Customer Segmentation Principles

1.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization www.prism-gb.com Customer Segmentation Principles of effective differentiation Vladimir Dimitroff Director PRISM Consulting http://www.prism-gb.com IIR Telecommunications Conferences Customer Segmentation Strategies London November 2005

2.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization WORKSHOP AGENDA Fundamentals and Benefits of Differentiation Value Segmentation Principles and Techniques Needs Segmentation Methods Strategic, Macro- and Micro-segmentation Differentiated Customer Planning and Resource Optimisation

4.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Product Excellence Operational Efficiency Customer Intimacy Competitive edge based on cost (and price competition) is not sustainable in the long term. Product leadership is short-lived, too. Technology moves fast and even products that are not overtaken are easily replicated. Customer centricity is about long-term relationships, therefore provides sustainable advantages. It also results in added competitiveness in the other two dimensions see Treacy & Wiersema: ‘The Discipline of Market Leaders’ WHY FOCUS ON CUSTOMERS? THE 3D VIEW - THREE DIMENSIONS OF COMPETITIVENESS Slide 1 All three are important, but you can only excel in one - and should choose your focus:

6.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization NumberofCustomers Customer Value CRM Picket Fence Mass Marketing Highest Value Customers WHERE TO START Slide 4 Source: Peppers & Rogers Group

7.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Customer value segments Most Valuable Customers: Retain Most Growable Customers: Grow Marginal customers: Business as usual? Service costs Actual value Strategic value (potential share of customer) ‘Below Zero’ Customers: Dismiss, or? DIFFERENT CUSTOMERS BY VALUE Slide 2 Source: Peppers & Rogers Group

8.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization • From revenue to profitability – Pure spend-based models: straightforward and easy – Introducing cost elements: allocation methods – Detailed individual customer costing • From past to future value – Historic value: recent history – Historic value: total cumulative history (‘lifetime’) – Future (potential)value: different predictive methods – Net present value (NPV): discounted future value • Lifetime Value (LTV) or CLV (customer lifetime value) “The net present value of all future profit streams from an individual customer’s relationship with the company” CALCULATING CUSTOMER VALUE

9.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization • Predictive techniques – Regressions (linear, multiple, logistic) – Trees (classification, decision) – Advanced techniques (neural networks, genetic algorithms) • Definitions of ‘lifetime’ – Strictly referring to a future period – Need for consistent predictability and actionable/manageable – Techniques to calculate LOS (length of service); survival analysis (LIFEREG, PHREG procedures in SAS) • Alternative models and techniques – the RFM (recency, frequency, monetary value) model as a segmentation tool – Rapid identification techniques (‘golden questions’) CALCULATING CUSTOMER VALUE

10.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization “Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.” Adam Smith, The Wealth of Nations, 1776. WHY NEEDS? Slide 6

12.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Fundamentals: Any business only exists if it has customers. Customers have specific needs that have to be satisfied. A business only exists to satisfy specific needs. The Link to Value: In satisfying needs a business provides value. Products and services represent value to the one with needs (the Customer). (see Added Value concepts in economic theory, supply/demand concepts etc.). In the process of satisfying needs value ‘changes hands’. (see Value Migration concept in strategy models and theories). WHY NEEDS? Slide 7

13.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Customer Profiles (Who they are?) Sets of (static) attributes allowing reasonable assumptions, e.g. “families with babies need nappies”, “teenagers need bright- coloured mobile phones” or “companies with vehicle fleets need motor insurance”… Customer Behaviour (What they do?) Based on assumptions like “beer drinkers are more likely to choose beer over wine” or “once a gambler, always a gambler”. THE WORLD OF PROXIES Slide 8

14.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Demographic profiles: Grouping people by gender, age, marital status, education, occupation etc. Geo-demographic: Adding the spatial dimension in one or more ways: absolute (North, South, Wales, Leeds), relative to population concentrations (urban, suburban, rural) or based on economic regions (Thames Valley). Psycho-demographic: Introducing attitudinal and emotional affiliations (nerds, lads, anoraks) – often hard to distinguish from pure demographics (e.g. education, occupation) or from behaviour types (see below). In B2B environments the equivalents are vertical sectors and sub- sectors, company size (employees and core business metrics, e.g. turnover), location(s), target market(s) etc. WHO THEY ARE Slide 9

15.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Transaction (purchasing) behaviour: Frequent shoppers/ flyers, bulk buyers, occasional shoppers, declining custom etc. Motivation-based behaviour: Impulse buyers, early adopters, bargain hunters, status seekers. Lifestyles: Often mixed with demographics, indicate needs through preferences manifested in everyday behaviour (a number of popular templates and commercial databases of pre-scored population). B2B: Order consolidators, end-of-quarter (end-of-year) buyers etc. WHAT DO THEY DO Slide 10

