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What is customer segmentation all about?

October 5, 2011 | Posted in: Articles & News, Marketing pow wow

Customer segmentation is a concept used in marketing to describe how sub-sets of customers/organisations share similar characteristics that allow a marketer to better predict a customer’s preferences, how they will behave etc. Characteristics (or “variables”) such as geo-demographics (age, location etc), physchographics (personality, values etc) and behaviour (attitude/response to a product/service/offer etc) are the main criteria for assigning customers to segments (groups). The other criteria useful in business for segmenting customers is by value – this allows you to look at which customers belong to profitable vs unprofitable segments (and anything in between). I like to simplify the possible segmentation options to:

1. Customer interests
2. Customer behaviour
3. Customer value

On a customer database, the customer records would be “flagged/tagged” with a code that identifies that customer as belonging to a particular segment. Customers can belong to more than one segment, however often it will be one particular segment membership that a marketer will be interested in when running a query on the database. On a sophisticated database, customers will be assigned “scores” for their segmentation profile (a formula calculating the combined weighting assigned to individual customer segment memberships), as often this will be needed to determine which offer they are to be given, the value of that offer or the level of customer contact that is appropriate to their profitability contribution.

There are a few tools for capturing the data to assign customers to segments – the most common are:

  • customer application form/questionnaires (i.e. interests – geo-demo-psycho)
  • transactional (behavioural) data from point of sale etc
  • financial data (profitability)

If companies treat their customers as ONE group (regardless of the size of their customer base) then they are bound to be missing opportunities to ensure that customers needs are fully met, that their promotions are as effective as possible and they are investing their time and efforts in the right customers.

The potential pay off from using customer segmentation to tailor your offers, communications etc is enormous…how do we know this?…from controlled tests on large databases that show for example significant up-lift in retail spending as a direct result of better appeal, relevancy, timeliness etc.

After all, if everyone liked the same flavour icecream, we’d probably all be stuck with vanilla…so why do so many companies still send out vanilla promotions to everyone and hope they work?! If you are tired of spending money on promotional activities that aren’t as effective as you’d hoped or you are wasting too much time on business that costs you more to attain and service than it pays, then you need to get a customer segmentation plan underway to get smarter about your marketing budget.

Flex Marketing & Design can create a custom segmentation plan for your business. Call Andrea today to discuss on 09 416 2209 or 021 952 324.

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