time when "everyone is my potential customer" was a viable strategy. But the simple fact is that we can no longer be all things to all people, if we ever could; and those who try to be are seldom able to provide superior service to anyone. And so for starters, you can redeploy dollars previously spent in pursuit of unprofitable business—because you can now recognize it for what it is.
You can assign a percentage of your marketing budget to each segment that merits pursuit, echoing the percent of potential profits that segment can generate. You can use the segmentation schema and the pyramid to help your field force do a realistic analysis of how much business they can do in their territories rather than "arbitrarily" asking them to increase their business by ten or some such percent.
Because you understand the priorities of each segment so well, you'll have the inside track on the right message to deliver, and the media which can do it most effectively, within a given segment's allotted portion of your budget.
Ultimately, most of your dollars will be invested where the profit potential for developing loyal customers is the greatest—a strategy that appears to be self-evident, but too seldom is practiced in real-life decision-making.
As a result of this approach, effective data-based, loyalty-focused business-to-business marketers find that they are investing a lot more of their budgets in highly targeted communications to the segments most likely to become loyal customers, rather than through more traditional mass-media attempts to send one watered-down message to their entire, undifferentiated universe. They have the tools to become more active managers of relationships with both dealers and end-users—educating their organizations about the needs of individual segments, enhancing the delivery of products and services, developing targeted offers more likely to draw response, and better allocating resources in the design of sales territories. And, since they're talking to each customer in terms specific to their own concerns, a dialogue is established; relationships are formed; knowledge is managed; satisfaction, growth and profits follow; and, with them employee performance and morale are increased. A reinforcing feedback loop which leads to sustainable competitive advantage.
Nick Poulos is the managing director of Chrysalis Marketing, a Milwaukee, WI-based CRM consulting and strategy firm specializing in CRM strategy (Sales, Marketing and Customer Service), marketplace coverage issues, segmentation and the related process issues. He can be reached at (414) 324-2559. Visit him on the Web at www.e-transformit.com.