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 / Winter 2011 / Issue 65(originally published by Booz & Company)


Making Customer Segmentation Deliver

As the ability to gather sophisticated data grows, here’s a four-step process for making segmentation drive improved performance.

Few phrases have as much currency in today’s business-to-consumer (B2C) companies as the customer-centric organization. Although the particulars vary widely, most companies pursuing customer-centricity rely on some form of market segmentation. Segmentation provides insight into customer behavior, habits, and preferences, increasing the odds of success in marketing and experience management campaigns, and driving brand positioning and product development. For transaction-intensive industries, such as the airline, credit card, retail banking, retail, and telecommunications and wireless sectors, customer segmentation has become a critical capability in using the growing volumes of data on individual customer behavior to develop and implement successful go-to-market strategies.

More B2C companies are striving to build customer-centric businesses, but will they be able to derive real value from their effort? A handful of companies — such as Charles Schwab in investments, Capital One in credit cards, and Caesars Entertainment in gaming — have had well-documented success. But other data-intensive companies feel their segmentation efforts have failed to deliver anything near the level of benefit they should. Even as they collect more information than ever before, these companies struggle with applying the insights afforded by segmentation to drive change and performance improvement.

This paradox — that companies with the most data about their customers find it most difficult to use it — is likely to become more widespread as the digital transformation continues. Too often, companies develop segmentations that are based on conflicting business objectives, are not broadly understood or shared, or cannot be readily acted upon. Top managers must realize that a segment-based model requires rigorous execution. It will succeed only if it is embedded in the company’s overall strategy, crosses the boundaries of all business units and functional departments, and produces clear and actionable guidance.

Companies that have implemented segmentation successfully tend to use it as a strategic context in designing their business models, as a touchstone for branding and value proposition development, and to guide processes such as customer acquisition and retention. Crucially, they know how to manage the complexity that segmentation inevitably introduces to an organization, and how to capitalize on the insights it provides.

We advise companies to take a four-step approach to segmentation: define the objectives of segmentation clearly, design the segmentation around those objectives, prepare a blueprint of the effects of the segmentation across the entire company’s decision processes, and carefully manage the necessary changes that segmentation will demand of the organization. The goal is to ensure that segmentation leads to well-defined processes and actions that improve performance.

1. Define the objectives clearly. The most important question for each company to ask: What is the purpose of segmentation? Understanding the purpose will enable decision makers to determine whether the segmentation effort is strategic, tactical, or both.

Strategic segmentation is used for broad, enterprise-wide purposes — operating model design, branded customer experience, and overall value proposition development. It often becomes the basis for the design of the organization. Charles Schwab’s approach to segmenting investors by assets and desired relationship support level is one example. Many retail banks group their customers into income or asset classes such as affluent, mass affluent, and mass market, and others combine these classifications with insights relating to behaviors and channel usage.

Tactical segmentation is used for a much more specific purpose, such as new customer acquisition, an up-selling campaign, or channel migration. Among the successful implementers, the tactical segments map to the strategic segments in an explicit way. In fact, combining the strategic and tactical segments in campaign modeling produces substantial uplift; one bank was able to triple the profitability of a home equity line of credit (HELOC) cross-selling campaign by tailoring its HELOC acquisition model and offer to a specific strategic segment. The notion of “horses for courses” — designing the segmentation around the specific business purpose — is apt here. Understand clearly which decision processes will be affected and which business partners need to be involved.

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