Principles of Effective Differentiation Customer Segmentation Strategies

EVOLVING CUSTOMER SEGMENTATION
IIR Telecommunications Conferences
Customer Segmentation Customer Segmentation

Strategies Principles of effective
differentiation
London
November
Vladimir Dimitroff
2005 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 EVOLVING CUSTOMER SEGMENTATION

WHY FOCUS ON CUSTOMERS?

THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS
All three are important, but you can only Product Excellence
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 Operational Efficiency Customer Intimacy
sustainable advantages.
It also results in added competitiveness

in the other two dimensions see Treacy & Wiersema: ‘The Discipline of Market Leaders’


WORKSHOP AGENDA


WHERE TO START
Picket
Fence
Number of Customers Mass Marketing CRM
Highest Value
Customers
Customer Value
Source: Peppers & Rogers Group


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 Strategic value (potential share of

value 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
customer’s 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’)


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


WHY NEEDS?
Fundamentals: The Link to Value:
Any business In satisfying needs a business provides

only exists if value.
it has
customers.
Products and services represent value to

Customers
the one with needs (the Customer).
have specific
needs that (see Added Value concepts in economic
have to be theory, supply/demand concepts etc.).
satisfied.
In the process of satisfying needs value
‘changes hands’.
A business
only exists to (see Value Migration concept in strategy
satisfy models and theories).
specific
needs.

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 bright-coloured 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”.


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 sub-sectors, company size (employees and core
business metrics, e.g. turnover), location(s), target
market(s) etc.

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.


HOW ABOUT PREFERENCES?
Customers have Product or service preferences are directly linked to

individual (and needs. The chance that those are true needs is somewhat
group) higher, although product preferences may often reflect
perceived needs.
preferences
often exhibited
in behaviour Attribute preferences also manifest needs, however
patterns, those are secondary, ‘satellite’ needs accompanying the
sometimes core need in a dynamic ‘bundle’. The likelihood here is
declared in greater that they are perceived needs, particularly in the
dialogue with less tangible areas of taste, fashion, peer influence etc.
the company,
but sometimes
For practical purposes of needs modelling and needs
also withheld
group management, explicit and implicit preferences can
and/or unknown.
be considered a proxy for needs.


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: Used in defining market proposition/s,

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


WORKSHOP AGENDA


SEGMENT MANAGEMENT
Acquisition
Business goals:
Segment 1 Retentio
Get customers
n
Development
Keep customers
Grow customers Acquisitio

Segment 2
n
Retention
Development
Overall objectives Acquisition

translate to
Segment 3 Retention
different priorities
in each segment. Developme
nt


RESOURCE OPTIMIZATION
Allocating Most valuable customers

communication
e
channels according
lu
va
to the value of EP
KE
er
segments Most growable
m
to
customers
are
us sh er
C
OW om
GR cust Marginal
t
s
of e co
z
mi
ini
Media t,
m Unprofitable
rofi
p
E-channels ize
x im
Direct mail M a
s t
ve
Telemarket Di
er
In-person service reps
Dedicated service
reps


THE ‘HOW TO’ OF PRACTICAL STRATEGIC SEGMENTATION
Evolving segmentation:
V1 - From historic to predictive value and
from revenue to profit-based individual
V2
customer value
Starting simple could mean few, expenditure-based
V3 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
V5
from a market (macro) segmentation, using proxies like
basic demographics or transaction behaviours. As
N1 N2 N3
companies learn to interpret the true needs behind
N4
such proxies, more complex needs clustering replaces
the macro segments and allows linking individual needs
to value growth, retention and targeted, profile-
based acquisition.


‘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 company’s 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 EVOLVING CUSTOMER SEGMENTATION

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
Austria • Czech Republic • Germany

Hungary • Italy • Malta • Poland • Russia
Spain • Switzerland • Turkey • UK

Principles of Effective Differentiation Customer Segmentation Strategies

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Principles of Effective Differentiation Customer Segmentation Strategies

Uploaded by

Copyright:

Available Formats

EVOLVING CUSTOMER SEGMENTATION

IIR Telecommunications Conferences

Customer Segmentation Customer Segmentation

The PRISM Organization

Fundamentals and Benefits of Differentiation

Value Segmentation Principles and Techniques

Needs Segmentation Methods

Strategic, Macro- and Micro-segmentation

Differentiated Customer Planning and Resource Optimisation

The PRISM Organization

Fundamentals and Benefits of Differentiation

Value Segmentation Principles and Techniques

Needs Segmentation Methods

Strategic, Macro- and Micro-segmentation

Differentiated Customer Planning and Resource Optimisation

The PRISM Organization

WHY FOCUS ON CUSTOMERS?

Technology moves fast and even

Customer centricity is about long-term

It also results in added competitiveness

The PRISM Organization

Fundamentals and Benefits of Differentiation

Value Segmentation Principles and Techniques

Needs Segmentation Methods

Strategic, Macro- and Micro-segmentation

Differentiated Customer Planning and Resource Optimisation

The PRISM Organization

Number of Customers Mass Marketing CRM

Source: Peppers & Rogers Group

The PRISM Organization

DIFFERENT CUSTOMERS BY VALUE

Most Valuable Customers:

Most Growable Customers:

‘Below Zero’ Customers:

Actual Strategic value (potential share of

The PRISM Organization

CALCULATING CUSTOMER VALUE

• From revenue to profitability

• From past to future value

• Lifetime Value (LTV) or CLV (customer lifetime value)

The PRISM Organization

CALCULATING CUSTOMER VALUE

• Alternative models and techniques

The PRISM Organization

“Man has almost constant occasion for the help of

Adam Smith, The Wealth of Nations, 1776.

The PRISM Organization

Fundamentals and Benefits of Differentiation

Value Segmentation Principles and Techniques

Needs Segmentation Methods

Strategic, Macro- and Micro-segmentation

Differentiated Customer Planning and Resource Optimisation

The PRISM Organization

Fundamentals: The Link to Value:

Any business In satisfying needs a business provides

Products and services represent value to

THE WORLD OF PROXIES

Customer Profiles (Who they are?)

Sets of (static) attributes allowing reasonable

Customer Behaviour (What they do?)

Based on assumptions like “beer drinkers are more

The PRISM Organization