Within most business environments, one principle generally holds true – the large majority of business revenue comes from a minority of customers. Using the widely quoted Pareto principle to put things in context, 80% of your profit will come from 20% of your customers.
Why should you then treat all customers in the same way? One could conclude that the most efficient route to profit is to concentrate on the smaller percentage of customers that bring in 80% of the revenue or more. However, doing so would mean narrowing your options considerably and possibly throwing away potential revenue by ignoring customers who may one day, perhaps in the not-so-distant future, also be part of the top 20%.
The best strategy is to segregate your customer base into common attributes, called ‘segments’. You can then target each segment with relevant and specific marketing campaigns and promotions.
The right definition of these segments will be key and is a process that requires careful analysis.
The factors that one could take into consideration to define customer segments are nearly unlimited, and can include such areas as:
- Purchasing patterns
- Socioeconomic status
Customer segmentation procedures include deciding what data will be collected and how it will be gathered and integrated. Data mining is usually deployed when evaluating multiple segmentation factors, or basing segmentation mainly on behavioural factors. Provided the data mining models are properly built, they can uncover groups with distinct profiles and characteristics and lead to rich segmentation schemes with business meaning and value.
Data mining can also be used for the development of segmentation schemes based on the expected or estimated value of the customers.
Once a set of segments has been defined, it should help you to start answering important questions such as:
- Who are my customers?
- How profitable are my customers?
- Who are my least profitable customers?
- Why are my customers leaving?
- What do my best customers look like?
- Which customers are going to be more profitable in 6 months’ time?
Having answers to these questions is necessary in order to prioritise customer handling and guide all marketing communications, promotions and activities. Although segmentation is not an exact science, applied correctly it can reduce the costs of servicing your customer base and significantly improve customer relationship management.