Effective housefile segmentation begins with sound strategy and defined goals.
The ability to market to customers with different needs, in different ways, requires what marketers call housefile segmentation.
But what you many not realize is that housefile segmentation isn’t so much a technique or a tool as it is the result of goals, strategy and research coming together.
Housefile segmentation fits into a strategy to grow the customer base, increase loyalty, and grow share of customer. In some ways, it drives the strategy, in other ways it reflects the strategy. For example, an organization with a goal of rapid growth would look more at lifetime value and future sales than an organization with a goal to maximize cash flow today.
Using the database to create effective housefile segmentation should help you answer basic questions such as: Who should be contacted? What offers are appropriate? Which customers are most valuable? When should contacts be made? Where are best customers coming from? Why are segments different? How should contacts be made?
Answering these questions, and fitting housefile segmentation together with strategy and goals, demands understanding. For these reasons, a “black box” approach to scoring or ranking customers, no matter how statistically accurate, is insufficient by itself.
Like great lines in a play, which don’t reduce the role of the actor, but rather make the actor more engaging, great research doesn’t reduce the marketer’s role. It enhances it, and allows you to engage the customer more effectively.
Each basic question has several components. Here’s what you should look for as you consider each of those questions.
Who Should Be Contacted?
To know who should be contacted, you need to be able to predict three basic behaviors:
1. How likely is he to respond?
2. If he responds, how much is he likely to spend?
3. Is he likely to continue to respond in the future?
As a general rule, dollars per name—or how much was sold on average to each name contacted—is a better measure than response rate alone. It is a combination of questions No. 1 and No. 2, and marketers who measure results both by response rate and dollars per name tend to rely more heavily on the latter.
An understanding of lifetime value will help target customers and potential customers who will pay off in the long run, even if response rates and dollars per name look sub-par in the short term.
What Offers Are Likely to Be Appropriate?
Constructing unique offers for different segments requires an understanding of the needs and behaviors of each segment. It leads to testing and defines reasons to test different offers. Here are some of the questions you should be able to answer to have reasons to test:
• Is the average order substantially different among segments? Should buyers spending $50 each purchase get a different offer than buyers spending $500 each purchase?
• Are different segments buying different things? Are “best buyers” simply buying expensive items, and average buyers buying cheaper items?
• Are different segments buying more types of things, while some buy only one or two things? In general, customers who buy a greater variety of items are more valuable.
Offers can then be fit to specific goals. If a segment is buying one item, and loyal buyers are buying many items, offers can be constructed to get buyers to try different items. If a segment has a low average order, offers can be constructed to raise the average order by a reasonable increment. For example, $50 buyers might get an offer of free shipping on orders over $75, while $500 buyers might get 10 percent off an order over $750.
Which Customers Are Likely to Be Most Valuable?
Knowing which customers have the potential to become more valuable helps to grow loyalty within the housefile. Here are some of the things you need to look for to spot a target ready to move up to a more valuable segment:
• Does the customer look like—demographically, or firmagraphically in B-to-B— a “best customer”?
• If she is buying only one or a few items, could she be sold a greater variety of items?
• If you have only one contact name, or no contact name (not unusual in B-to-B), would reaching more people in the organization increase sales potential?
Similar logic can be applied to prospects. It is important first to define where profitable customers come from and what they look like before targeting markets because they are large or easy to reach.
When Should Contacts Be Made?
The best timing of offers often varies substantially between segments. To know when to test, the marketer should understand:
• How seasonal is the market by segment? Typically, seasonality takes on two components. Best customers tend to buy more regularly, and often less seasonally, than occasional customers or first-time buyers.
• How often do customers buy? The more often they buy, the more appropriate it is to contact them frequently. The less often they buy, the less appropriate it is to contact them too frequently.
• How soon do they buy again after a purchase? For most consumable goods and services, customers are more likely to return sooner rather than later. A quick follow-up offer generally is effective.
As a general rule, the better the customer, the less seasonal and more frequent the contact.
Where Are Best Customers Coming From?
Many marketers seem to believe that new best customers come in from the outside. However, this usually is not the case; they move up in the housefile. To devise a strategy to most effectively increase best customers, the marketer needs to know:
• Are best customers moving up in the database, or just dropping in from outside?
• Is enough emphasis placed on keeping customers, or are current customers being ignored while the organization chases prospects?
• What is the right balance of marketing efforts between prospecting and retention?
It’s important to note that retention drives prospecting—not the other way around. Retention increases lifetime value, which increases the value and potential of prospects. Retention is the horse, prospecting is the cart.
Why Are Segments Different?
It is not enough to segment customers based on total spending. There are nearly always specific customer behaviors that correlate with high or low spending, and marketers need to understand which triggers are most effective. Typical differences include:
• Average order. Some customers make many small purchases, some make a few large purchases. In general, average order is a more effective segmentation tool than total monetary value (overall spending.) A recency-frequency-average order segmentation usually will be substantially more effective than a recency-frequency-monetary segmentation.
• One item vs. many. In general, the greater variety of things customers buy, the greater the likelihood they are to return. By contrast, a large customer who buys only one item often has a high likelihood of defecting.
• Time on file. New customers often behave differently than customers who are set in a pattern. New customers often try many different things; they are ripe prospects for cross-selling.
Note how each difference in the customer leads to a different response by the marketer, and how the customer’s response could move him or her into another segment.
How Should Contacts Be Made?
Marketers often select a favorite media to reach buyers and prospects, and tend to rebel when that media is deemed ineffective for certain offers. For example, a marketer sending out 500,000 direct mail prospecting pieces usually is disappointed if it finds out that only 250,000 are likely to be profitable and the mailing size should be reduced.
Rather than testing another media such as print, e-mail or broadcast, it might struggle to avoid reducing its favorite media. However, especially with the Internet, there certainly is a media mix that is appropriate for even classic direct marketers. To pursue that mix, ask yourself:
• Does a combination of media produce better results? For example, will a letter and e-mail outperform a letter alone?
• Do some customers prefer one medium over another? For example, can some customers be eliminated from certain mailings and sent e-mails instead without a loss in sales?
• Does general media, like magazines or radio, produce good prospects or information requests? Many catalogers now get most of their new prospects from their Web site. Knowing which media channel customers come from, respond to and prefer is critical.
Research Is the Best Strategy
The best strategy for housefile segmentation requires you to understand the customers, their behavior and why segments are unique. It places a high demand on research, not only to uncover complex patterns, but to understand them, internalize them, and create new offers and strategies with them.
Look for information that supports understanding and allows you to know when and how to change your strategy. Don’t be afraid to seek a partner with experience to help develop the research. In the end, housefile segmentation based on understanding is not only more effective, but easier and more fun to do.
Alan Weber is president of Marketing Analytics Group and is a consultant who works with direct marketing firms and agencies. Weber can be reached at firstname.lastname@example.org.