Managing customer segments to reduce churn

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By now, most people have realized that one to one consumer marketing is really not practical. Too little is usually known about any one person to know his or her preferences. And no one can afford to have one million different marketing strategies for one million customers.

Instead, we market to customer segments. The factor in the shortest supply in any company is imagination: the creative idea of what a segment is interested in and what can be done to motivate that segment to modify their behavior in ways that benefit your company. Few companies can correctly identify, dream up strategies for and manage more than a dozen different customer segments.

Segmentation is very important in reducing churn. We can define churn as the act of leaving one supplier to purchase from another supplier. Most telecoms today suffer from churn that varies from 10 percent to 25 percent per year. When these people leave, you lose the money spent to acquire them plus the expected revenue from them for at least a year ahead. Typical acquisition costs for consumers in the wireless industry are in the $300 to $400 range. Average annual revenues are about $600. So each defecting customer may be costing you $1,000 or more. The largest wireless players have a customer base of close to 50 million. Lose even 10 percent of these and you have lost $5 billion per year.

A segment is defined as a group of customers who have similar behavior, demographics or preferences. A well-defined segment is one that a segment manager can understand. The manager sees what these folks are doing and predicts what they will do; dreams up strategies to get them to buy more products or to become more loyal; and can run promotional tests with controls to see what strategies are working and what strategies are not.

This does not mean, of course, that promotions to segment members are not personalized. They should be. Using the company customer database, the segment manager crafts messages that include personal references based on consumer expressed preferences, past purchases, volume of purchase, length of service, etc. Studies show, and any segment manager can prove, that personalized communications work better than "Dear Valued Customer" messages.

Don't confuse segments with status levels

Status levels, like platinum, gold and silver are based on customer spending. They can be useful in motivating customers to move up. Airlines have found that millions of customers will deliberately select their airline over less expensive or faster routes in order to gain points towards gold or higher status levels. Why? Because the airline provides higher service levels for these higher status levels.

Status levels, however, should not be a basis for customer segments. A customer segment is quite different. Segments are such groups as affluent seniors, families with children, avid pay-per-view sports fans, home office customers, or college student music downloaders.

Several years ago, MCI created a customer segment consisting of their top 5 percent of long distance customers. An elite group of segment managers was assigned to these customers. It was a serious mistake. Segment managers were compensated based on the performance of the customers assigned to them.

The regular segment managers resented the elite group. They realized that if they were successful in getting their customers to buy more, these high purchasing consumers would be taken away from them and given to the elite managers.

How to compensate segment managers

Every company that has more than one product has to have product managers. In banks, for example, there are VPs for retail, auto loans, home mortgages, home equity, credit cards, etc.

In telecoms there are product managers for landlines, for broadband or for TV. These product managers worry about the sales of their products, positioning, advertising and marketing. Product managers are compensated based on their success in boosting sales of their products.

Some companies, in addition, have customer segment managers. Here, compensation becomes a problem. Some segments always spend less than other segments. Segment managers have to be compensated based on improvements in sales rather than actual volume.

In many cases, it is hard to see how a segment manager can fit in to the organization. If you already have a product manager and he is doing well, the reasoning goes, why do we need a segment manager?

One reason is that segment managers are the best and probably only ones who can understand and deal with churn. Churn is more a matter of understanding the psychology of the segment members. What do they want? Why do they leave? Most companies with multiple products have found that the retention rate is a function of the number of products owned. For this reason, segment managers try to cross sell to their segment members.

The more different products owned, the less likely to churn. That kind of thinking is almost impossible to achieve with product managers, each competing with other product managers to do the best job of selling their own products.

To reduce the cost of multiple managers, some companies make segment management a part time job of employees who have other assignments. You may be in charge of marketing communications and also, part time, in charge of affluent seniors.

If you can get affluent seniors to reduce their churn rate or increase their sales, you get a bonus in addition to your regular compensation as a marcomm manager. This type of assignment is particularly satisfying to employees because they can do their regular job while constantly thinking, "What can I do to make my segment more responsive?"

Segments change over time. What was an intelligent, responsive group last year may not be so this year as products and competition change the landscape. A segment that is wild about ringtones this year may have no interest in ringtones next year as they move on to something more interesting. Individual consumers move from segment to segment as they get married, have children, become empty nesters and retire.

How to go about setting up segments

If churn is a problem for your company, successful segment management can represent a solution. Use your database to do analytics. Do customer profiles.

Armed with these profiles, do brainstorming to identify the segments that you think you can work with to modify their behavior in positive ways. Assign segment managers, at first, at least, on a part time basis, to see what your staff can come up with in terms of really creative ideas to change the behavior of each segment.

Set up a reporting system based on these segments so that you can learn each month how the segment is doing. Give your segment managers budgets so they can experiment with promotions and rewards to their segment members.

Define a reasonable goal for each segment. Set up a compensation scheme for success. Manage customer segments to reduce churn.

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