Principles of Effective Differentiation Customer Segmentation Strategies

EVOLVING CUSTOMER SEGMENTATION
IIR Telecommunications Conferences
Customer Segmentation Strategies

London November 2005
Principles of effective differentiation
Customer Segmentation
Vladimir Dimitroff
Director
PRISM Consulting
http://www.prism-gb.com
www.prism-gb.com
The PRISM Organization
WORKSHOP AGENDA
Fundamentals and Benefits of Differentiation

Value Segmentation Principles and Techniques Needs Segmentation Methods Strategic, Macro- and Micro-segmentation Differentiated Customer Planning and Resource Optimisation
WORKSHOP AGENDA

Slide 1
WHY FOCUS ON CUSTOMERS? THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS All three are important, but you can only excel in one - and should choose your focus: Competitive edge based on cost (and price competition) is not sustainable in the long term. Product leadership is short-lived, too. Technology moves fast and even products that are not overtaken are easily replicated. Customer centricity is about long-term relationships, therefore provides sustainable advantages. It also results in added competitiveness in the other two dimensions
see Treacy & Wiersema: The Discipline of Market Leaders
Product Excellence
Operational Efficiency
Customer Intimacy
WORKSHOP AGENDA

Slide 4
WHERE TO START
Picket Fence
Number of Customers
Mass Marketing
CRM
Highest Value Customers
Customer Value
Source: Peppers & Rogers Group
Slide 2
DIFFERENT CUSTOMERS BY VALUE Most Valuable Customers: Retain
Most Growable Customers: Grow
Marginal customers: Business as usual? Below Zero Customers: Dismiss, or?
Service costs
Customer value segments Actual value
Strategic value (potential share of customer)
CALCULATING CUSTOMER VALUE From revenue to profitability Pure spend-based models: straightforward and easy Introducing cost elements: allocation methods Detailed individual customer costing From past to future value Historic value: recent history Historic value: total cumulative history (lifetime) Future (potential)value: different predictive methods Net present value (NPV): discounted future value Lifetime Value (LTV) or CLV (customer lifetime value)
The net present value of all future profit streams from an individual customers relationship with the company
CALCULATING CUSTOMER VALUE Predictive techniques Regressions (linear, multiple, logistic) Trees (classification, decision) Advanced techniques (neural networks, genetic algorithms) Definitions of lifetime Strictly referring to a future period Need for consistent predictability and actionable/manageable Techniques to calculate LOS (length of service); survival analysis (LIFEREG, PHREG procedures in SAS) Alternative models and techniques the RFM (recency, frequency, monetary value) model as a segmentation tool Rapid identification techniques (golden questions)
Slide 6
WHY NEEDS?
Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.
Adam Smith, The Wealth of Nations, 1776.
WORKSHOP AGENDA

Slide 7
WHY NEEDS?
Fundamentals: Any business only exists if it has customers. Customers have specific needs that have to be satisfied. A business only exists to satisfy specific needs.
The Link to Value: In satisfying needs a business provides value.
Products and services represent value to the one with needs (the Customer).
(see Added Value concepts in economic theory, supply/demand concepts etc.).
In the process of satisfying needs value changes hands.

(see Value Migration concept in strategy models and theories).
Slide 8
THE WORLD OF PROXIES
Customer Profiles (Who they are?)

