Segmentation: Value based or Need based?
Often I come across the discussion on whether a company or a unit should go for Value based segmentation or a Need based segmentation. Customer A,B,C are most worthwhile to me and XYZ are low value customers and therefore let me find ways to service low value customers at a lower cost, through self service channels, reduced customization, etc. or target most profitable customers within each segment for initiatives to increase retention & wallet-share
Segmentation is an integral component of any company’s strategy to gain an edge over their competitors or must say achieve a sustainable competitive advantage. Any company would like to be profitable by increasing revenues (via increasing penetration of attractive segments, growing the more customer attractive segments, retaining the existing customers) or reducing the operational expenses (more effective and efficient (read low costJ) marketing campaigns, reduced sales & service costs etc)
Many companies view segmentation as dividing customers into high, medium and low value brackets, measuring the customer’s gross or net contribution margin. The reason behind such value based segmentation is; one the required information tends to be readily available and second the goal of attracting and retaining the highest value customers would logically have a high ROI
However the major issue with the above stated “value-based” segmentation is that it assumes that all high-value customers have identical needs and preferences which is not the case most of the time. Therefore, a “needs-based” segmentation will have far more impact on determining what combination of products and services will be required to create a compelling value proposition for different customer segments.
Needs-based customer segmentation involves dividing your existing, and potential, customers into distinct groups that have similar needs, preferences and satisfiers.
- Needs: What all needs of a particular segment can be fulfilled by your company? i.e. what all products and services are best suited to meet those needs?
- Preferences: How does a segment prefer to interact and transact with a company?
- Satisfiers: Among varied options available, which solution set would a segment choose to fulfill a given need?
If done properly, a unique value proposition will appeal to all customers of the segment, which will be distinct from the value propositions that will appeal to other segments but please understand, execution is the key here
Other important questions are whether segmentation is actually an important component of customer experience strategy? And if yes how should we go about operationalizing the same? What are the risks which may lead to failed execution of the segmentation strategy? How is the segmentation linked with the business challenges?
Comments
I agree on the need based segmentation piece. However, there are some categories in India that still hasn't progressed to this level to warrant it. In my experience, while need based segmentation is what we work with (a mix of demographic and psychographic), it's still in its infancy in most categories and lack of good data is a big reason.
Posted by: beanpole | June 5, 2008 3:54 PM
The article is really good. This brings out a clear distinction between what can be a misleading segmentation strategy to a more disciplined and a focussed approach. The questions at the end does suggest that both the strategies cannot be seen in isolation rather companies should go for a hybrid of both. This to my thought will clearly differentiate the intended target group more correctly and thus helping to create the appropriate value proposition for the various segments.
Posted by: Chinmay | June 8, 2008 5:44 PM
I agree with you beanpole, that clean and elaborate data is required for the segmentation. But having said that, its not that we do not have the data. The issue which concerns most of the time is that we do not have a 360 degree view of a customer and not enough effort is made/system put in place to drive intelligence out of data captured at various customer touchpoints.
Posted by: Amandeep Singh Syali | August 7, 2008 10:49 AM
There is also a pandemic problem of teaching people what to do with the data you collect from and push to customer touch points. Everyone wants churn to go down and revenues per customer to go up but no one wants to change anything about how they operate. Secondly, executives don't want to wait for the changes to have any effect. It can take time to show the return on additional increments of CRM efficacy. Anyone have any advice on how to socialize and influence internal customers?
Posted by: Michael Fantus | August 11, 2008 8:29 PM
Thanks Michael. Whenever a company goes for a segmentation strategy, the top management support, having an overall plan which includes Surveying and Engaging appropriate company personnel, training and change management program is an important aspect of the overall process which will finally lead to improved customer experience. Overall plan with cost/benefit analysis over a period of time is shared with the team to set the right expectations with the executives. This will ensure that the required executives are aware of the staggered manner in which they will get the results. Any major change should have a cross functional team and executives buy-in to ensure all required and important internal customers are taken along in the boat.
Going further in details while building the segmentation strategy- current state inventory which includes descriptions of all the relevant people, processes and technologies that impact the customer experience needs to be created. Also customer contact centers and process analysis outlines the people, process, technology and product required to enable the proposed customer strategy
Appropriate Systems, Processes, Integration strategy and Training structure is put in place to ensure that sales & service personnel are able to understand the process and systems and are able to up-sell or cross-sell, retain customers that want to stop service or sales and communicate customer product suggestions and complaints to marketing and product development
Innovative incentive measures also need to be included to incentivize internal customers to follow the new process and strategy and once the people start adopting the new process and systems, it becomes a self enforcing loop
Your views?
Posted by: Amandeep Singh Syali | August 15, 2008 3:58 AM