Successful Segmentation for Creating Profitable Customers
Carlos Soares
Head of Customer Insight
October 2008
1. Introduction
2. Renewing our understanding
3. Profiting through segmentation
4. Investing to action segmentation
5. Making it happen
Contents
Introduction
• Renewing our understanding– What is segmentation really? And why do we use it?– Communicate the learning and drive understanding throughout the business
• Profiting through segmentation– Understanding who our customers are? What drives and motivates their behaviour?– Understanding how to drive value for both parties. Determine risk and value.– Developing customer and targeting strategies. Strategic and tactical.
• Investing to action segmentation– What tools and skills are necessary– What system implementations are there?
• Making it happen– Demonstrating through action, testing and hypothesising. – The myth of the average customer– Internal Passion
Segmentation is needed to drive higher profitability through understanding customer needs and delivering on those needs
Meet Exceed
Relationship Development
Retain anddevelop
Manage
Customer Expectations
Cherish and tailor
Nu
mb
er o
f in
div
idu
als
Few
Many
Low HighValue per individual
Unprofitable Marginally profitable
More profitable
Very profitable
Segmentation is an important tool in becoming customer-centric. It is a key enabler of CRM.
“Recognise me, remember me, value me.”
Typically customers are not created equal ..and different “segments” need different customer strategies to exploit their value
Renewing our understanding
20-30%
40-50%
20-30%
Segmentation is an ongoing process for managing the customer base
•A segment is a group of customers who display similar attributes to each other...
•They may react similarly in a product/service offering
•They may provide comparable values (profitability) to the company
•They may bear the same needs or behave in alike ways.
•There is no one right way to segment (not should there be)
•Many different approaches and techniques
•Choosing an approach requires a mix of art, science, common sense, experience and practical knowledge
•Also depends on market, business needs, availability of data
•The aim is not necessarily to build one holistic model to meet all needs, several models used in conjunction with each other can work well.
Renewing our understanding
How can we
segment
Transactional /
value (RFV), LTV
Attitudinal/
needs
Loyalty / length of relationship
Geography /
demographics
Behavioural Propensities
*** * ***
*** * **
** ** **
** * **
* *** *
Targeting / Selections
Value Management
Propositions Development
Key for planning e.g prioritising marketing spend, setting segment strategies & objectives and prioritising spend & resource
Predictive behavioural models are key for targeting customers for a behavioural change e.g. buying a product
Overlays and geography can give insight of different regional profiles.Geography allows us to address specific competitor behaviour.
Likelihood to take up of new products.Level of customer-led contact.
Identifying customer needs and drivers can lead to new developments or product tailoring opportunities
Comments
There are many types of segmentation:Having one type will not meet all our needs
*** Nearly always useful ** Sometimes useful * Not that useful alone
Renewing our understanding
Identifiable– From the data available
Differentiated– Segments should be different from each
otherViable
– Big enough to warrant attention / resource allocation from business
Understandable by the business–No point having complicated mathematical solutions that only analysts can understand.–Use the right language, communicate with business
Actionable–Attached to customer records so that action can be taken at a customer level
(Not one for retention, one for propositions and another for marcomms)
•Segments may be predictive of value, forecast responsiveness or help with acquisition modelling, however most are designed to be descriptive
•Predictive modelling can be used in conjunction with descriptive modelling
•Depending on type of segmentation, allocation code should be regularly refreshed
•Segments should pass tests for good marketing AND good business - plus be statistically sound !
Segmentation should be built so as to be used across all functions of the business
Renewing our understanding
Yesterday: Today & Tomorrow:
Targeting Mass customisation
Focus Acquisition
Approach How big is my list?
Differentiation
Retention
Test and learn
Company KPIs Volume targets
Marketing KPIs Sales volumes
Value targets
Segment objectives (KPIs)
Propositions Sell to all Customer-needs driven
Using segmentation for a ‘Customer Driven Organisation’ Renewing our understanding
Turning Data into Actions
Inputs:
Product Holdings, Usage, Payment Type, Channel, Debt Costs, Defection Risk, Potential
Who are we building a relationship with (Profile)
What do customers need from us
Intercept & Communicate
What value can we getCurrent v potential
valueHigh risk defection &
debt
Develop customer programmes based customer action or feedback (acquisition & retention)
Offer tailored propositions based on trigger events (e.g. reason to leave)
Develop your pricing strategies
Identify what support our people need & focus our systems and training on giving it
Remove blockages –PEOPLE MAKE IT HAPPEN … Technology enables it!
