Market Segments – Value for Them and Value for Us (English translation), MarketingUP, 05/2007

One of my recent articles published in Marketing UP magazine in May 2007 and translated here to English. You can find here some classical wisdom about segmentation.

Twenty percent of customers make eighty percent of sales, Vilfredo Pareto (1911)*

The popular “20/80” metaphor of the Pareto principle reflects its simplicity and broad applicability. This is one of the most used and most cited principles in economy. Anyone who ever tried to trade on an open market can recognise this pattern.

Segmentation allows creation of manageable, homogenous groups of customers

Segmentation is a wide marketing topic, which, among other, helps understanding the value of each customer to your organization, and vice versa – it creates insight to what are the aspects of your products and services that your customers value the most. Such awareness enables adapting of business strategies to different homogeneous market  groups that we call segments. Differentiating customers with regards to the value that they ‘deliver’ to the organization became particularly important in recent decades with highly saturated markets and consumers that show great immunity to the large amounts of marketing information they have been exposed to. The marketing response to such market conditions is basically answering the question: “how to keep the most profitable customers in the most efficient and cost-effective way?”. Driven by the above mentioned transformation in market environments and by changes in technological capabilities of modern information and communication systems, the evolution of marketing has yielded some new and innovative concepts. Among those, the services marketing represents a fundamental change in the traditional market approach, followed by important concepts such as niche marketing, relationship marketing and the customer relationship management (CRM).The latter two concepts are mutually overlapping and complementing each other. Boundary between them is a wide “zone” of common postulates and shared principles. In this ‘zone’, the understanding of the value that customers ‘deliver’ to the organization, take a very prominent place. A number of segmentation tools and techniques exist that are used to support strategies aimed to identifying and retaining the most profitable groups of customers (customer segments).

The value exchange as foundation of business

The purpose of markets as well as the foundations of the marketing concept lies in exchange of value. How much are you aware of the value provided to your organization by each of clients you serve? It’s a good question indeed, because the value is not allocated only within the tangible parameters, such as actual sales figures. It is the difference between costs and revenues, but much more than that. Doing business with certain clients for your organization can be matter of image, reference, or some other “intangible” benefits. Some clients, even if they do not contribute significant revenue to your business, can be your good messengers to a wide number of potential customers. On the other side, some others will take a significant place in your business books and stand up with figures, but a deeper analysis will discover that they are actually “value destroyers”. There are different ways in which your customers can destroy value. Those can be reflected in requests for (unreasonable) product customizations or frequent urgent deliveries. Other aspects of destroying value could be wide exploiting of customer service rights, taking advantage of long delays in payment and by generating similar expenses or other extraordinary pressures to your organization’s resources. We often justify such actions by customer’s revenue figures. However, we should ask ourselves: is it the volume of transactions on our bank account the purpose of our business? Or is it perhaps the amount that remains after the transactions are completed, through a longer period of time?

Value based segmentation

There are different methods of recognizing the value of customers for the purpose of grouping them into segments. These methods range from the most primitive measurement of sales figures to complex models that include the allocation of the current and future value creation such as potential referrals or future use of other products in your portfolio. In practice, the value of a client is measured by different surrogate measures. Some well known segmentation methods are RFM (Recency, Frequency, Monetary value), usage analysis and Customer Lifetime Value.

Within Customer Relationship Management strategy, the most suitable segmentation is the one based on the so-called Customer Lifetime Value. It is used to define the general approach to the customer set. The Customer Lifetime Value is a complex, synthetic value gained by allocation models that take into account both present and future value exchange factors. To simplify identification of present and future “value creators” marketers seek to identify visible client attributes that indicate his or her tendency toward specific behaviors that affect value creation. For example, within a costly customer lifetime value segmentation project, conducted by one of America’s leading insurers, among other findings, they understood that the size of individual’s US credit score represent a very strong “value creation” predictor.

Segmentation takes into consideration different views on customers

ABC method – earn the status

Director of Customer Service department of one of Croatian telecom operators, when arguing the substantial investment in segmentation and distinctiveness of customer service levels, said: “We started the investment when we realized that we couldn’t afford any more the highest service levels to all of our customers.” What the telecom operator actually did in that occasion was to use the ABC method to diversify approach to their customers based on their value creation. The best customers were entitled to the so-called premium service. When deciding about the granted quality of service, the CRM system was able to distinguish not only those which created value, but those who were destroying it as well. The investment in a customer’s service level was reciprocal to his or her contribution to the profitability as the operator’s measure of sustainable success.

For a better segment “visualization”, the value levels within the ABC method are often marked by descriptive terms such as “bronze”, “silver” and “gold”.

