Improving Segment Definitions
Segmentation only leads to higher profits when you segment well. It may be necessary to modify how you think about segment design. You need to ask more questions about your customer base, look at more factors than basic demographic information and go deeper into your sales history to find similar customer groups.
If it’s not enough to group customers across broad categories like industry or client size, then what are the other factors you should consider? Here are some suggestions you may want to consider the following when analyzing your customer base:
- Buying Power. You may want to group customers together not just based on their sales figures, but also based on the breadth of product they purchase from you. How many product lines do they buy from you compared to other customers? What is their consistency, recency and frequency? How long is their time between orders? How many times did an item show up on one of their sales orders?
- Profitability. Compared to others and their own history, is their margin and gross profit going up or down?
- Average Order Size. Many distributors estimate that it can cost between $50 to $150 or even more to process a single order. Customers with larger order sizes tend to be more profitable and you may want to consider segmentation based on order size.
- Cost to serve. The cost of serving a customer can span a variety of dimensions. You might look at average days to pay. You might look at their product mix, as customers who buy more A and B products tend to be more profitable than customers who buy C and D products.
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