16.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Customers have individual (and group) preferences often exhibited in behaviour patterns, sometimes declared in dialogue with the company, but sometimes also withheld and/or unknown. Product or service preferences are directly linked to needs. The chance that those are true needs is somewhat higher, although product preferences may often reflect perceived needs. Attribute preferences also manifest needs, however those are secondary, ‘satellite’ needs accompanying the core need in a dynamic ‘bundle’. The likelihood here is greater that they are perceived needs, particularly in the less tangible areas of taste, fashion, peer influence etc. For practical purposes of needs modelling and needs group management, explicit and implicit preferences can be considered a proxy for needs. HOW ABOUT PREFERENCES? Slide 12

17.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Give me … (speed, safety, confidence, a positive experience, success-personal or corporate). Help me to … (get to a destination, connect to a person/organisation, enhance my life). Save me … (time, money, hassle, risks or hazards, negative experiences). THE 3 QUESTIONS TEST Slide 11

19.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization ALL KINDS OF SEGMENTATION Macro-segmentation: typically a market segmentation view Strategic segmentation: customer segmentation for long-term differentiation Micro-segmentation: a tactical, action-oriented tool for immediate targeting Used in defining market proposition/s, brand values, and in targeting mass marketing activities. E.g. ‘Youth’, ‘Pre-paid’ or ‘Rural’ segments Used in strategic planning, resource allocation, Marketing/Sales/Service optimisation. E.g. ‘High Value’, ‘Growable’ or ‘BZ’ customers, ‘Technos’, ‘Savers’ or ‘Status-symbol’ segments Used in day-to-day direct campaigns (cross- and up-sell), targeted churn prevention, acquisitions. E.g. ‘Seasonal roamers’, ‘Bargain hunters during competitor’s campaigns’, ‘Location patrons’

21.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Business goals: Get customers Keep customers Grow customers Segment 1 Segment 2 Segment 3 Acquisition Retention Development Acquisition Retention Development Acquisition Retention Development Overall objectives translate to different priorities in each segment. SEGMENT MANAGEMENT Slide 5

22.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization Most valuable customers Most growable customers Marginal Unprofitable KEEP GROW share of customer Maximize profit, minimize cost Divest Media E-channels Direct mail Telemarketer In-person service reps Dedicated service reps C ustom ervalue Allocating communication channels according to the value of segments RESOURCE OPTIMIZATION Slide 3 Source: Peppers & Rogers Group

23.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization THE ‘HOW TO’ OF PRACTICAL STRATEGIC SEGMENTATION N1 N2 N3 N4 V1 V2 V3 V4 V5 Evolving segmentation: - From historic to predictive value and from revenue to profit-based individual customer value Starting simple could mean few, expenditure-based value segments. Introducing any known costs leads to a better, profitability-oriented differentiation. Using non-linear predictive models allows managing future, lifetime value. -From broad, proxy-based needs segments to precise, true need clusters -Early needs-driven segmentation schemes often start from a market (macro) segmentation, using proxies like basic demographics or transaction behaviours. As companies learn to interpret the true needs behind such proxies, more complex needs clustering replaces the macro segments and allows linking individual needs to value growth, retention and targeted, profile-based acquisition.

24.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization • Customer Plan (operational efficiency through customer intimacy) – Developing differentiated treatments for each intersection of a needs cluster with a value segment (customer community with a unique combination of value and needs) • differentiated marketing and sales • differentiated service levels and approaches • differentiated communications: message and channel • all above differentiated consistently across touchpoints • embedding in the company’s goal-setting, planning and resource allocation • Product development (product excellence through customer intimacy) – Re-defining the mission (and often the primary industry sector) of a company as ‘the business of satisfying customer needs’) – Intimate needs understanding at the core of new product development and existing product improvement – Managing product capabilities around needs (and value) ‘SO WHAT?’ (ACTING UPON THE KNOWLEDGE)

25.  EVOLVING CUSTOMER SEGMENTATION The PRISM Organization contact details Vladimir Dimitroff Director PRISM Consulting (UK) Ltd 6 Priors Court Newark Str Reading RG1 2SR United Kingdom Phone: +44 (0)7947034944 E-Mail: vdimitroff@prism-gb.com www.prism-gb.com Austria • Czech Republic • Germany Hungary • Italy • Malta • Poland • Russia Spain • Switzerland • Turkey • UK THANK YOU