Advanced customer segmentation

Customer/market segmentation is one of these topics that are defined in a multitude of different ways. And while all these definitions are in a way correct - they tell more about the person ‘s understanding of the subject – rather than of the subject itself!

The biggest point of contention is whether segmentation is the business application, or it is an analytical method. So, to those users who think that segmentation is just synonym for clustering technique – I would say – it is a good starting point, but there is so much more into it.

And once different facets of segmentation are understood (natural segmentation - versus business driven - versus segmenting on specific business dimensions) - then you can start appreciating all the different directions where this application can take you. Add to that substantive knowledge of market, customers and data sources together with effective data preparation and your ingredients for success are coming together.

Why customer segmentation? Well, customers with similar attributes tend to behave in similar ways, more often than not. This fact is particularly evident in customer relationship management, marketing, and risk management. People within same life-stage segment tend to buy certain-types of products, so promoting products that go with that specific group can lead to successful marketing. In credit and insurance industry, good customer segmentation can lead to minimum exposure to risk. Similarly, in catalog sales, customers can be selectively targeted to reduce marketing cost.

What is the first step in segmentation? It is to know your segmentation objective. What is the goal that you want this application to take you to? Do you want to just to see your natural, data driven-segments among your customers?. Do you want to better explain your existing business-driven segments (who are my “gold-card” customers for example, what do they buy, and where do they come from)?  Or, do you want to segment your customers based on their buying potential, value, risk, propensity to attrite, or something else?

After you know your segmentation objective it is just a matter of translating it into data driven analytical process, supported by business knowledge.  Once you have a segment your population you can now act on these segments in and measure their movement and stability.

So, is that all to it? No -this is just beginning to more advanced segmentation.

If you imagine segment in a circular shape, you can imagine that there is inner and outer layer. Inner layer you can describe as your core segment members who are typical for that segment. Then you have an outer layer which is far less stable. Any segment migration strategies are done on outer layer. And that’s where the fun begins. So, depending on the direction of the portion of the outer layer you can now do two basic things. You can try to stop movement in a specific direction or you can try to encourage movement by running specific (marketing) stimuli on this sub-segment.

So not only that you are able to group your customers, and understand what makes them similar, but you can entice sub-segment movement, or even  stop it – if that is what would go in line with your initial objectives.

So, hopefully this article gave you some more insight into the power of segmentation and what can you do with it.  But how would you do it? Well, this may be in my next article, so – I hope to see you again on my blog!