customer segmentation

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.


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


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


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


1,000 15 10 - 25 1,050


25 1,000 5 - 50 1,080

Low Value Segment 3

5 50 1,000 - 75 1,130


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


1,050 1,145 9.0% 2.4% 9.5%


1,080 1,190 10.2% 4.6% 6.9%

Low Value Segment 3

1,130 1,085 -4.0% 6.6% 4.4%


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

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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

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Free content

FreeProduct


Optimisedupgrade offer

Optimisedupgrade offer


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


1,393,284 Customers


1,961,843 Customers


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


309,000 Customers


1,393,284 Customers


1,961,843 Customers


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.