Customer segmentation is one of the most discussed concepts in customer relationship management. There have always been customers with different needs and attitudes. Segmentation is designed to help organizations achieve differentiation based on customer relationship management that is optimally tailored to the segment in question.
Customer segmentation is understood as a division of the customer base into homogeneous groups that are heterogeneous among themselves. It represents the basis of differentiated customer relationship management.
In practice, however, customer relationship management is still implemented according to the “watering can principle” or the “shotgun principle”. Customers are offered the same (favorable) experience, and those who grab may have won or lost. Customer relationship management is done in an undifferentiated way, and usually efficiency for the organization and enthusiasm for the customers suffer from this approach. But why is
that so?
In our view, customer segmentation is understood too one-sidedly. Customer segmentation has a dual focus. This duality must be understood precisely. A customer-centric organization should generally use segmentation for customer relationship management. Thus, as shown in the many explanations, segmentation is an essential element of customer orientation. In this context, customer orientation focuses on value for the customer and for the organization (customer-firm value). Customer relationship management is to make investments in the customer segments that can provide the greatest value to the organization in the future. This premise is the basis for the remainder of this paper. Segmentation is not done because it is possible (in the sense of: because customers are different), but because segmentation supports the increase of customer-firm value.
Data management
We offer comprehensive support on the topic of customer segmentation as part of our Data Management Practice.
Market capture as one side of customer segmentation
As stated earlier, gaining and using customer insights are important elements of customer focus. With reference to customer segmentation, this is called market capture.
Market capture refers to the goal of determining customer behavior in terms of
understand customer insights as well as possible in relation to the organization’s objective.
Market mapping can be used for defining the relevant market, determining the relevant market segments, and finding market gaps. Thus, customer data or gaining customer insights is the focus of this part of customer segmentation. In the past, it was usually sufficient to refer to simple customer data such as
e.g. age and gender to identify different market segments. Clear gender brand preferences existed, and age correlated with purchasing power in most supply categories. By using age and gender (socio-demographic data), organizations were able to differentiate themselves from the competition and increase their value. Today, age and gender are usually no longer helpful in determining stable market segments. More and more women are buying supposedly “masculine” car brands and more and more men are buying supposedly “feminine” car brands. Some young people spend all their money on cars (especially in Aargau) and more and more older people will give up their cars. Although there are still differences between age and gender, these are becoming increasingly blurred. In addition, most organizations have the ability to analyze socio-demographic data and use it for customer relationship management. As a result, studies show that offers and brands are becoming increasingly similar, partly because the same data was used as the basis for the respective decisions. If everyone uses the same data, the decisions or results will be more or less identical. In the meantime, it is possible to use higher-level segmentation approaches based on customer behavior and customer-firm value to capture the market. These segmentation criteria are helpful to strengthen differentiation and value creation. As an example, the difference between NPS® (attitude) and actual recommendation (behavior) can be identified. An organization that would know for each individual customer how often they recommend their own organization and – even better – to whom, could use this for more efficient customer relationship management. At this point, a big but is in order. The vast majority of organizations do not know this or have no data on the actual referrals of each individual customer.
Customer segmentation
The topic of customer segmentation is presented comprehensively from page 234 onwards in our book Customer Orientation.
Market cultivation as one side of customer segmentation
The second side (action side) of customer segmentation is market cultivation.
Market cultivation refers to the use of the developed segmentation(s) for customer relationship management through the use of the tools.
In contrast to market intelligence, the focus of market development is not on gaining customer insights, but on using them. As with the example of referrals made, it would be valuable for an organization to understand which customer is actually recommending. In practice, this information is usually not available at the individual level. Thus, unlike market capture, market development must be limited to the existing customer data in the organization.
The high significance of customer data management for improving customer orientation becomes clear. If an organization only uses sociodemographic
If a company has data about its customers, only this data can be used for marketing purposes. Although the organization can determine the customer purchase process or the actual number of referrals as part of the market survey, for example, these findings can only be used with a great deal of effort and usually with too high an error term in market cultivation. The error term results from the fact that only a small proportion of customers participate in a customer survey. Subsequently, “crutches” such as e.g. to determine the age, which combines a different strength of recommendation. The actually high data quality on the side of the market acquisition is lost again in the attempt due to the missing individual data about each customer on the side of the market processing. The explanations show the central problem of customer segmentation in practice. From our point of view, too many people in charge are not aware of this problem at all. Another challenge that is closely related to customer segmentation, but also does not always seem to be clear, is the requirement to add value. While the vast majority of organizations still do not use segmentation on a day-to-day basis, other organizations are developing too many segments. This inevitably leads to a high level of complexity in customer relationship management and the challenge of processing the individual defined segments in such a way that the high level of effort also leads to an increase in profits. The number of segments has a big impact on the cost of content creation. Investments are necessary so that campaigns, offers and touchpoints can be targeted to the respective segments. While too many segments can add value for customers, it can also destroy value for the organization. Thus, I recommend considering at the beginning how many segments make sense at all from a financial point of view before segmenting too “finely”. Each organization must decide which segmentation strategy should be used. In the meantime, ideas are circulating about responding to the customer as individually as possible or using individual segmentation. However, this requires high competencies in the area of customer data acquisition and use, which the vast majority of organizations do not yet possess. Thus, two to four segments are usually used in practice or no segmentation at all.
The process of segmentation
The process is shown in the figure above.
As a first step, it is important to precisely determine the objective. Should communication be improved, should customer acquisition be improved, etc.? Depending on the objective, different segmentations may be recommended. Customer-focused organizations usually do not have just one segmentation, but rather multiple segmentations are in use for the respective application area. The important thing here is that they are all connected via the dimension of performance. Thus, it is not helpful if, for example. the communications department segments based on lifestyles and there is no understanding of customer value. On the other hand, sales only uses customer value segmentation and completely ignores the customer’s lifeworld in its activities. Once the relevant market has been defined, the relevant segmentation criteria must be determined against the background of the requirements for market detection and market cultivation. Subsequently, the relevant segments must be determined. The information obtained about the individual segments is to be used for decision-making within the framework of market recording. Finally, the individual segments are processed on the basis of the decisions made.
Time and again, we hear that the biggest challenge in customer segmentation is measurability. Why does this impression persist so much? In the meantime, everything and everyone is measurable or measurable. Many measurements such as online customer surveys and online analytics of your own website aren’t even expensive. The real challenge in segmentation against the background of multi-optional buying behavior lies in behavioral relevance. Does customer segmentation really allow me to best understand and influence the future behavior of my customers? To do this, the data must be at an individual level, and this can quickly violate the cost-effectiveness requirement (although many opportunities now exist to reduce costs, but they are rarely used). In addition to these requirements, when selecting the segmentation, it is particularly important to take into account the need to integrate market recording and market cultivation in a target-adequate manner. The ability to act on customer segmentation is at the heart of the assessment. In practice, too many organizations still segment with existing data on socio-demographics, purchase of offers, etc. The first step is to have “better” data on customers. Thus, the first step is to have “better” data about the customers, since in highly differentiated markets the customer (not in terms of age and gender) should be placed at the center of segmentation.
