In this section, you’ll read about a number of basic disciplines that can be useful during CPM.
These include market segmentation, sales forecasting, activity- based costing, customer life- time value estimation and data mining.
Market segmentation
CPM can make use of a discipline that is routinely employed by marketing management – market segmentation. Market segmentation can be defined as follows:
Market segmentation is the process of dividing up a market into more or less homogenous subsets for which it is possible to create different value propositions.
At the end of the process the company can decide which segment(s) it wants to serve. If it chooses, each segment can be served with a different value proposition and managed in dif- ferent ways. Market segmentation processes can be used during CPM for two main purposes.
They can be used to segment potential markets to identify which customers to acquire, and to cluster current customers with a view to offering differentiated value propositions supported by different relationship management strategies.
In this discussion, we’ll focus on the application of market segmentation processes to identify which customers to acquire. What distinguishes market segmentation for this CRM purpose is its very clear focus on customer value. The outcome of the process should be the identification of the value potential of each identified segment. Companies will want to identify, target and acquire those customers that can generate profit in the future: these will be those customers that the company is better placed to serve and satisfy than competitors.
Market segmentation is increasingly being transformed by information technology, par- ticularly in consumer markets. The dramatic increase in customer- related data is increas- ingly used by companies to segment customers according to their attributes and behavior.
Regrettably, segmentation remains highly intuitive or habitual in many companies. In a CRM context however, market segmentation is highly data- dependent. Internal data from market- ing, sales, service and finance records are often enhanced with additional data from external sources such as marketing research companies, partner organizations in the company’s net- work, social media and other big data sources, and data specialists. Either through data and or intuition, the customer management team will develop profiles of customer groups based upon insight and experience. This is then used to guide the development of marketing strat- egies across the segments.
Intuitive Data- based
• brain- storm segmentation variables • obtain customer data – age, gender, life- style – internal and external
– sIC, size, location • analyse customer data
• Produce word- profiles • Identify high/ medium/ low value customer segments
• Compute sizes of segments • Profile customers within segments
• assess company/ segment fit – age, gender, life- style
• Make targeting decision – sIC, size, location – one/ several/ all segments? • assess company/ segment fit
• Make targeting decision – one/ several/ all segments?
Figure 5.1 Intuitive and data- based segmentation processes
CUsToMER PoRTFolIo ManagEMEnT
The market segmentation process can be broken down into a number of steps:
1 Identify the business you are in.
2 Identify relevant segmentation variables.
3 Analyze the market using these variables.
4 Assess the value of the market segments.
5 Select target market(s) to serve.
Identify the business you are in
This is an important strategic question to which many, but not all, companies have an answer.
Ted Levitt’s classic article “Marketing myopia” warned companies of the dangers of thinking only in terms of product- oriented answers.2 He wrote of a nineteenth- century company that defined itself as being in the buggy- whip industry. Unsurprisingly, it has not survived. It is important to consider the answer from the customer point of view. For example, is a manufacturer of kitchen cabinets in the timber processing industry, or the home- improvement business?
A customer- oriented answer to the question will enable companies to move through the market segmentation process because it helps identify the boundaries of the market served, it defines the benefits customers seek, and it picks out the company’s competitors.
Let’s assume that the kitchen furniture company has defined its business from the cus- tomer’s perspective. It believes it is in the home value improvement business. It knows from research that customers buy its products for one major reason: they are homeowners who want to enhance the value of their properties. The company is now in a position to identify its markets and competitors at three levels:
1 Benefit competitors: other companies delivering the same benefit. These might include window replacement companies, heating and air- conditioning companies and bath- room renovation companies.
2 Product competitors: other companies marketing kitchens to customers seeking the same benefits.
3 Geographic competitors: these are benefit and product competitors operating in the same geographic territory
Identify relevant segmentation variables and analyze the market
There are many variables that are used to segment consumer and organizational markets. Com- panies can enjoy competitive advantage through innovations in market segmentation. For example, before Họagen- Dazs, it was known that ice cream was a seasonally sold product aimed primarily at children. Họagen- Dazs innovated by targeting adults with a different, luxurious and adult product that had all- year round purchasing potential. We’ll look at consumer markets first.
Consumer markets
Consumers can be clustered using four main methods – behavioral, geographic, demographic and psychographic – each of which employs a number of variables, as summarized in Table 5.1.