In the late nineties, the former Swiss monopoly telecommunications operator Swisscom, started a loyalty program to protect its market position during the market liberalization process*. The objectives of the program were focused on keeping the leader position, retaining the most profitable customers, while trying to avoid price wars with the newly introduced competitors. The loyalty program was delivering certain benefits to its members. Based on the data collected through the program, Swisscom was able to analyze more than 20 target groups. Four segments were chosen based on the analysis. Using the ABC analysis method, different approaches were deployed towards each of the four segments:

– Premium customers: keep them loyal at all costs

– Profitable customers: keep them loyal and intensify cross selling

– Customers with medium consumption: offer packaged services, cross sell

– Unprofitable customers: there are no benefits without increasing consumption

The ABC method can easily be recognized by clients in the banking industry. The personal banker (or clerk) service is meant to be a lever of investing in “value creators.” The remaining clients are left with the option of waiting in queues within the branches, the ATMs or other self-service systems. For the “worst ones”, which can be described as “the value destroyers”, the preferred channel of business is – the one with the competition.

Customer segmentation based on benefits

The above described segmentation will differentiate customers according to their contribution and their potential profitability. It is obvious that it puts the needs of sales organizations in the focus (which client is better for ME).On the other side, it is good to know what customers find most valuable in our offer or our general approach. We’d like to know that in particular, for those that we value the most.

Contemporary markets are often perceived as collections of different business models (within the organizational buyer) and lifestyles (in case of consumer markets). Such determinants of our clients define the reasons why they would accept our value proposal. Benefit segmentation is a mirror in which we try to figure out how our customers segment their “suppliers market” based on their perception of value. In contrast to value based segmentation, the segmentation based on benefits puts the needs of customers in the center of the segmentation effort.

A business organization, whose business model is based on low costs or minimal inventory, will value your ability of flexible, frequent and timely delivery options. Two persons that purchase the same vehicle will base their decisions on completely different reasons. While one will value a prestigious brand and design, the second will be making the purchase based on safety features and high quality service network. This understanding of value that the customer perceives within our proposal can have a powerful impact on adapting the product / service, the marketing approach, as well as the pricing strategy.

Segmentation based on value will give us the answer to the question about who are the customers that are worth our best effort, while the segmentation based on benefits will help us to understand what this effort should look like. Modern marketing segmentation concepts keep confirming – Vilfredo Pareto was right.

*The idea use of Vilfredo Pareto’s principle in this article was  inspired by Art Weinstein’s “Hanbook of Market Segmentation – Strategic Targeting for Business and Technology Firms”, The Harworth Press, 2004


The original of this article has been published in MarketingUP, 05/2007  magazine. The article and the above English translation are copyright of Alen Gojceta.

The Swisscom business case is described in: Brown, Stanley A.; Customer Relationship Management – a strategic imperative in the world of e-business; John Wiley & Sons Canada Ltd; Toronto, 2000.

If you decide to use this article or its parts for academic or professional work, do not forget to cite the author and the source.

© 2011 Alen Gojceta

CRM education – the follow up

I had the opportunity to host a CRM seminar for a great group of professionals. Here are the conclusions written in form of follow-up letter to the attendees. I’m sure you will find it interesting too…

Past Thursday I had an opportunity to host a seminar on CRM for a group of experienced professionals. I have announced the education in my recent post, describing challenges and uncertainties around the topic and the potential audience. This post is written in form of a follow-up letter to the seminar attendees, but it might be interesting to many of you who deal with CRM and who are interested in what were the major take-aways from the intensive 6 hours CRM education.

Dear attendees,

thank you for taking part of this seminar that showed to be very productive and interactive, due to contribution of all of you.

All of my concerns before the education about the homogeneity of the group vanished when I received the first list with your names, your companies and business functions. The group was very compact in terms of CRM understanding as well as your experience in managing customer relationship or implementing CRM systems. A bank, several telecommunication companies and two CRM vendors made a perfect audience for a focused and productive education.

I really enjoyed the experience and I hope you did as well.

The customer's hidden attributes

There are ten points that I want to stress out and that I’d like you to keep in mind as points to take away from the lecture:

  1. No one needs CRM because it is fancy (’cause others „have“ it too) unless they plan to waist time and money
  2. CRM often doesn’t need „implementing CRM“. In many cases, I’d rather advice you to take a look at you core processes and make it fast, responsible and transparent.
  3. Basics of a healthy customer relationship management lies in you customer focused corporate culture in opposite to the one that arises from product or process orientation (remember our first exercise?)
  4. When you work on aligning your company’s agenda with that of your customers, don’t forget about different motivations of your departments as well as talents and motives of individual employees
  5. Manage customer experience through managing their perception. Perception is often tightly related to expectations. Take care! Expectations are set by your organization’s „CRM processes“, your marketing communication, as well as by your competitors.