Understand who our customers are
Segmentation & Overlays
Develop Customer / Targeting Strategies
Set segment strategic objectives Identify key business activities to
influence Provide Management Information
& Monitoring Triggers:
Life events (Home move, family, etc.)
Customer Contact (Complaints are a gift, opt outs, service)
Profile:Customer Data
(Demographics, Life stage / style, region)
Behaviours (Channels preference, propensities to purchase, loyalty, value)
Profiting through
Segmentation
Using Segments to understand our Customers Profiting through
Segmentation
HEARTS STRATEGY: Connect with these customers to retain, grow value and win-back
INSIGHTS SUMMARY
• Demanding & smart segment
• Need convenience and VFM propositions to manage their daily lives
ACTIONS
• Brand: Trust the brand / traditional
• Proposition: Deliver the best deal for me (VFM)
• Experience: Hassle free – not hard work – value add self service
• Contact: Work and leisure opportunities, new technology/internet channels
WHO ARE THEY?• These households tend to be a mix of single
occupants and families with the majority falling within the mid to low affluence range of the FSS. Customers are more likely to have become a British Gas customer during the last couple of years and the majority are owners of 2 or 3 bedroom dwellings.
27% have a customer vintage of 2007 (1.6 times more likely to fall under this vintage than the base
More likely than the base to have a BG consent status of ‘Opt In’ (63% of customers)
Over half have a boiler that is less then ten years old (38% more likely)
Significantly more likely to pay for their gas and /or electricity by cash/cheque and less likely to pay by direct debit
The 23% that have a price protected tariff for their gas are over represented compared to the base
Significantly more likely to be classified as ‘Elderly Deprivation’, ‘Ageing Workers’, ‘Credit Hungry Families’ or ‘On the Breadline’
Tend to live in ‘East Midlands’ (14%), ‘Norweb’(13%) and ‘Yorkshire’ (12%) electricity regions
Developing Customer Strategies: Driving Value
1. Retain high value customers
2. Cross sell valuable customers
3. Broaden the relationship
5. Improve the margin of value destroying customers
4. Acquire the right customer
THE BUSINESS CHALLENGE
Understand me and provide me with reasons to stay (e.g. Next Best Action, Loyalty recognition – discount)
THE CUSTOMER ISSUE
Provide me compelling reasons to purchase again(e.g. VFM - account review for best ‘package)
Understand me & make relevant, competitive offers(e.g. Exclude high defectors, debt risk, relevance to customer type)
Understand my needs & make more competitive offers(e.g. Use customer feedback – research & response to tailor props)
Can I be satisfied more cost effectively(e.g. Intercept & Communicate)
Profiting through
Segmentation
1. Retain high value customers
2. Cross sell valuable customers
3. Broaden the relationship
5. Improve the margin of value destroying customers
4. Acquire the right customer
THE BUSINESS CHALLENGE
Profiting through
Segmentation
Recognise & Reward
Increase Value
Leverage Benefits
Increase Value /Manage costs
Drive Engagement /Target the right customer
STRATEGY
Set objectives for each segment. Remember you are managing acustomer P&L, not products.
OBJECTIVES
Developing Customer Strategies: Driving Value
Developing Customer Strategies: Applying segments to Sales and Marketing
What movements in customer segment would we ideally like to influence? How can we achieve that? What objectives can we set ourselves in order to
test our hypotheses?
High Value Segment 1
Medium Value Segment 2
Low Value Segment 3
Loss Making Segment 4
High Value Segment 1
1,000 15 10 - 25 1,050
Medium Value Segment 2
25 1,000 5 - 50 1,080
Low Value Segment 3
5 50 1,000 - 75 1,130
Loss Making Segment 4
15 50 20 1,000 100 1,185
100 75 50 25 250
1,145 1,190 1,085 1,025 250
April May % Change % Loss % Gain
High Value Segment 1
1,050 1,145 9.0% 2.4% 9.5%
Medium Value Segment 2
1,080 1,190 10.2% 4.6% 6.9%
Low Value Segment 3
1,130 1,085 -4.0% 6.6% 4.4%
Loss Making Segment 4
1,185 1,025 -13.5% 8.4% 2.1%
Total 4,445 4,445 0.0% 5.6% 5.6%
May 2008
Ap
ril
20
08
Customer Segment
May 2008 Live
April 2008 Live
Losses
Gains
Profiting through
Segmentation
Isn’t it my choice about what I want?
