segmentation analysis: the key to finding and keeping more profitable customers

© 2011 Catalyst

Do You Really Know Who Your Best Customers Are?A simple, highly effective way to generate higher ROI through the magic of the 80/20 rule

By Steve Khederian, Director of Analytics, Catalyst

June 16, 2011

Customers Are Not Created EqualWe can generate higher ROI by properly segmenting customers and aligning higher-value propositions with higher-value segments

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So Why Don’t We?

1. Many marketers believe they already know who their best customers are. They are often surprised to find out otherwise.

2. Many marketers overcomplicate the process. The secret is to start simple.

The 80/20 RuleHow to measure and determine customer value by segment

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Beyond the Pareto Principle

20% of your customers will produce 80% of your sales.

The trick is figuring out which 20% is the right 20%.

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Beyond the Pareto Principle Once you have determined the right 20%, you can focus your marketing strategy based on what each data segment is telling you:

Which customers are worth retaining

Which customers you should try to win back

Which customers are worth cultivating

Who’s actually costing you money to keep

Here’s How To Start A step-by-step guide to segmentation

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Segmentation Steps

1. Determine your value segments based on whatever criteria drive your business:

Sales

Margin dollars

Unit volume

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Segmentation Steps

2. Rank your customers from highest value to lowest value for the most recent 12-month period.* The customers who produced 80% of total value are your High Value segment. The balance is Low Value.

*This same approach can be taken using the last 90 days vs. the previous 90 days, or any other time frame that makes sense for your customers’ buying cycle.

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Segmentation Steps

3. Do the same thing for the previous 12-month period and you will have High and Low Value segments from last year (Year 1) and this year (Year 2).

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Segmentation Steps

You’ll also have new customers who had zero value in Year 1 but are now High or Low Value customers.

And you’ll have lost High and Low Value customers from Year 1 who had zero sales in Year 2.

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Sample Segment Distribution

For each of these segments, ask yourself:

What happened?Why?

Tracking Movement Across Value Segments Year Over Year Defines Specific Targeting Opportunities

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What am I Looking to Learn?

Each segment presents opportunities to impact customer behavior and grow ROI if you understand what happened and why.

For each segment, ask yourself, “what can I do to move you forward?” Your goal is to drive customers into higher value segments.

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What am I Looking to Learn?

Among customers who moved from Low to High, how can I better determine marketing spend? What about those who remained Low?

Among customers who moved from High to Low, how can I proactively avoid value loss next year?

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What am I Looking to Learn? How can I find more Best Customers?

How can I keep more Best Customers?

How can I get more from current customers?

How can I reduce churn and win back lost customers?

The AnalysisAsking “what happened?” and “why?”

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Analysis = Answers

Each intersection in the segmentation matrix begs important questions—the answers to which should:

Shape marketing and sales strategies

Drive growth

Minimize attrition and churn

Prioritize marketing spend

Improve ROI

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Analysis = Answers

What other secrets can you find hidden in your data? How about:

Customers who should be marketed to less frequently

Customers who shouldn’t be marketed to at all

Lost customers to target for win-back

Clues for more effective acquisition

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Don’t Limit Yourself

Identify “red flags” so you know where to focus first.

Then, identify other objectives based on what the data tells you. Each segment yields different information.

We’d be happy to talk to you about doing a segmentation analysis. It’s fast, affordable and extremely effective.

For more information contact Mark D’Amico at 585.453.8338 or email: mdamico@catalystinc.com.

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About The Author

Steve Khederian is director of analytics at Catalyst, a Rochester, NY-based direct and digital marketing agency, where he specializes in applying data to develop and implement integrated, multichannel sales and marketing programs. He is the former CMO of Modern Marketing Concepts and VP of client services at Concentrix. He holds an MBA from the Simon School of Business at the University of Rochester.