Segmentation - Capitalize on the Differences (1,345 words)
by Mary Ann Kleinfelter
Different people behave differently. Business people are no exception. By recognizing differences in your database, you can group customers with like characteristics and capitalize on these attributes in your promotions.
What Is Segmentation & Why Do It?
Segmentation is used to create groups within your customer and prospect databases based on past performance, like characteristics, predicted performance or any of a host of methods. For example, if you are selling software, it may be critical to segment users of IBM PCs from those who use Macintosh computers..
The immediate result of your segmentation efforts will be a snapshot or profile of how your customers and prospects look and behave. Use this profile to increase sales and profits by promoting unique segments differently. Over time, you can see trends in the performance and size of these segments that will provide insight into your business and help anticipate future needs. For example, you may find that a large group of buyers has not bought in 11 months, and that retention drops significantly among buyers when they don't buy at least once per year. Either offer this segment a special retention effort, or plan to replace them and their sales and profits.
The most effective segmentation starts with those attributes most critical to your business. Since many b-to-b marketers are not sure of those attributes, a good place to start is with RFM—Recency (how recently a customer bought), Frequency (how frequently a customer bought) and Monetary Value (how much a customer spent). How you use these variables can significantly impact your outcome. For example, compare a customer who bought once in the last 30 days and spent $100 to a customer who bought five times in the same period and who spent a total of $100. These individuals may have widely different levels of purchasing authority.
Obviously, RFM variables are most powerful when used in combination, but be careful. Are your one-time buyers so recent they are still trying you out—or has so much time passed you may never hear from them again? When you segment buyers who bought in the last 30 days, make sure you know which are new buyers and which are repeat buyers. Ask the same question when you rent a mailing list with a "hotline" segment.
Segmentation by product or product categories is essential for b-to-b marketers selling multiple products. Product categories can be created by separating your products into groups with similar characteristics, such as degrees of consumability. Segmentation by product category enables you to optimize the behavior that the nature of the product inspires. For example, you may find you retain widget buyers better and therefore choose to limit your promotions to widget buyers. However, beware of self-fulfilling prophecies in all forms of segmentation. When you decrease your promotional efforts to a group, they almost always lose value. Re-affirm your assumptions by re-testing them often.
Channel is another key segmentation variable. It is reasonable to expect that buyers who prefer to purchase on the Internet might be more likely to give you their e-mail addresses and be more amenable to an e-mail promotion. On the other hand, some buyers prefer to interact directly with your sales force.
Whichever attributes you test and find to be best, remember most of them can be measured at both site (physical location of a company) and individual (by name) levels. For example, the type of PC a businessperson uses may be an individual attribute, but the number of PCs at a company will be based on the site. To witness the power of site versus individual segmentation, try a simple test. Divide your prospects into those individuals at companies which buy from you (buying sites) and those individuals at companies which do not (non-buying sites). Promote to each segment. You should find a tremendous difference in how these two segments respond.
Developing a Plan
Whether you are just starting out or are a seasoned b-to-b veteran, you can enhance your results with a good segmentation plan. Just as you regularly plan how and when your promotions will happen, you need to have a short- and long-term segmentation plan.
A common mistake in segmentation planning is changing segments with every promotion. Unless you are able to re-accumulate these segments, you will not have consistent groups whose performance you can track over time. It is the historical record of the performance of these consistent, "bellwether" segments that will allow you to predict the future size and performance of your segments.
Having established benchmark segments, it is important to test. Just as you devote 15 percent to 20 percent of your promotions to testing new offers, you need to be constantly on the lookout for new segments to test. For example: You have determined that customers who bought widgets in the last six months are a segment that works well. You might want to "drill down" to test whether buyers who bought widgets in the last three months perform better than those who bought their widgets four to six months ago.
For years, b-to-b marketers would complain that offers tested would not perform the same when they were rolled out to a larger group. For some, the answer was that segments performed differently to offers and that the relative mix of the segments affects the outcome dramatically. For example, you test 5,000 one-time buyers and 5,000 repeat buyers. When rolled out to the entire database, which might consist of 75 percent one-time buyers, the result might be different than what you had experienced when you artificially mailed 50 percent one-time buyers in the test.
Remember that keeping a record of how a segment performs historically will allow you to compare that segment's test results to the traditional performance of that segment over time—not just to the results of different segments being tested. Now you can understand how seasonality, fiscal years, budget timing, etc., can affect tests and rollouts.
Another common mistake database marketers make, especially in b-to-b markets where databases may be smaller than their consumer counterparts, is to segment their databases into segments too small to measure or predict reliably. On the other hand, certain segments are so powerful that you do not want to collapse them, even if they are small. For example, separate one-time buyers from repeat buyers. Unfortunately that means, with a very tiny but select database, you may need to mail repeatedly to accumulate the 100 to 200 orders necessary to show sound results and patterns.
Just as your segmentation plan addresses which segments you will select for which promotions, it should also account for which segments you will suppress or exclude from certain promotions. For example, you might want to exclude a segment if it consists of customers or prospects that have proven unprofitable in the past, requested no more promotions or are actively being tested elsewhere.
Some b-to-b marketers believe that the choice of which segments to suppress is actually more important than the choice of which to promote. To illustrate the power of suppression, consider key decision-makers in a b-to-b database. These individuals may appear as prospects that never buy because they place orders through others. If you are overly vigilant in your suppression, you may exclude these individuals and the sales and profits they produce. Use suppression only when you are certain of whom you are excluding. Also, remember to suppress consistently. If you suppress names from a benchmark segment sometimes and don't suppress them at other times, your performance record for that segment may vary.
In short, make sure your segmentation plan includes the following variables at site and individual levels: recency, frequency, monetary, product and channel. Incorporate data obtained from research activities, and purchase other data for variables your tests have indicated to be essential. You can, and will, develop the combination of attributes particular to your business that will make your b-to-b segmentation successful!
Mary Ann Kleinfelter is vice president of sales and marketing for Delta Education's direct marketing division. She can be reached at (603) 598-7170.