    The "Moments of truth" exercise
  6. Manage touch points. Those are the essential „places“ where customer experience occur. Try to use „Moments of truth“assessment in combination with customer expectations or even emotions as a powerful tool to manage total customer experience.
  7. Customer data derive from customer oriented processes not vice versa
  8. „Critical point of CRM implementation“ is the one where you know what do you want to achieve, why do you want it so much and what is the frame within you are able to do it
  9. The message of the story tale „Wolf and the three piglets“ is that we have to build solid basis for a lasting survival (business) model. The same is with social media and their use in CRM ecosystem (sCRM): invest time, engage to get them engaged
  10. …ah yes, segmentation. Some of you stated that you didn’t get enough. You asked for more. More of theory, more of tools, more of segmentation methods. It is homework for me and a great feedback from your side. Thank you.

When talking about segmentation, is not only about splitting customers into (more) manageable groups. And especially it is not just

The list of touch points from one of the exercises (in Croatian)

about distinguishing them based on their spending (value based segmentation). It is about what does your offering or your organization mean for different customer groups (benefit segmentation). It is about events from the CRM ecosystem that create dynamic

segmentation attributes and micro segments. The segmentation is about the general approach to certain customer profiles, as well as small operational activities. This is in particular case for the segmentation of the CRM era where you are able to track in real time what your customers are doing, experiencing or even saying.

About trends of the future, remember that today’s products can become powerful interactive touch points. Use QR codes in combination with Web 2.0 tools.

I encourage you to try in your everyday work what you have learned. Think customer. Think expectations. Think experience at touch points. Think about service – the fast one, responsive and transparent.

Thank you for your active contribution and for sharing your time, energy and experience with all of us.

Alen

P.S. Feel free to comment about your experience or suggestions for further improvements.

© Alen Gojceta 2010

The CRM seminar redesing – the whys and hows

After several years, I’ll keep an open seminar on CRM. Read about the challenges and the approach I took to overcome them.

Some time has passed since I held my last open seminar on Customer Relationship Management. In the mean time I had some engagements on universities or in form of in-house education.

From my experience, open seminars are particularly challenging comparing to the other two forms of lectures. In-house educations allow precise matching the content to the audience. Thorough preparation and understanding of expectations of the audience can be performed before the actual education. Usually one or more preparatory assessments and meetings are performed. The company that orders the education is in most of the cases a fair candidate to be used in business cases.

Academic lectures, from the other side, usually have homogenous audience. The lecturer has to prepare more facts, is able to offer long definitions that students systematically write down. Faculty students are unfortunatelly, in general, passive in terms of expectations over the quality of lectures and speakers. This puts lower pressure on the lecturer, despite his decisiveness to invest time to gain the maximum quality.

Open seminars however attract people with very different expectations, mostly totally out of lecturer’s control. It does not help much even when put the maximum effort to understand each seminar attendant’s „why“. You will usually have 3 or 4 different homogenous sets of people within an usual group of 10 or 15. Here are some profiles from my experience:

Est. share Profile Their motivation
40% The general knowledge seeker I heard a lot about this CRM. I’d really like to learn more about it.
30% The CRM professional Let’s see what does this guy have to say that I still don’t know.
20% The project guy We are implementing the XY software, we will learn how to do it (usualy 2-3 persons from the same organization)
10% The victim of transformation My boss has sent me ’cause we have te fancy HR initiative in our organization, but I don’t care much about the topic. You don’t mind if I leave after lunch?

The bottom line is that you will never be able to make everyone perfectly satisfied with the content. Therefore I usually estimate which of the groups is dominant and then try to narrow the content for that group, without forgetting the rest of the audience.

My first open seminar after several years has some additional challenges comparing to the previous ones. The education provider (Institute for management / Istitut za menadzment) offers mostly soft skills educations such as coaching, fast reading techniques and creative writing. My CRM course stands out from the self–transformational and workshop–like educations. I estimate that the general tone given by most of the lecturers at Institute for management will impact expectations over my content and educational style. Therefore I have decided to adapt the seminar, making it more interactive with more usable material to take away. My next imperative, independent to the Institute for management’s clients, was to modernize the content, make it more attractive and up to date. So I’ll spend some time during te seminar on the Social Media role within CRM and I’ll open a discussion about a new CRM concept. I will share some of my thoughts about new possibilities of Web 2.0 enabled CRM development, which I call the in-the-product CRM.

The CRM seminar redesing

Wow, I’m looking forward to lead the course on 18.11.2010. at Institut za menadzment, Zagreb.