I will sell product B at a discount to get a sale of my
product
You can’t do that, it will hit my P&L
and I won’t get a bonus this year
Product Manager
Product Manager
Customer
Needs / desires
Ability to pay
Channel preferences
Timing
etc
Working together
Developing Customer Strategies: We need to be customer centric and not just product centric
• Customer-centricity drives revenue and profit, but for offers to work a business must align both its marketing strategy and resources with customer opportunities rather than product-driven goals
• CHANGE is required in the CULTURE - working together as one is necessary because it enables a more bottom-up and customer focused approach to marketing
Profiting through
Segmentation
Customer Value
Chu
rn R
isk
High
High
New kit£XX offer
Samplepremium
FreeProduct
FreeProduct
Product deal
Service
DD migration
On-lineExtra kitFull price
Service
Service
Service
Service
Tenure Basedoffer
Service
Service
Tenure Basedoffer
Tenure Basedoffer
ServiceService
Samplepremium
Samplepremium
Product deal
Extra kitFull price
Extra kitFull price
Extra kitFull price
Samplepremium
New kit£XX offer
New kit£XX offer
New kit£XX offer
On-line
Product upgrade
Extra kitoffers
Pay up front3,6 months
Free content
Replace Old
equipment
Optimisedupgrade offer 2
Optimisedupgrade offerOptimised
upgrade offer 3
Free content (14 days, free)
Free contentWeekend (free)
BOGOFcontent
Sample DVD
Mid tierSample
CONTENT£5 for x months
CONTENT£5 for x months
Extra kitoffers
Extra kitoffers
FreeProduct
Free content
Product upgrade
Existing proposition
New – product based
New – Sample based
New – pre payment
New – anniversary
Low
Sample DVD
BOGOFcontent
BOGOFcontent
Free content
FreeProduct
Optimisedupgrade offer 2
Optimisedupgrade offer
Optimisedupgrade offer
Optimisedupgrade offer 2
LTC Bundle
Fairly well covered, but only
with introduction of new propositions
(green)
Illustrative only
Developing Customer & Targeting Strategies: Identify proposition weaknesses & design propositions to make them effective
Profiting through
Segmentation
•Bundling or offerings can make customer targeting very complex without the right targeting systems and methodology
Channel?(multiple)
Campaign?(hundreds)
Customer?(thousands/millions)
Timing?(any day/time)
25,000 volume
1,200 sales
£450,000 budget
10% ROI
Offer “A”
Offer “B”
Product “C”
Product “D”
Action “E”
Action “F”
Missed opportunity?
Wrong timing?
Saturation?
Preference?Transaction trigger
End of Term
Up-sell opportunity
Competitor product renewal
Recent contact
100,000 mail volume
Minimum 32,000 leads
Contact frequency?
Channel usage?
Channel preference?
Event trigger
Enquirer
Life-stage
CompetitorProductRenewal
Market inflection
Optimisation can solve the difficulty of targeting customers with many different product combinations
Developing Customer & Targeting Strategies: Which proposition? Which channel? What time?
Profiting through
Segmentation
Developing Customer & Targeting Strategies: Key messages for bundles or offering strategies
Put the customer and not the product first
Pricing and proposition is critical and can take several months to get right
Make sure there are no proposition gaps in your portfolio, otherwise your offers or bundles will be weak
Remove the business silos and work together. The common goal is the customer
Bundles can pose a significant risk to your P&L as well as offer many benefits
Understand your different business objectives and use different varied offers or bundles strategies to suit
1
2
3
4
5
6
Profiting through
Segmentation
Investments to action segmentation
• If you have customer data, you CAN have segmentation…– Access to data– Start small and learn as your customer knowledge grows
• ...HOWEVER…– Garbage in = Garbage out !! – To ensure segmentation is actionable, certain capabilities need
to be in place
• A truly integrated approach takes a greater investment
Investing to action
Segmentation
An integrated approach to segmentation
Total CRM would include an integrated approach to segmentationBusiness knowledge - what is the strategy? What is the current product portfolio?
Data knowledge - availability and limitations
Statistical / Analytical skills - inhouse or outsourced.
Knowledge transfer
Usage of segments
Marketing database to provide data
Analytical tools and platforms to create single customer view
Decisioning tools, channel implementation capability
Regular feeds of data from operational systems
Ongoing process to update and refresh segments once built
Processes to operationalise segments - providing customer data at the customer touchpoints
Communication of insight
Technology
PeopleProcesses
Investing to action
Segmentation
Segmentation is just a part of the customer insight process
• There must be a balance to maximise business value: •Generate insight through understanding customer needs (Research) & behaviours (Customer Analytics)•Optimise Customer Interaction through relevance, personalisation, optimisation and campaign management•Create and maintain an integrated view of the customer using the customer database, external data and integration the insights into one
What is the customer like?