Sets of (static) attributes allowing reasonable assumptions, e.g. families with babies need nappies, teenagers need brightcoloured mobile phones or companies with vehicle fleets need motor insurance
Customer Behaviour (What they do?) Based on assumptions like beer drinkers are more likely to choose beer over wine or once a gambler, always a gambler.
Slide 9
WHO THEY ARE Demographic profiles: Grouping people by gender, age, marital status, education, occupation etc.
Geo-demographic: Adding the spatial dimension in one or more ways: absolute (North, South, Wales, Leeds), relative to population concentrations (urban, suburban, rural) or based on economic regions (Thames Valley).
Psycho-demographic: Introducing attitudinal and emotional affiliations (nerds, lads, anoraks) often hard to distinguish from pure demographics (e.g. education, occupation) or from behaviour types (see below).
In B2B environments the equivalents are vertical sectors and subsectors, company size (employees and core business metrics, e.g. turnover), location(s), target market(s) etc.
Slide 10
WHAT DO THEY DO
Transaction (purchasing) behaviour: Frequent shoppers/ flyers, bulk buyers, occasional shoppers, declining custom etc.
Motivation-based behaviour: Impulse buyers, early adopters, bargain hunters, status seekers.
Lifestyles: Often mixed with demographics, indicate needs through preferences manifested in everyday behaviour (a number of popular templates and commercial databases of pre-scored population).
B2B: Order consolidators, end-of-quarter (end-of-year) buyers etc.
Slide 12
HOW ABOUT PREFERENCES?
Customers have individual (and group) preferences often exhibited in behaviour patterns, sometimes declared in dialogue with the company, but sometimes also withheld and/or
Product or service preferences are directly linked to needs. The chance that those are true needs is somewhat higher, although product preferences may often reflect perceived needs.
Attribute preferences also manifest needs, however those are secondary, satellite needs accompanying the core need in a dynamic bundle. The likelihood here is greater that they are perceived needs, particularly in the less tangible areas of taste, fashion, peer influence etc.
unknown.
For practical purposes of needs modelling and needs group management, explicit and implicit preferences can be considered a proxy for needs.
Slide 11
THE 3 QUESTIONS TEST
Give me (speed, safety, confidence, a positive experience, success-personal or corporate).
Help me to (get to a destination, connect to a person/organisation, enhance my life).
Save me (time, money, hassle, risks or hazards, negative

experiences).
WORKSHOP AGENDA

ALL KINDS OF SEGMENTATION
Macro-segmentation: typically a market segmentation view Strategic segmentation: customer segmentation for long-term differentiation Micro-segmentation: a tactical, action-oriented tool for immediate targeting
Used in defining market proposition/s, brand values, and in targeting mass marketing activities. E.g. Youth, Pre-paid or Rural segments
Used in strategic planning, resource allocation, Marketing/Sales/Service optimisation. E.g. High Value, Growable or BZ customers, Technos, Savers or Status-symbol segments Used in day-to-day direct campaigns (cross- and up-sell), targeted churn prevention, acquisitions. E.g. Seasonal roamers, Bargain hunters during competitors campaigns, Location patrons
WORKSHOP AGENDA

Slide 5
SEGMENT MANAGEMENT
Acquisition
Business goals: Get customers
Segment 1
Retention
Development
Keep customers
Grow customers
Segment 2
Acquisition
Retention
Development
Overall objectives translate to different priorities in each segment.
Acquisition Segment 3
Retention
Development
Slide 3
RESOURCE OPTIMIZATION
Allocating communication channels according to the value of segments
Most valuable customers
Most growable customers Marginal

Media E-channels Direct mail Telemarketer In-person service reps Dedicated service reps
Unprofitable
THE HOW TO OF PRACTICAL STRATEGIC SEGMENTATION Evolving segmentation: V1 V2 V3 - From historic to predictive value and from revenue to profit-based individual customer value
Starting simple could mean few, expenditure-based value segments. Introducing any known costs leads to a better, profitability-oriented differentiation. Using non-linear predictive models allows managing future, lifetime value.
V4
-From broad, proxy-based needs segments to precise, true need clusters

-Early needs-driven segmentation schemes often start from a market (macro) segmentation, using proxies like basic demographics or transaction behaviours. As companies learn to interpret the true needs behind such proxies, more complex needs clustering replaces the macro segments and allows linking individual needs to value growth, retention and targeted, profile-based acquisition.
V5
N1
N2
N3
N4
SO WHAT? (ACTING UPON THE KNOWLEDGE) Customer Plan (operational efficiency through customer intimacy) Developing differentiated treatments for each intersection of a needs cluster with a value segment (customer community with a unique combination of value and needs) differentiated marketing and sales
differentiated service levels and approaches differentiated communications: message and channel all above differentiated consistently across touchpoints embedding in the companys goal -setting, planning and resource allocation
Product development (product excellence through customer intimacy) Re-defining the mission (and often the primary industry sector) of a company as the business of satisfying customer needs) Intimate needs understanding at the core of new product development and existing product improvement Managing product capabilities around needs (and value)
contact details
THANK YOU
Vladimir Dimitroff
Director
PRISM Consulting (UK) Ltd 6 Priors Court Newark Str Reading RG1 2SR United Kingdom Phone: +44 (0)7947034944 E-Mail: vdimitroff@prism-gb.com www.prism-gb.com
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EVOLVING CUSTOMER SEGMENTATION

IIR Telecommunications Conferences

Customer Segmentation Strategies