customer segmentation masterclass - iir 2010

Vladimir Dimitroff

London Oct-2010

IIR – Customer Segmentation and Intelligence


1. Segmentation Fundamentals

- Types and Purposes of Segmentation

2. The Value Chain

- Why value? What value?

3. Understanding Costs

- Directly attributable costs and allocating

aggregate costs

4. More Dimensions

- Loyalty, Social weight

5. Customers Adding More Value

- Feedback value, Engagement

6. The Big „So What?‟ Question

- Applying insight for business performance


Granularity Level and Dynamics

Addressable Entity

Objective Level (Purpose)

Strategic

Segmentation

Tactical

Segmentation

Operational

Segmentation

Market

Segmentation

Customer

Segmentation

Macro-

Segmentation

Core / base

Segmentation

Micro-

Segmentation


By Objective and Purpose

Strategic: broad segments for long-term orientation and goal-setting

Operational: stable customer groups for consistent decisioning

Tactical: dynamic segments for ad-hoc actions

By Addressable Entity

Market segments: large anonymous groups of customer and non-

customers, statistically studied and extrapolated from smaller,

representative groups

Customer segments: contain uniquely identified individuals, with

explicit attributes for each person

By Level of Granularity and Dynamics

Macro-segmentation: high-level customer segments similar to market

segments, used predominantly for long-term strategy

Micro-segmentation: highly granular customer segments for tactical

purposes

Operational customer segmentation: (sometimes referred as „base‟ or

„core‟) In the middle with overlaps (can also be used for strategy or

tactics)


Our Business and Our Customers

They have needs and are therefore critically important

We have capabilities and satisfy their needs creating value

They reward us (pay for the product /service provided

The Investors and Our Business

We didn‟t always have the capabilities to satisfy needs

They invested to create those capabilities

We return to them the value received from customers (ROI)

Other Stakeholder Entities

Suppliers provide essential stuff so we can address customer needs

Employees contribute their time and talent

Partners take our product to market, acting as a channel

Community (society) is an environment in which we operate - extracting

and delivering value in interactions


Prepaid subscribers: Identical Value

Both top up always for € 5.-

Both fully consume this credit in

6-8 weeks

Each has a monthly ARPU of € 3.-

0987654321 0123456789


Identical Value



6-8 weeks


But:

Names are different

Gender is different

0987654321

Adam Smith

0123456789

Eve Smith


Identical Value



6-8 weeks


But:

Names are different

Gender is different

And:

Usage is different (!)

0987654321

Adam Smith

0123456789

Eve Smith

90 SMS x € 0.05

25 SMS x € 0.00

5 mins x € 0.10

(3 calls, 1 to Eve)

Free Internet add-on

50 mins x € 0.10

(12 calls, 4 to Adam)

Internet not activated


Identical Value



6-8 weeks


But:

Names are different

Gender is different

And:

Usage is different

More different behaviours -

0987654321

Adam Smith

0123456789

Eve Smith

90 SMS x € 0.05

25 SMS x € 0.00

5 mins x € 0.10

(3 calls, 1 to Eve)


Tops up online, ATMs

Never calls CC

In MBM program

50 mins x € 0.10



Tops up in shops

Calls CC often (free)

Not in MBM program


Identical Value



6-8 weeks


But:

Names are different

Gender is different

And:

Usage is different

More different behaviours, and

Age is different

Customer Value is different!

Different costs (!)

Different social contribution

Different growth potential

Therefore – different lifetime value

Adam Smith Eve Smith

90 SMS x € 0.05

25 SMS x € 0.00

5 mins x € 0.10

(3 calls, 1 to Eve)


Tops up online, ATMs

Never calls CC

In MBM program

Age: 19

50 mins x € 0.10



Tops up in shops

Calls CC often (free)

Not in MBM program

Age: 72


From revenue to profitability

Pure spend-based models: straightforward and easy

Introducing cost elements: allocation methods

Detailed individual customer costing

From past to future value

Historic value: recent history

Historic value: total cumulative history („lifetime‟)

Future (potential)value: different predictive methods

Net present value (NPV): discounted future value

Lifetime Value (LTV) or CLV (customer lifetime value)

“The net present value of all future profit streams from an individual

customer’s relationship with the company”


Predictive techniques

Regressions (linear, multiple, logistic)

Classification trees (regression, CART, CHAID)

Advanced techniques (neural networks, genetic algorithms)

Definitions of „lifetime‟

Strictly referring to a future period

Need for consistent predictability and actionable/manageable

Techniques to calculate LOS (length of service); survival analysis

(LIFEREG, PHREG procedures in SAS)

Alternative models and techniques

the RFM (recency, frequency, monetary value) model as a

segmentation tool

Rapid identification techniques („golden questions‟)


Customer loyalty

Clear business case of loyal customers being more profitable

The importance of a good definition of Loyalty

Measuring Loyalty (NPS, Loyalty Index), scoring and segmenting

Social weight

Implicit social value (size of network, intensity of activities)

Explicit social value (evidence of referrals or advocacy)

Community participation and role(s)

Direct customer contribution to the business

Feedback value (Do you love your complaining customers?)

Co-creation participation (new products, content)

Engagement in functional roles (customer care, decision making)


On what principles?

Equal % of customers in each segment

or..?

Pareto principle: equal % of total value

Adjusted Pareto: business case (value

portions of comparable magnitude, viable

segment sizes)

How many value segments?

When just a “20:80” is good?

Sufficiently different to merit a different

approach

Manageable - by proportionately allocated

resources

Issues of migration

When to upgrade (or downgrade) a

customer?

Choosing a „buffer‟ period

Where to place new customers?


CUSTOMER-FACING FUNCTIONS

• Marketing

• Sales

• Customer Care

OBJECTIVE-DRIVEN ACTIVITIES

• Acquisition

• Retention

• Value Development

TIME: Phased Maturity Evolution

Differentiated approaches in:


MARKETING

• Proposition

• Messages

• Channels / media

• Targeting

PHASING

• Immediate steps: simple differentiation, focus on high value

• Medium-term: optimal / viable differentiation, expanding portfolios

• Long-term direction: granular differentiation, P&L management

SALES

• Channels

• Sales force

• Process

• Merchandising

CUSTOMER CARE

• Service levels

• Processes

• Frontline staff

• Touchpoints



PHASING

• Immediate steps: simple differentiation, focus on high value

• Medium-term: optimal / viable differentiation, expanding portfolios

• Long-term direction: granular differentiation, P&L management

ACQUISITION

• Setting strategic

priorities

• Mapping and

developing

propositions

• Targeted promotions

• Segment-aware sales

RETENTION

• Prioritization of

efforts and resources

• Segment-relevant

incentives

• Balanced OEN

toolkit

• Lifecycle

management

VALUE DEVELOPMENT

• Needs-aware

cross-sell

• Managed internal

migration

• Social group

accounting

• Share of customer



THANK YOU!

[email protected]

+44-7947-034 944