Have You Defined Your Customer Segments?

Customer segmentation is essential to successful database marketing. Segments are groups of customers with similar interests in your products or services, which you have created based on their demographics and lifestyle. Your messages to customers in each segment should reflect these differing interests if you want to find a receptive audience. The old corner grocer had a couple of hundred customers. He could keep their data in his head. His loyalty strategies, if they were any good, were based on what he could learn from the customers by trial and error.

Today we have thousands or even millions of customers. To manage them we cannot create a million different marketing programs. We create a few segments, and create 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, their behavior, etc.). “Since you have been a loyal customer since 1992, Ms. Hopkins…” or “Since you took a cruise with us to Alaska last year…” To create these communications, you must have several things: a database with data about the customer that can be used for personalization, a segment containing that person, a marketing plan for the segment, and an automatic system to produce the communications that uses all of the above. Let’s take an example an airline might use:

Segment: Retired couples who visit their children and grandchildren.

Strategy: Get them to register their children’s and grandchildren’s cities and birthdays. Suggest air packages to the proper destinations a month in advance of each date.

Communication: “We can fly you both from Atlanta to Portland, Maine next month to visit David and Tracy for Tracy’s birthday. The price is only $189 each roundtrip. 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, up sales and referrals. Wherever possible, these action programs should operate automatically with outgoing messages sent based on dates or transactions.

A good segment strategy involves four basic concepts:

• Definition. Each segment must have definable characteristics in terms of behavior and demographics so that a customized marketing strategy can be developed and implemented for that segment.
• Strategy. The marketing budget must be allocated and driven by the segment strategy. In other words, it may not be the most profitable strategy to treat all customers alike. Each segment will usually need its own marketing strategy with different messages and rewards.
• Infrastructure. Your company will need an analytical and campaign infrastructure to support the segment strategy. The infrastructure should measure success and support automated segment campaigns. The infrastructure will involve automated communications and a feedback loop to learn what is working.
• Action Plan. There should be an action plan with definite goals, milestones, timetables and budgets.

An ideal segment is one which:

• Has definable characteristics in terms of behavior and demographics: for example, Retired Couples, Business Travelers 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 by cost-effective rewards to modify their behavior in ways that are profitable for your company
• Makes efficient use of available 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 necessary to modify member behavior.
• Analytics involves using statistical analysis, which supports or rejects each hypothesis: Does such a segment exist? How much are they spending now? What is their income? When do they purchase 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, which can be tested before any rollout.

Each defined segment requires a custom marketing strategy. One size may not fit all. Some people are motivated by premiums or discounts; others by perks; others by exotic destination packages, etc. For example: a businessman whose travel is paid by his company may not be primarily interested in discounts. He may be interested in perks that give him status, or make his travel more relaxing.

A valid strategy for each segment involves:

• Communications to the segment (direct mail, email, 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

Segment marketing strategy involves a database infrastructure with a user-friendly analytical and campaign management front end, which can be accessed by authorized personnel. To support the strategy, the infrastructure should be:

• Available to all authorized users 24/7 over the web
• Updated frequently to keep it current and fresh with feedback from actions of the segment members
• Designed to permit the development of automated segment campaigns, event-driven communications, back end analysis, creation of control groups, measurement of success
• Easy for marketers to understand and use in their work
• Capable of supporting multi-channel communications: email, direct mail, point of sale communication, personalized web, and inbound and outbound telephone contact.
• Capable of supporting standardized segmentation applications
• Able to support automated customer contact strategies without extensive manual intervention
• Able to support central marketing programs, while assisting decentralized branch initiatives. In other words, you set up a system whereby you can run programs centrally, but you let regional managers create their own marketing programs at the same time.
• Able to provide speedy evaluation of campaigns to support continuous improvement
• Capable of moving from ad hoc analysis to automated marketing programs
• Designed so that top management can learn, on a regular basis, whether the segment strategy is working — and where it falls short.

The segment action plan should show how we get from here to there. It guides the development and implementation of the segmentation strategy. It includes:

• A roadmap showing what will happen when. “Send each policyholder a birthday card and a policy review 45 days before their policy renewal date.”
• A budget for the infrastructure and for the segment marketing plans
• Standard application of segmentation–how to maintain consistency and control while providing flexibility and localization power
• An organization chart that shows who is responsible for each segment
• Specific goals to be achieved with milestones for measurement of success

So, given the foregoing, have you defined your customer segments and implemented an action plan for them? If not, you should get busy right away.

Arthur Middleton Hughes, vice president of The Database Marketing Institute, has presented 28 seminars on database and email marketing.  Arthur has also authored several books includingStrategic Database Marketing 4^th Edition (McGraw-Hill 2012). He and Andrew Kordek, chief strategist and co-founder of Trendline Interactive, are hosting a two-day Email Strategy Study Group in Fort Lauderdale  March 26-27, 2013, featuring group competition for email marketers responsible for subscriber acquisition, lifetime value, ratings and reviews, boosting their email budget, and doubling their ROI.  To learn how to attend the Study Group, click here

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