Customer segmentation. It’s one of the pillars of direct marketing. So why are many marketers still challenged when it comes to codifying their customer bases? When Forrester Research asked a panel of customer insight professionals to rank their segmentation sophistication levels, 59% of them described their prowess as “basic or evolving.” Nearly a quarter singled out marketing functions as making little use of segmentation analyses.
“All of these companies have segmentation strategies, but they need to make incremental changes in them. There is still a lot of segmentation being done that is not predictive of any customer behavior,” says Forrester Customer Insights Analyst Srividya Sridharan. “A lot of these companies have just scratched the surface.”
Many other companies, though, are investing in refreshing their segmentation efforts and seeing big returns. Hello Music transformed itself from a gaig finder for musicians into an e-commerce stalwart by closely identifying the different members of its customer base. B2B computer reseller Network Hardware Resale identified new enterprise-level accounts through social media and content mining, and saw sales rise 35%. Hpnotiq, a liqueur brand with an already tightly defined customer base, tightened it further, launched a laser-focused marketing campaign, and positioned itself for future growth.
Each of these stories has a different plot and ending. But they all have a common beginning: detailed character studies of the people who pay the bills.
Drumming up new segments through social
Segmentation can take on a lot of permutations, says Sridharan, often depending on where the need emanates from in an organization. “It can come from senior management and be used to define a company’s customer proposition,” she says, “or it can come from product development to identify a market for a specific product.”
In the case of Hello Music, a deal website for musicians, segmentation studies helped separate what started as an apparently homogenous customer base into seven segments—plus a lucrative subsegment: affluent men 40 and over who dreamed of being rock stars and now indulge their youthful fantasies by buying electric guitars.
The original mission of Hello Music’s two-musicians founders was to function as a collective through which its members could network and find opportunities on music-related products or services, including instruments, marketing and distribution assistance, and studio time. It was a sort of online version of the artists and repertoire (A&R) division of a record label—the department responsible for the scouting and development of talent. To make money, Hello Music offered daily deals on surplus equipment it scored from manufacturers.
“It resonated loudly with the musical community, but it didn’t perform well from a business model perspective. Only about 5% to 7% of the content was…commercial,” says CEO Rick Camino, a former record company A&R scout and marketing executive who built the first segmented databases for Capitol Records and EMI Music. When Camino joined Hello Music in 2011, only four deals a day were offered online and via email. They’d sell out quickly and that was the end of the company’s commerce for the day.
The first thing Camino did was to expand the business to a larger vision encompassing new segments. “Now this company is reengineered around segmenting and targeted marketing,” he says. Ninety-eight percent of Hello Music’s 450,000 members are males and two thirds are aspiring musicians ages 18 to 34, most of whom are heavily engaged with the brand. Email open rates average between 10% and 12%, Camino says, and click-through rates run 3% to 5%. Most come to Hello Music through Facebook, so he cast the company’s social net wider to identify customer segments through Twitter and Pinterest.
Camino and his team identified seven musical “tribes,” including guitarists, keyboardists, drummers, and engineers, then reconstructed the Hello Music website and email designs to cater to them individually. For example, each page on the site is headed by seven buttons corresponding to each of the seven tribes. When members click through the daily “Door Buster” deal emails, they can self-segment by clicking through the appropriate button. This offsets any assumptions the company’s marketers may have made, like identifying a member as a keyboardist who may have a side business as a DJ.
Despite this, Hello Music still has to incorporate behavioral tendencies into its segmentation. Self-identification has its limits. “Who [our customers] purport to be and who they demonstrate themselves to be can be very different,” Camino says. “We have people who call themselves guitarists, but spend a lot of time in the engineering section.”
So, to trigger personalized email offers, Hello Music tracks length of membership, time between first visit and first purchase, and site navigation. A new member who’s visited the website several times without buying anything might trigger a 15%-off first-purchase offer. A longtime member who has made several visits shopping a specific category without buying might receive an offer in his daily email for 10% off a $300 purchase.
Camino’s ongoing segmentation symphony is, he says, centered on data collection. Hello Music uses digital marketing solutions provider Lyris to adjust segmentation controls and customize emails, two of which go out to each member every day. His small marketing staff consists of an overall director, a community and social media director, and a database manager. But in the first three quarters of going tribal, Camino reports, Hello Music posted 40%-plus sales gains.
“We’re a small company trying to meet the needs of a community, and we have to know exactly who they are,” Camino says. “Our culture is built around selling and satisfying the community.”
Lodato finds the right business buddies
“Fear of change perplexes monarchs,” wrote Irish statesman Edmund Burke. However, when senior executives at Network Hardware Resale (NHR) decided to make a fundamental change in their business, they found that change can usher a company into a period of enlightenment.
The 25-year-old company is a $300 million-plus operation that sells pre-owned and surplus computer network hardware to businesses worldwide. It has a steady clientele of businesses looking to save up to
50% on their hardware purchases, and NHR’s average sale had long hovered at around $5,000. When the recession began cutting heavily into corporate budgets, NHR senior management decided to add large enterprises as a new customer segment and approach them with their low-cost proposition, perhaps even moving into sales of original equipment. NHR senior management set then–VP of Marketing Mike Lodato to the task of quantifying and identifying this new customer base.