Sometimes, managers segment markets using single variables. For example, most tooth- paste brands aim to deliver one or more of three benefits sought by consumers: white teeth, fresh breath or dental caries prevention. More typically, though, several variables are used to identify market segments. Few marketers use only demographic attributes to segment con- sumer markets. The concern has been that there is too much variance within each of the demographic clusters to regard all members of the segment as more or less homogenous. For example, some 30–40 year- olds have families and mortgaged homes; others live in rented apartments and go clubbing at weekends. Some members of religious groups are traditional- ists; others are progressives.
The family life cycle (FLC) idea has been particularly threatened. The FLC traces the development of a person’s life along a path from young and single, to married with no chil- dren, married with young children, married couples with older children, older married cou- ples with no children at home, empty nesters still in employment, retired empty nester couple, sole survivor working or not working. Life for many, if not most, people does not follow this path. It fails to take account of the many and varied life choices that people make – some people never marry, others are late or serial marriers, and there are also childless couples, extended families, single- parent households and divorced couples.
Occupational status is widely used to classify people into social grades. Systems vary around the world. In the UK, marketers have conventionally used the JICNARS social grading system for segmentation. This allocates households to one of six categories (A, B, C1, C2, D and E) depending upon the job of the head of household. Higher managerial occupations are ranked A; casual, unskilled workers are ranked E. Media owners often use the JICNARS scale to profile their audiences. Sometimes marketers rely on Government data during market segmentation. Government agencies in the UK do not use JICNARS, but a different occupation classification scheme – the NS- SEC (National Statistics – Socio- Economic Classification).3 There are several versions of this scheme, clustering occupations into three, five or eight groups. The eight groups scheme identifies the following occupational groups:
1 Higher managerial and professional occupations.
2 Lower managerial and professional occupations.
Table 5.1 Criteria for segmenting consumer markets Major segmentation methods Variables
behavioral benefits sought, usage and purchase occasion, volume consumed, loyalty status (recency–frequency–
monetary spend, share of category spend)
geographic Country, region, TV region, city, city size, postcode, residential neighborhood
Demographic age, gender, occupational status, household size, marital status, terminal educational age, household income, stage of family life cycle, religion, ethnic origin, nationality, language group
Psychographic lifestyle, personality, values
CUsToMER PoRTFolIo ManagEMEnT
3 Intermediate occupations (clerical, sales, service).
4 Small employers and own account workers.
5 Lower supervisory and technical occupations.
6 Semi- routine occupations.
7 Routine occupations.
8 Never worked or long- term unemployed.
A number of commercial firms have developed geo- demographic classification schemes.
CACI, for example, has developed ACORN that segments UK households, postcodes and neighborhoods into 6 categories, 18 groups and 62 types. There is an average of 15 households in each postcode. Most people in the UK live in private households. Five of the ACORN categories, comprising 17 of the groups and 59 of the types, represent the population in pri- vate households. The last group is reserved for other kinds of postcode, primarily communal households who live in various kinds of institution rather than in private households, and postcodes with no resident population.
Lifestyle research first became popular in the 1980s. Rather than using a single descrip- tive category to classify customers, as had been the case with demographics, it uses multi- variate analysis to cluster customers. Lifestyle analysts collect data about people’s activities, interests and opinions. A lifestyle survey instrument may require answers to 400 or 500 ques- tions, taking several hours to complete. Using analytical processes such as factor analysis and cluster analysis, the researchers are able to produce lifestyle or psychographic profiles. The assertion is made that we buy products because of their fit with our chosen lifestyles. Lifestyle studies have been done in many countries, as well as across national boundaries. A number of companies conduct lifestyle research on a commercial basis and sell the results to their clients.
Behavioral segmentation variables can be particularly useful for CRM purposes. Benefit segmentation has become a standard tool for marketing managers. It is axiomatic that cus- tomers buy products for the benefits they deliver, not for the products themselves. Nobody has ever bought a 5mm drill bit because they want a 5mm drill bit. They buy because of what the drill bit can deliver – a 5mm hole. CRM practitioners need to understand the benefits that
Table 5.2 aCoRn geo- demographic household classification (UK)4
ACORN categories Approx. % of UK
households
1. affluent achievers 21
2. Rising prosperity 9
3. Comfortable communities 27
4. Financially stretched 24
5. Urban adversity 18
6. not private households <1
are sought by the customers they serve. When it comes to creating value propositions for the chosen customers, benefit segmentation becomes very important.
The other two behavioral variables – volume consumed and loyalty status – are also useful from a CRM perspective. Many companies classify their customers according to the volume of business they produce. For example, in the B2C context, McDonald’s USA found that 77% of their sales were to males aged 18 to 34 who ate McDonald’s three to five times per week, this despite the company’s mission to be the world’s favorite family restaurant.
