So, you've wisely decided to focus on proper customer segmentation in creating,
growing and evolving your business. Now, you're facing one of the most important
questions of all: " Where do I start?"
The good news: there's no shortage of great advice
readily available from industry experts—real-life entrepreneurs from across a full
spectrum of vertical industries who can speak from valuable, personal experience.
The challenge: not all of those experts agree
on exactly the best way to segment a company's customers for maximum satisfaction,
retention and profitability.
To overview the basics of customer segmentation—as well as get a glimpse into the
diverse range of opinions on the subject—let's examine the views of two well-know
authors on the topic: Brent R. Grover of Evergreen Consulting, LLC and Louis Stern
of the Kellogg School of Management at Northwestern University.
How many groups?
Like the majority of customer-segmentation authorities, Grover agrees that it's
critical to focus on customers with the greatest potential for profit. The fastest
way to identify them, he says, is to divide your customers into groups.
How many groups? "A meaningful segment," Grover suggests, "is any group of customers
that meets three criteria: they are identifiable by common characteristics,
they are profitable, and they are growing." For simplicity—and
to retain focus—he observes, "it makes sense to keep the number of segments as small
Often, customer segmentation can be as simple as identifying as few as two customer
Grover offers an example from his study of distribution businesses. A distributor
of foodservice items divided its customers into just two segments—hospitals and
"The two segments appeared, on the surface, to be one segment (healthcare)," Grover
notes, "but the distributor quickly found that different types of salespeople were
needed to serve the two segments better—and more profitably—than a single sales
force serving only healthcare accounts."
How could the two customer groups possible be so different? After all, they were
purchasing similar products and services from the same provider.
Simple answer: things change.
In this case, the rapidly growing hospital audience had become quite predictable.
The entire industry was moving toward group purchasing, with exclusive, long-term
contracts awarded to vendors based primarily on brand preferences and pricing.
Nursing homes—on the other hand—tended to choose suppliers based entirely on relationships.
Customer service was the key factor. Treating both groups the same in product planning,
marketing and customer-service efforts would have been a huge waste of resources.
Leave no customer segment unturned.
As for common, identifying characteristics, Grover suggests searching for as many
clues as possible that a customer group might be profitable and growing: industry
type, frequency of purchase, product mix purchased, order method, delivery method
or just about anything else you can measure.
Use trial and error. Test different possibilities. Grover cites an example of a
power transmission component distributor who gauged common customer characteristics—industry,
geographic location, and frequency of purchase and product mix. Customer-profitability
rankings showed that product mix and purchase frequency. Customers who were more
organized and consistent in purchasing patterns placed larger, more profitable orders.
One especially profitable customer segment emerged as a total surprise. They were
redistribution customers, who purchased products for resale. Based on sub-standard
profit margins, this group had been deemed "second class" customer citizens. Upon
closer analysis, it was quickly determined that this profitable, fast-growing segment
deserved special attention.
Look for these high-profitability characteristics:
- Large orders
- Fast payment
- Lower service needs
- Customers with inventory-management/order-entry tools
The bottom line, according to Grover, is that identifying your most profitable,
fastest-growing customer segments is the roadmap to your company's future. It lets
you know precisely where best to concentrate your efforts and investments of time,
money and human resources. It also helps you quickly zero in on those customer groups
that should be protected at all costs, as well as those that need work in order
to be worth your time in the long run.
"The way most companies segment customers and markets is just totally wrong."
Louis Stern of the Kellogg School of Management at Northwestern University is a
noted authority on customer channels. To him, " major problems arise when suppliers
want to reach heterogeneous customers with different service needs." His answer:
a needs-based customer segmentation, followed by mapping out a series of channels
that can provide appropriate levels of service to each customer group.
"This is not about training and rebates and pricing," Stern says, "it is about saying:
'I know this particular set of customers want a lot of product variety, small sizes
and proximity and instantaneous delivery' and setting up a channel which will meet
their needs. Sure, sometimes customers will buy from a different channel—that is
channel competition—and if they stray over, that's OK from time to time. But if
I plan it properly, they will not walk into my dealers expecting them to look like
my sales force, and they will be willing to pay extra for services."
Stern has serious disagreements with the way most companies approach segmentation:
"Most companies still cut up their markets by describing the external characteristics
of the groups who make it up," he says. "So they talk about consumers, small business
and large accounts or the French or German markets. This is what I call the 'demographics'
So, what's wrong with that?
"It doesn't tell you anything about the real needs of your customers," according
to Stern, who notes that this isn't just academic theory—it's serious bottom-line
business. "It is much better to analyze your customers by their needs and to develop
products and services which meet those needs. People who do needs-based analysis
are the ones who are going to make pots of money!"
Asked for an example, Stern proudly points to the non-traditional thinking successfully
deployed one of his former students (now a professor, as well).
The former student was consulting for a caterer who was designing bars and restaurants
to be built in an airport. A typical demographic analysis might focus on four groups—business
people, groups, airport employees and tourists—and build facilities for each.
But Stern's student knew to do a needs analysis, as well. His research showed that
what was really important was the amount of time customers had available. Those
with more time typically valued increased service levels, while those with less
time want faster food. His solution addressed the underlying needs of travelers
in a way that a traditional demographic analysis would have overlooked.
Why listening to a customer complaints is critical.
According to Stern, many companies make the critical mistake of moving directly
to focus groups to find out what customers want. "Customers cannot tell you what
they want—they can only tell you what they don't like about your products
and services. They can't tell you what they want, because they haven't actually
seen the new product."
"Typically, companies are bad at listening to complaints and criticism from customers—the
area where feedback is most useful and quite reliable. If they were better at this,
they could quite easily make big improvements in what they do."
Segmenting customers carefully can help you plan for the future, knowing where to
deploy financial, customer-service and human resources. It can also help you maximize
profitability by knowing which customer groups to protect at all costs, as well
as those who require additional attention.
For more information about segmenting customers for maximum profitability, contact
us at http://www.surveymethods.com/contactus.aspx
"A meaningful segment is any group of customers that meets three criteria: they
are identifiable by common characteristics, they are profitable, and they
—Brent R. Grover, Evergreen Consulting, LLC
"This is not about training and rebates and pricing—it is about saying: 'I know
this particular set of customers want a lot of product variety, small sizes and
proximity and instantaneous delivery' and setting up a channel which will meet their
—Louis Stern, Kellogg School of Management, Northwestern University