digital alchemy - customer segmentation whitepaper

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Segmentation has been used for decades to empower marketers to communicate to the right groups of customers. Nowadays, as markets have become fragmented, businesses need to be more resourceful and effective in reaching and engaging their customers, this forces marketers to come up with techniques that enable them to segment more precisely.

Jed Kolko of Forrester Research in Demystifying Segmentation succinctly describes segmentation as ‘shorthand for understanding consumers’.

Customer segmentation is an iterative process of identifying distinct groups of people or organisations that share something in common, based on general attributes such as demographics, geographics, psychographics, behaviours and so on. Compared with traditional segmentations, today segmentations are generally more specific and personalised. Fed by a constant stream of information that reflects changes in customer aspirations and circumstances, the data is highly dynamic and changeable. In all cases relevant variables for segmentation must be identifiable, accessible and recordable, examples are: transaction data, usage frequency, response and purchase history. Given the greater potential for individual data collection, segmentations should not be solely limited to geo-demographic profiles or other static, passive characteristics. The ultimate goal of segmentation is that each segment group will respond in an expected manner to marketing and promotional offers that marketers tailor to them. A secondary aim is to create a competitive edge for the organisation.

Segmentation is not targeting

Marketing now relies heavily on customer initiated contact, the traditional role of segmentation as the main method of targeting is essentially redundant. With one-to-one interactions, targeting is largely driven by the activation of specific events and individual customer behaviours. Hence, in a permission-based environment, involved individuals now self-select themselves as targets. So, although customer segmentation is no longer the principal driver for targeting, it still plays an important role in optimising communications for individual target customers.

What is it?

Why do you need segmentation?

Customer Segmentation: Leverage Communication Through Personalised Offers


Segmentation in layers

Developing layered segmentation models based on factors such as value, lifecycle and behaviour can deliver both strategic and tactical benefits. Tailored marketing communications can be developed for each segment group, the improved targeting and relevance means that you can contact them more often at a lower overall cost and therefore more effectively. This helps to reduce churn by improving customer experience, stimulating long-term engagement and hence customer loyalty.

Segmentation should be dynamic

Traditional segmentation alone is too shallow to generate deep, meaningful results; it focuses on static criteria like demographics and geographics that lack the nuance and perspective to define a specific target with any accuracy. Markets now are more mature with constantly changing trends which also contribute to increased volatility in segmentation variables.

Contemporary marketing revolves around customers’ needs and preferences, causing a shift from a business-centric to a customer-centric approach, segmentation therefore needs to be more customised and tailored. Relying on static attributes will not tell you enough about your customers and increases the risk of wasting marketing resources on the wrong people. A more comprehensive approach to market segmentation, allowing marketers to analyse dynamic attributes to disclose behaviour patterns and distinguish customers more accurately is required. Additionally, where the approach used to be rigid and monolithic with a limited number of segments, the potential and indeed the need now exists for multiple segmentations to co-exist.

Figure 1 illustrates three different scenarios that firms can adopt as their segmentation strategy, customer value,

product holding and price behaviour.

Figure 1: Segmentation in layers

Low High Low HighLow High

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Customer Value Customer ValuePricing Behaviour

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Segmentation for offers decisioning

Figure 2 depicts the role of segmentation in Event Based Marketing (EBM). The target and timing are determined when

a trigger is activated by a predetermined event; available customer information is analysed and processed using an

appropriate model that decides on the best product to present to the individual; the manner of communication and type

of offer are then determined by the segment in which the customer is categorised. The segment may either be pre-set

or dynamically generated.

Risk reduction

Care must be taken as consumers are less predictable and much harder to classify than in the past. If segments are too broad, there is a risk that key customers and opportunities are missed, communication has lower relevance, and the cost of communicating to customers becomes too high and unprofitable. Conversely with the benefit of rich data, we are able to segment customers more precisely and effectively, reaching them more often and at lower cost. For even greater precision, database marketers can employ micro-segments to cater for the more granular requirements of particular markets.

Keeping up with changes

Segmentation is more beneficial when combined with other techniques such as Customer Lifecycle Management (CLM). Each transition and other changes within a customer’s lifecycle affects their segmented criteria, so by identifying the new positions, marketers are able to re-segment or reallocate customers appropriately. Each change potentially adds more useful information and precision to the re-segmentation while further aiding marketers to keep pace with the progression of customer lifecycles.

Figure 2: Applied Segmentation

TriggersTiming decision

Propensity ModelsProduct decision

SegmentOffer decision


What needs to be considered?

Organisational change

To be effective, marketing activities must be driven by customers: this alone may require a paradigm shift in an organisation’s culture. The role of segmentation also needs to evolve and grow within a customer-centric environment. Now with the use of segmentation at the ‘sharp end’ to underpin and guide offer decisions and communication during the customer interaction, virtually all marketing activities employ some degree of segmentation. This all pervasive role means that segmentation must be integrated into key processes to enable it to work holistically.

