DM News Essential Guide to Lists and Databases: Build Retention, Profit With Customer Segmentation

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Customer segmentation is essential to database marketing. Segments are groups of customers with similar interests in your products or services that you have created based on their behavior, demographics and lifestyle.


Today, we have thousands or even millions of customers. We can't create a million different marketing programs, so we create a few segments and a marketing program for each segment. The programs can be personalized, of course. They can say something different to each person based on what we know about them.


· Segment: Retired couples who visit their children and grandchildren.


· Strategy: Get them to register their children's and grandchildren's cities. Suggest air packages to the proper destinations a month in advance of holidays.


· Communication: "We can fly you both from Atlanta to Portland, Maine, next month to visit David and Tracy for Thanksgiving. The price is only $189 for each roundtrip ticket. If you are interested in learning more, click here."


The goal of customer segmentation is to develop database marketing action programs that lead to measurable increases in retention, cross sales, upsales and referrals. Where possible, these programs should operate automatically with outgoing messages sent based on dates or transactions.


An ideal segment:


· Has definable characteristics in terms of behavior and demographics: for example, retired couples, business travelers ages 30-60, college students, families with young children, etc. Business customers should be segmented by SIC code, annual sales and number of employees.


· Is large enough in terms of potential sales to justify a custom marketing strategy with appropriate rewards and budget.


· Has members who can be motivated with cost-effective rewards to modify their behavior in ways profitable for your firm.


· Makes efficient use of data to support segment definition and marketing efforts.


· Can be measured in performance, with control groups.


· Justifies an organization devoted to it. The managing organization can be a single person, or part of a person's time, but there should be someone definite in your company who "owns" each segment.


Defining the segments requires insight, analytics and anecdotes.


Insight requires experienced marketing strategists who develop hypotheses about each possible segment including the rewards needed to modify member behavior.


Analytics involves using statistical analysis that supports or rejects each hypothesis: Does such a segment exist? How much are they spending now? What is their income? When do they buy in our category? How much will it cost to change their behavior?


Anecdotes are success or failure stories that illustrate what your company or other companies have done to modify the behavior of segments like this one. They offer a clue as to what is likely to work in terms of an actionable strategy. You start with an anecdote and develop a hypothesis that can be tested before any rollout.


A valid strategy for each segment involves:


· Communications to the segment (direct mail, e-mail, on-location personal attention).


· Rewards designed to modify behavior.


· Controls to measure the success of the strategy.


· A budget for implementation of the strategy.


· Specific goals and metrics for engagement: for behavior modification.


· An organization that accepts responsibility for the segment.


Each segment needs its own marketing strategy with different messages and rewards. Segments differ in profitability as well as needs. Segment strategy development begins by understanding each customer segment, its size, potential value and the best way to reach them. Then you start mapping the content, the offers, the channel and the contact strategy with that segment. You should build testing and learning steps into this process so that all the decisions can be refined and optimized along the way. The strategy for each segment should involve:


· Targeted communications to the segment. Communications should support both your short-term sales and long-term marketing objectives. These may differ. For example, if you have a segment that normally pays full price, it may not be in your long-term interest to send them bargain offers, even though your message may generate some immediate sales. You may be training them to wait for bargains. You may lose their normal full-price business.


· Using the channel that works best for each customer. E-mails, of course, are cheaper than direct mail. Some mail recipients may be stimulated to buy more if they get an e-mail saying, "Look in your mailbox this week for a special catalog from us with photos of the new fall fashions. Ponchos are definitely 'in.'"


Rewards may have to be varied based on what the customers want. What do they want? A free night in a hotel or a free air fare? Points toward a long-range goal? Recognition and status when they show up at a retail location? If your program is not working, it may be because you're not offering the correct rewards.


At one bank, branch managers were trained to recognize their best customers by sight. When one of these customers came in to the branch, the manager would jump out of his chair and walk into the lobby to greet these customers. It did not cost much to do this, but it was an effective reward for boosting retention of those people whom the bank had determined most important to retain. For a business traveler, a free night in a hotel may not be an entirely desirable reward.


Why segments should not be based on spending. It may be self-defeating to segment customers by total sales. Silver, Gold and Platinum may be great for status levels for customers - it gives them something to work toward. It may not be useful in planning your marketing campaigns. What do you say to the Silver people? "Buy more." What do you say to the Gold people? "Buy more." How can your marketing programs be personalized when they all have the same message? The marketing staff views segments from an entirely different perspective from the customer status levels.


What you should do now: Start with some anecdotes. Learn what others have done with segments. Then apply these anecdotes to your customer base. Instead of looking at your customers as a total group, try to identify segments that may respond to particular strategies aimed at their segment rather than aimed at the market as a whole.


Use analytics to see whether each segment is large enough in sales to make it worth your while to focus on them. Ask yourself, "Can I come up with some rewards that will change the behavior of this segment in a positive direction?" If so, dream up some strategies that might work with your segments. Create a budget and put someone in charge of each segment.


Set aside control groups in each segment that do not get the rewards given to other members of the segment. Then announce a limited test (expires in one year, for example). Create the communications and measure your results. It's not as complicated as you might think.


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