Sunday, 27 May 2012

Customer Segmentation basics

Customer segmentation is the process of dividing customers into distinct, meaningful and homogeneous sub-groups based on various attributes and characteristics.  

It is used as a differentiation strategic marketing tool. It enables organizations to understand the customers and build differentiated strategies, tailored to their characteristics. 

Traditionally organizations, regardless of the industry they operate in, tend to use market segmentation schemes that are based on demographics and value information. Over the last decades organizations have been deciding their marketing activities and developing their new products and services based on these simple, business rule segments. In the today’s competitive markets, this approach is not sufficient. On the contrary, organizations need to have a 360 degrees view on the customers in order to gain a competitive advantage. They should also focus on the customer needs, wants, attitudes, behaviors, preferences, perceptions and analyze relevant data to identify the underlying segments. The identification of groups with unique characteristics will enable the organization to manage and target them more effectively with, among other things, customized product offerings and promotions. 

There are various segmentation types according to the specific segmentation criteria used. Specifically, customers can be segmented according to their value, socio-demographical and life stage information, behavioral, needs / attitudinal and loyalty characteristics. 
The type of segmentation to be used depends on the specific business objective. Main segmentation types include: 

1.     Value Based: In Value Based Segmentation customers are grouped according to their value. It is one of the most important segmentation types since it can be used for identifying the most valuable customers and for tracking value and value changes over time. It is also used for differentiating the service delivery strategies and for optimizing the allocation of resources in marketing initiatives.
2.     Behavioral: A very efficient and useful segmentation type. It is also widely used since it presents minimum difficulties in terms of data availability. The required data include product ownership and utilization data which are usually stored and available in the organization’s databases. Customers are divided according to their identified behavioral and usage patterns. This type of segmentation is typically used for developing customized product offering strategies, for new product development and design of loyalty schemes.
3.     Propensity Based: In Propensity Based Segmentation customers are grouped according to propensity scores, such as churn scores, cross selling scores etc., which are estimated by respective classification (propensity) models. Propensity scores can also be combined with other segmentation schemes to better target marketing actions. For instance, the value at risk segmentation scheme is developed by combining propensities with value segments to prioritize retention actions.
4.     Loyalty Based: Loyalty segmentation involves the investigation of the customers’ loyalty status and the identification of loyalty based segments such as loyals and switchers / migrators segments. Retention actions can then be focused on high value customers with a disloyal profile while product offering on prospectively loyal customers.  
5.     Socio-Demographical and Life Stage: Reveals different customer groupings based on socio-demographical and/or life stage information such as age, income, marital status. This type of segmentation is appropriate for promoting specific life stage based products as well as supporting life stage marketing .
6.        Needs/Attitudinal: This segmentation type is typically based on market research data and identifies customer segments according to their needs, wants, attitudes, preferences and perceptions pertaining to the company’s services and products. It can be used for supporting new product development and for determining the brand image and the key product features to be communicated.

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