Adopting marketing support tool/technology

Segmentation needs to be more granular and personalised. Relevant inputs to each segment must be determined in advance and procedures implemented to systematically capture and manage appropriate data. Data inputs for segmentation are dynamic and frequently changing, hence the requirement for a robust yet flexible technological foundation to serve as a platform and provide operational support. The system needs to facilitate Event Based Marketing as the main customer driven marketing tool; incorporate analytics and modeling functions to support decisioning; and host offer and communications libraries that can be accessed on the fly. A capability to distribute through all communication channels is essential in order to implement the triggered output. All processes need to be integrated within the Marketing Automation framework.


Using Nectar data, Sainsbury’s was able to identify and group together different purchasing behaviour patterns. Data segmentation enabled them to generate discount coupons highly customised to each user’s needs, improving its customers’ shopping experience and loyalty. While the company’s present mantra is to keep offerings as simple as possible for shoppers, behind the scenes data integration, mining and analysis involves 15 billion lines of data. After segmentation and modelling, business rules are applied to create nearly 1,200 different coupons, each targeted by type of offer, strength of discount and other key dimensions. This is delivered in real-time whenever a customer swipes their Nectar card.

Outcome:Better customer understanding: Sainsbury’s was estimated to have achieved a 50% efficiency improvement in their understanding and segmenting of customers. (According to Heather J. Anderson, Teradata)

Response rate: Response to targeted mail and email increased 300% compared to Sainsbury’s previous general mailings. (H.J. Anderson)

Sales Increased: Five times more sales from direct marketing than was achieved 2 years earlier. (Richard Zanetti, Customer Segmentation Manager, Sainsbury’s)

Sainsbury’s received a Data Strategy Award for Best Use of Data in Retail in 2010.

“It is easier to get somebody to carry on with an existing behaviour than it is to try to get them to change to a new behaviour”

Andrew Mann, Director of Insight and Loyalty at Sainsbury’s

Solutions:In response, Sainsbury’s adopted data-mining software to analyse customers’ buying behaviour through its Nectar loyalty card, with the purpose of spotting future buying trends. Data was generated from loyalty card applications, demographics including age, gender, number of children, lifestyle data and mailing history. Additional transaction data showed what people bought, when they bought, how they paid, how frequently they visited each store, whether the product was on promotion and so on.

Case Study from Sainsbury’s (UK) Challenge: Sainsbury’s, which had been one of the UK’s most successful retail chains until the year 2000, found its market share diminishing and profits eroding in the face of fierce competition. The retailer’s access to customer intelligence was restricted by cumbersome data retrieval, manipulation and analysis, limiting their ability to generate meaningful offers for each customer group. Moreover, its corporate structure did not facilitate the necessary emphasis on local preferences, unlike Tesco who came out with a more successful loyalty program.


In conclusion, while segmentation plays a significant role in structuring the customer base, it is the underlying analysis and application of each segment that determines what marketing is actually presented to the customer. Segmentation is one component in a range of techniques that enable marketers to reach the right customers in the most effective way. More importantly, building a relevant dialogue with appropriate customers enhances relationships and improves customer experience. Hence, segmentation needs to be fully aligned with the other techniques in order to play its part in both the strategic and tactical implementation of database marketing. The capability to meet customers’ short-term needs benefits both customers and the organisation in the long run.

About Digital AlchemyDigital Alchemy Limited (DA) is Asia Pacific’s leading Database Marketing Services Provider. DA’s team of professionals are dedicated to working with clients to improve their marketing efficiency and to capture latent customer value. Established in 2003 and operating in Sydney, Melbourne, Auckland, Bangkok, Hong Kong, Nanjing, and Singapore, DA has been contributing to the success of an expanding breadth of clients including leading companies in financial services, telecommunications, motoring services, media and other industry sectors.

“This document has been prepared for the purpose of providing general information and should not be relied on in substitution for individual professional advice. Copyright in this document is owned by Digital Alchemy Consulting Pty Limited, and except as permitted under the Copyright

Act 1968, no part of it may be reproduced by any process, electronic or otherwise, in any material form or transmitted to any other person or stored electronically in any form without the prior written permission of Digital Alchemy Consulting Pty Limited.”


Reference Citedhttp://www.marketingweek.co.uk/disciplines/data-strategy/the-data-guru-who-uses-simplicity-to-get-results/3023339.article

http://directmag.com/mag/marketing_nectar_feeds_sainsburys/

http://www.silicon.com/i/s/wp/spnsr/sas/Sainsburys_analytics.pdf

http://www.merkleinc.com/user-assets/Documents/Research/Merkle-DMA%20Webinar%20-%20Operationalizing%20Enterprise%20Segmentation.pdf

http://www.marketingweek.co.uk/disciplines/data-strategy/the-data-guru-who-uses-simplicity-to-get-results/3023339.article

http://www.marketingweek.co.uk/disciplines/data-strategy/the-data-guru-who-uses-simplicity-to-get-results/3023339.article

http://directmag.com/mag/marketing_nectar_feeds_sainsburys/

http://www.silicon.com/i/s/wp/spnsr/sas/Sainsburys_analytics.pdf



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