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Segmentation: An Important Marketing Strategy

In the current hyper-competitive business environment, understanding customers’ changing tastes and purchasing behavior is extremely important! It is clearly evident that companies that do not track changing consumer wants and needs have seen a decline in their fortune. KODAK is just one but a very good example to underline this point. Failure of understanding and predicting consumers’ buying trends towards more technologically advanced digital  cameras lead to the bankruptcy and demise of the company.

Most companies today make tremendous effort to track consumer behavior. Meticulous recording and utilization of consumer digital body language serves as the keystone of the process. The advent of the internet and mobile technologies has changed the consumer behavior – They search for things on the net, educate the pros and cons of the product, compare prices and evaluate vendors for timeliness and customer service. They actively seek coupons and collect feedback from friends on the social networks.

In doing so the consumer leaves a trail of breadcrumbs all over the internet. Astute businesses collect, analyze and utilize the digital body language of the customer to improve their marketing activities. There are several ways of collecting and analyzing the customer data – web crawling, browser based java scripts, server log mining, geo location tracking in malls and stores. Most companies use a data warehouse to store the data and analyze it to find out the customer purchasing behavioral patterns. Effective utilization of this information can lead to revenue generating promotional activities for the company.

All promotional marketing activities are expensive since the response rates are very low. You cannot send a letter or catalog to every customer in the country, as it will be cost prohibitive. To make these promotional activities cost effective, it is very important to segment the customers, so that the promotional plans can be directed towards selected and potentially profitable customers.

Segmentation is a process by which a large customer base is divided into small subsets of customers, having common needs and priorities. There are several conventional methods of creating segments such as: Geographical segmentation, Demographic Segmentation, Behavioral segmentation etc. However, more sophisticated ways, currently utilized in the market include various statistical techniques such as K-means clustering, hierarchical clustering etc. An interesting and upcoming technique of segmentation is “Micro segmentation”. It is utilized to understand individual customer behavior and to make personalized marketing offers.

When using these methods, companies should consider the ideal characteristics of the segments such as:

  • Segment should be measurable and profitable.
  • Stable across the time
  • And every consumer in the segment should be easily reachable.

We will focus our discussion on the segmentation method commonly utilized by most b2c companies. In retail industry, companies prominently focus on customers’ transactional behavior to create various segments. Recency, Frequency and Monetary (RFM) are the main indicators used for creating segments of the consumers. Few marketers utilize these individual indicators and while others combine the various segmentation techniques to implement their marketing plan.

Traditionally, more recently active customers are considered as the more important customers. Some marketers divide customers according to the recency of their purchase. e.g. customers who made a purchase during last 12 months, 13-24 months and 25+ months. Marketers use predictive modeling techniques such as linear regression, logistic regression to score their consumer base. Finally, consumers are segmented by their geography such as zip codes, households as well. These groups are then combined to make several mini segments.  These resultant segments are considered as potential consumers and are targeted for promotional efforts of the company.

The performance of these segmentation and promotional strategies is measured for each segment, against the metrics such as:

  • total revenue generated,
  • average revenue per customer,
  • cost of the promotional activity.

This report is then utilized as a feedback, to continually improve the marketing strategy. Segments evolve over time depending on the performance feedback, more recent trends, and various experimental testing (A/B testing).

It is worth considering those consumer segments that are not current and active buyers; they may represent potential defectors to competitors. Knowledge of their purchasing behavior and transactional data can be very helpful to target and attract them through selective marketing strategies.

Hence, marketing strategies conducted by utilizing selective customer segmentation can serve as a win–win situation for both, the company as well as consumer; as company can promote the right offer to right consumer at right time and consumer may eventually respond to the offer by making a purchase, while not getting bombarded with junk mail.

 

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