“You need some tools to do this,” says Lodato, who implemented InsideView, a social CRM system that uses technology to replace the traditional sales network, as his tool of choice. “We wanted to try to change the formula about how many conversations you can generate and how far up the organization you can go. We started with targeting and segmentation.”
Less than two years later NHR’s meeting acceptance rate for prospective customers has gone from 5% to 50%, Lodato states. Contracts of $10 million and $20 million are now interspersed among the thousand-dollar deals. And Lodato is president of the company, based, he says, solely on the fruits of efforts he initiated in 2010 to use cloud computing and social media mining to segment high-value customers and sell to them in the way they wanted to be sold to.
Lodato’s approach to segmentation starts with a touch of technology. InsideView scans about 30,000 content sources for updated company profiles, contacts, financial news, and contract wins. Marketers and sales account managers at NHR receive daily alerts on their dashboards that could provoke some form of outreach to a customer or prospect in the sales funnel. It also integrates with NHR’s Salesforce.com CRM system to unearth employees or customers who might know or compete against prospects in play.
“I have what I need right there in Salesforce.com to start targeting. There are five or six tabs and one of them is ‘Competitors.’ I can see all the companies [that a prospect] competes with and check off the ones we already do business with,” Lodato says. “Another tab is ‘People’ and I can go into the social sphere to see if some business contact or even someone here inside NHR knows the key contact at this account and can introduce us.”
This new capability, he says, turns traditional B2B segmentation on its head. “The old way of thinking of segmentation is on traditional groupings like industry vertical, location, or company size,” he explains. “While there are still parts of this alive here, we have created a different view on segmentation based on new data available through social media farming tools.”
Right person, right message, right time
One key business prospect for NHR is a company that’s just received a government contract and needs to quickly ramp up its computing capabilities. “Those companies could be any size and could be from five different verticals in 20 states. Had we used old segmentation rules, having one rep specialize on this would not have been possible.”
Lodato’s adventures in segmentation served to dash some preconceptions the B2B veteran has long held about his marketplace. Focusing on getting the appointment with the CIO is one of them.
“We used to go to those ‘pay $10,000 to get 10 meetings with CIOs’ events,” Lodato says, “and the CIO would go back to his chief technician and say, ‘Hey, Bob, these guys are 50% less. What do you think?’ And Bob would say, ‘Well, Boss, I already know about them and here’s why we don’t use them.’”
He formed a new unit of appointment setters to focus on his newly defined CIO segment, and brought in a company called Vorsight that uses contact insights and social channels to “surround the customer,” Lodato says. “We try to hit them from three angles on the same day. It shocks people. They’re not used to this attention.”
For example, on a Wednesday or a Thursday, a targeted CIO at a large telcom gets a package from NHR with a stainless steel coffee mug, some high-end cookies, and a T-shirt that says “I’ve got 99 problems, but a switch ain’t one.” (“IT guys seem to love this,” he says.) Near the same time, he gets an email from an NHR rep that tells him about three competitors the company has helped address IT problems while reducing costs. Then they send a meeting invite via Outlook.
It is a tale most told by consumer marketers: hit the right person, with the right message, at the right time. But, much to Lodato’s delight, it’s helping a B2B hardware reseller score tenfold increases in appointments, a steady 35% rise in revenue, and a leg up to a new playing field. “I was an IT guy for 19 years. I designed CRM systems, but they were CRM 1.0” Lodato says. “This is the 2.0 version.”
Pouring the drink into a smaller glass
Aqua or purple in color, distilled with a blend of vodka, cognac, and fruit juice, and sold in what could easily be mistaken for an outsized perfume bottle, Hpnotiq liqueur fairly screams to a young, female niche market. But it’s not as simple as that. The drink is actually popular among three distinct segments: newly legal female drinkers, slightly older urban drinkers, and gay males. Senior management at Wingard Imports, however, decided to focus Hpnotiq’s limited marketing budget on a micro-segment and charged brand managers to find it and design a campaign for it.
So the brand convened focus groups encompassing the three key segments in five cities to choose the segment that would produce the longest-term return on Hpnotiq’s marketing investment. Gay males lost out as the primary segment due to its limited geographic reach. More mature urban women turned to Hpnotiq only occasionally. New drinkers presented the greatest potential, so the brand team dug in with further research to find the right niche within its “newly legal” segment: multicultural women ages 21 to 24. Hpnotiq marketers used additional in-person focus groups to fine-tune their understanding of this microsegment’s primary interests and touchpoints. Then they took advantage of digital technology to reach those women. “We wanted to be able to capture [them] while doing what they do every day,” says Assistant Brand Manager MaryCrae Guild.
The brand’s studies of the segment revealed that it spends a lot of time online researching fashion items, so in June Hpnotiq launched the Glam Louder Bling It On contest, an eight-week digital campaign challenging young women to submit photos on the Hpnotiq website of the “glammest” shoes, nails, and makeup for a chance to win a shopping trip in Los Angeles with Khloe Kardashian. The company worked with in-image advertising company GumGum to seed teasers ads for entering the contest at the bottom of photos within editorial content of digital versions of Cosmopolitan, OK!, and US Weekly. The campaign also included print ads and on-premise events.
“We wanted to do a summer campaign that was fresh and…aligned the brand with a glamorous lifestyle,” Guild says. “We got really great engagement.” One quarter of the impressions Hpnotiq registered in its summer campaign were generated by the digital campaign, and the brand is positioned for further growth within its new core customer segment.