Assuming that they contribute in equal proportion to the bottom line, these are customers that the company must not lose. The volume they provide allows the company to operate very cost- effectively, keeping unit costs low.
Market segmentation based on recency of purchase, frequency of purchase and the money spent (RFM) adds another level of insight. For example, some customers may pur- chase large volumes but very infrequently, and others may buy smaller quantities but more often. If a consumer falling into this latter group shows no evidence of recent buying, they might be targeted with a win- back campaign. One hotel chain clusters customers into seven groups based on RFM data, and has created a CRM application that helps check- in staff recognize and welcome customers differently based on when they last visited the hotel, the frequency of their bookings and how much they spend.
Companies that rank customers into tiers according to volume, and are then able to identify which customers fall into each tier, may be able to develop customer migration plans to move lower volume customers higher up the ladder. This only makes sense when the lower volume customers present an opportunity. The key question is whether they buy product from other suppliers in the category. For example, customer Jones buys five pairs of shoes a year. She only buys one of those pairs from “Shoes4less” retail outlets. She therefore presents a greater opportunity than customer Smith who buys two pairs a year, but both of them from Shoes4less. Shoes4less has the opportunity to win four more sales from Jones, but none from Smith. This does not necessarily mean that Jones is more valuable than Smith. That depends on the answers to other questions. First, how much will it cost to switch Jones from her current shoe retailer(s), and what will it cost to retain Smith’s business? Second, what are the margins earned from these customers? If Jones is very committed to her other supplier, it may not be worth trying to switch her. If Smith buys high- margin fashion and leisure footwear and Jones buys low margin footwear, then Smith might be the better opportunity despite the lower volume of sales.
Most segmentation programs employ more than one variable. For example, a chain of bars may define its customers on the basis of geography, age and music preference. Figure 5.2 shows how the market for chocolate can be segmented by usage occasion and satisfaction.
Four major segments emerge from this bi- variate segmentation of the market.
Business markets
Business markets can also be segmented in a number of ways, as shown in Table 5.3.
The basic starting point for most B2B segmentation is the International Standard Industrial Classification (ISIC), which is a property of the United Nations Statistics Divi- sion. ISIC classifies businesses according to their dominant economic activity. ISIC consists of a coherent and consistent classification structure of economic activities based on a set
Emotional need 20%
Functional 40%
Planned 10%
Later sharing
30%
Satisfaction
Light snacking Indulgence Hunger
Usage
Eat now Take home Family sharing Gifts
Figure 5.2 bivariate segmentation of the chocolate market
Table 5.3 How business markets are segmented Business market
segmentation criteria Illustration International standard
Industrial Classification an internationally agreed standard for classifying goods and service producers
Dispersion geographically concentrated or dispersed
size large, medium, small businesses: classified by number of employees, number of customers, profit or turnover
account status global account, national account, regional account, a or b or C class accounts
account value <$50,000, <$100,000, <$200,000, <$500,000 buying processes open tender, sealed bid, Internet auction, centralized,
decentralized
buying criteria Continuity of supply (reliability), product quality, price, customization, just- in- time, service support before or after sale
Propensity to switch satisfied with current suppliers, dissatisfied Current share of customer
spend in the category sole supplier, majority supplier, minority supplier, non- supplier
geography City, region, country, trading bloc (asEan, EU) buying style Risk averse, innovator
is a standard that is in widespread use, some countries have developed their own schemes.
In the US, Canada and Mexico, there is the North American Industry Classification System (NAICS). In New Zealand and Australia there is the Australia and New Zealand Standard Industrial Classification (ANZSIC).
The ISIC classifies all forms of economic activity. Each business entity is classified according to its principal product or business activity and is assigned a four- digit code. These are then amalgamated into 99 major divisions. Table 5.4 details several four- digit codes.
Governments and trade associations often collect and publish information that indicates the size of each ISIC code. This can be a useful guide when answering the question “Which customers should we acquire?” However, targeting in the B2B context is often conducted not at the aggregated level of the ISIC, but at an individual account level. The question is not so much, “Do we want to serve this segment?” as much as “Do we want to serve this customer?”
Several of these account- level segmentation variables are specifically important for CRM purposes: account value, share of category (share of wallet) spend, and propensity to switch.
Table 5.4 Examples of IsIC codes ISIC 4- digit code Activity
1200 Manufacture of tobacco products
2511 Manufacture of structural metal products
5520 Camping grounds, recreational vehicle parks and trailer parks
8530 Higher education