What are their needs and attitudes?
What do they think about us?
What will they buy?Why will they or won’t they buy?Product or offer
positioning.Additional needs.
What is the customer worth to us?Why don’t they buy or use more?Can we change their behaviour to make them more profitable?
What is the customer doing?Why are they doing it?
PROFITABILITY LIFESTYLE SEGMENTATION
BEHAVIOURAL CLUSTERING
PROPENSITY MODELLING
HighLow
High
Energy Value (PTEC r5)
Risk
of E
nerg
y Lo
ss
SEGMENT 5:
Low Value
SEGMENT 4: Low Risk, Medium Value
SEGMENT 3: High Risk, Medium Value
SEGMENT 2: Low Risk, High Value
SEGMENT 1: High Risk, High Value3,354,529 Customers
£-51 Ave. Energy LTV
4,164,180 Customers
£143 Ave. Energy LTV
309,000 Customers
£66 Ave. Energy LTV
1,393,284 Customers
£298 Ave. Energy LTV
1,961,843 Customers
£356 Ave. Energy LTV
HighLow
High
Energy Value (PTEC r5)
Risk
of E
nerg
y Lo
ss
SEGMENT 5:
Low Value
SEGMENT 4: Low Risk, Medium Value
SEGMENT 3: High Risk, Medium Value
SEGMENT 2: Low Risk, High Value
SEGMENT 1: High Risk, High Value3,354,529 Customers
£-51 Ave. Energy LTV
4,164,180 Customers
£143 Ave. Energy LTV
309,000 Customers
£66 Ave. Energy LTV
1,393,284 Customers
£298 Ave. Energy LTV
1,961,843 Customers
£356 Ave. Energy LTV
Investing to action
Segmentation
Company X knows that...
Dispelling the myths - how can data help?
• The average customer spends £192.45
• A typical mailing response rate is 10%
• Most of my customers come from South East
• We have a good reputation and our customers generally like us
• No customers actually spend £192.45
• Half of the customers spend less than £50
• For certain groups of customers the mailing response rate would be 40%
• Marketing activity mainly in the South East - actually the best take up of product A is in South West
• 1% of recent purchasing high value customers have had a serious complaint
Examples only
But what if they knew that...
Making it Happen
What effect will this action have on the bottom line?
• Need to quantify expected outcomes based on:– Testing and/or typical results seen in other companies– Value it will generate for the business – Impact it will have on retention and costs
Making it Happen
% Response Rates Return on Investment
Using financial marketing costs, along with our expected response rates by model segment, we can calculate an ROI for each model group, ensuring that
only the most profitable customers are targeted.
891K opportunities available for mailing in the topdecileof the model, for these we would expect an average response rate of
1.3%.
% Response Rates Return on Investment
Using financial marketing costs, along with our expected response rates by model segment, we can calculate an ROI for each model group, ensuring that
only the most profitable customers are targeted.
891K opportunities available for mailing in the topdecileof the model, for these we would expect an average response rate of
1.3%.
Building a Business Case…
•Target 1 million customers, 0.2% response with average spend £100
–£200,000 revenue–costs £400,000 (40p per mailing) + fulfilment + ….
•No planned customer contact
–potential unhappy customers, quantify...
•New products driven by research but unable to be applied to customer base….
Without
•Customer contact planning uses segmentation
–know who to contact when about what, mailing sizes drop (100,000)–costs reduce (£40,000)–targeting right customers - 2000 respond - 2% response. –Profits higher
•Quantify–if 10% Medium value customers become High value customers - inc revenues £1,600,000 (H=£100, M=£60)–If churn reduced by 2% for High value customers….
With - Tactical
•Segmentation drives customer knowledge throughout business
–media and channel choices–product bundling–propositions and key messages–demonstrating knowledge drives customer satisfaction
•Quantify–3% more customers will buy product X if sold on price promise….–NPS / CSATdrives LTV...
With - Strategic
Examples only
Making it Happen
Planning around the customer will not come overnight...
Continue to plan for andmeasure sales volumes...
…whilst ensuring targets fit with planning at customer level
…BUT essentially, we need to ensure that:• The segment strategies are defined and clear.• We have customer segment KPI’s for everyone who ‘touches’ the customer
Conclusion & Summary
• Customer segments are the starting point but we need to learn to manage the customer P&L
• Products, Propositions and Channels do not drive the value of the business. It is CUSTOMERS - acquisition, mix, loyalty development and retention.
• Buy-in at all levels and usage is fundamental. We have failed in the past because there was no buy-in to the Customer P&L.
• Investment in technology is important but PEOPLE are critical.
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