Customer segmentation is more than just nominal grouping and categorization. If you approach your customer segmentation correctly – with real, profit-driving behavioral data – your customer segmentation becomes a blueprint for driving success throughout your organization. Your segmentation is a major part of your go-to-market strategy.
When done right, segmentation outlines what is really important about your business. Most distributors start their segmentation with simple industry, region or the overly simplistic current customer size. One particularly important point on using current customer size for stratification is that if your current “small” or “tiny” customer then gets assigned the highest product price then you are absolutely assuring that customer will always be a “small” or “tiny” to you while they may be a “large” to your key competitor. This type of segmentation lacks a call to action for changing customer-purchasing behavior toward higher profit potential. Size and geography don’t drive customer behavior and customer behavior is what drives the success of your business. It’s important to set your customer segmentation strategy up in ways that add up to more business.
Let’s take a look at an example of a distribution business that organizes their customer segments around three simple buying cues: profitability, cost to serve and buying power. These buying behaviors lead to much richer segments than simple ABCD rankings. Consider these four main types of segments that lead to action for the entire business rather than simple classifications inside your ERP system. Note that it is also important to name your segments descriptively that indicate the different strategies you might take with each group.
- VIP: These are highly profitable customers. They maintain a great relationship with you company, drive good volume and have a low cost to serve. These are customers you want to keep and grow so by calling them VIP customers you really spell out what they mean to the business rather than just an “A” customer. A sales rep might think that their favorite customers are “A” customers, but when you define your segments in terms of profitability, buying power and cost to serve, you have a meaningful and objective way to categorize your best customers. Your strategy with this group is to keep them loyal and go above and beyond, not just with better pricing, but with better service as well.
- Potential: These customers might have good profitability but lack a little in terms of relationship and volume. The segment name “Potential,” is very descriptive of the strategy we want to take with these customers. Since they are already profitable, we know our strategy here is to watch these customers for opportunities to grow their engagement with us with a better relationship that leads to increased volume. If we had simply called them “B,” customers without an objective measurement, we wouldn’t know what to do to improve their buying patterns.
- Convert: These are customers who have a good relationship so they are driving good volume, but for some reason their purchases are at a low profitability and potentially a high cost to serve. By calling this segment “Convert,” we signal that we want to identify what is causing the profitability drain on an otherwise good customer so we can maybe move them into the core category with a focus on more profitable behavior, higher lines per order, better shipping or other cost savers.
- Preliminary: These customers are low in all categories, low profit and volume, no real relationship and a high cost to serve. Here you just want to raise prices to offset the cost to serve and in a lot of cases, small customers are not as price sensitive because their volume and relationship is low so they are buying from you for other reasons. However, they also may represent your greatest opportunity for account growth. You might have many customers enter here until you work with them more frequently to better understand their purchasing behaviors.
With epaCUBE Segment Optimizer, you can easily organize your segments based on the data that is important to driving new profit in your business. Just as importantly, you can segment and resegment on a regular basis. It takes minutes to analyze and create new segments and subsegments when it used to take weeks or months using manual processes and spreadsheets. Being able to move your customers into the correct segment allows your team to fully realize your strategy and take action to affect your customers’ experience, pricing and profitability.