My Article on CRM customization (translated to English), Banka magazine, September 2002

Organizations in mature phase of managing customer relationship are becoming able to implement real time dynamic (micro) segmentation in addition to the traditional segmentation based on “obvious” customer parameters. Personalization of the content, on the level of individual customer, is possible through matrure data collection and management. The article starts by an original introduction into the topic by an example of a restaurant with 150.000 tables…

Contact me… in an adaptive way

If you will use this text for publishing or academic pursposes, be so kind to cite the author and source: Alen Gojceta, Banka, 09/2002. Thank you!

Restaurant with 150.000 tables – no thanks

Technological maturity has made possible what we call today Customer Relationship Management (CRM). The need to establish a business strategy based on technologically supported CRM philosophy, emerged from 3 factors: (1) high penetration of products and services, (2) highly saturated competitive markets, and (3) a large customer base.

When managing relationships with a relatively small number of customers, we do not need support of advanced technological solutions. On the contrary, the most effective CRM is the one based on close, frequent contact, strengthened by mutual trust and understanding.

Many of us have a favorite coffee shop where the waiter serves us with the “usual” drink, or restaurants that are part of daily gastronomic routes, where they know that we do not want vinegar in the salad, or don’t stand cakes with cinnamon. But let’s imagine that a restaurant does not have 15, but 150,000 tables all occupied by “regular” guests. In this case there is a choice: the restaurant management could allocate one waiter for every 5 tables, or make use of technological benefits. In the first case we would achieve the desired effectiveness and personalized relationship with customers, but with the same cost and a lower level of service. Actually, to help a waiter remember returning guests and their habits, the latter would be forced to sit always in the same “district” between the 150,000 tables of the giant restaurant. It is clear that gastronomic experience in such a large restaurant would be far from ideal. Let’s then rather split our tables in some 100,000 restaurants and enjoy properly for a little higher price.

Let’s consider the other case and reach for technological solutions, the same ones that lie below any contemporary CRM solution. In this scenario, we would still have 150,000 tables, but the number of waiters would not be 30,000 any more, but much less, say 10,000, keeping similar level of service. Except for the efficiency achieved by a CRM system, the reduced number of waiters may be additionally achieved by the use of different workforce management or advanced enterprise resource planning systems, often seen in conjunction with modern CRM solutions. The best part of such solution would have been the choice for a guest to sit in any part of our imaginary endless restaurant, and be served by any CRM waiter in a similar, yet adapted (personalized) manner. This is the basic idea of CRM philosophy: collecting and storing information about customers and acting upon it seamlessly across the whole organization, with the aim to establish and maintain relations adjusted to the individual customer or a customer segment. Our CRM waiters would have been equipped by hardware and software solutions that would help them to identify the customer and gain insight into their habits and aspirations. Such IT infrastructure would have enabled them to simulate mature established relationships with their guests, similar to the situation of a restaurant with 15 tables and a returning guest. All that would have been made possible despite the fact that the CRM waiter and the guest have had never met before. Unfortunately, the atmosphere of the enormous restaurant would have still been far from pleasant, but the scope of CRM is not perfection in mapping customer requirements, but rather a compromise between aspirations and wishes of individual customers, and objectives of CRM organizations.

The 150,000 tables in a restaurant is just an exaggerated picture of what’s going on during the past hundred years with dozens of industries from retail or manufacturing to tourism – the introduction of massive scale as a vehicle for maximizing revenues and reducing costs per unit of product or service. Such business model has led to the alienation of business organizations from its end users. Rapid growth of processing power on computer clients, improved database technologies and means of interaction with customers (Internet, call centers, laptops and PDAs) have enabled introduction of technologically supported customer relationship philosophy, the one that seeks to simulate intimacy of the increasingly lacking personal contact.

Dear George

Traditionally, marketing strategies have been relying on market segmentation and targeting specific market segments by different marketing initiatives.

The most primitive, the most easily applicable and the most widely used segmentation is based on revenue (who spent what with us) or, in a more advanced case, on financial potential of our customers (who has the money to buy our stuff). The theory of marketing segmentation is being developed for decades, so today we have advanced models that go beyond profitability or demographics, taking into account a number of parameters such as lifestyle, social affiliation, cultural determinants and the like.

CRM philosophy has set new standards for the segmentation. Its purpose is to recognize the most profitable or potentially profitable customers, adjust the value proposal to their profile, keep them as customers and create long-term (profitable) relations. The tendency is to use advanced technology to make interactions with customers as close as possible to their most positive expectations under a reasonable cost for the organization. The usual number of customer segments in an average organization is less than 10. It is easy to conclude that the communication strategy based on 10 groups from a large customer base is nothing less than a compromise. At the bottom line, such marketing strategies, especially those based on profitability segments, are reduced to the most profitable, or even just the wealthiest customers. Often the maximum achieved is differentiation model where those get a better service levels (better response, higher quality,…).

Organizations that where pioneers in using technology for accessing large customer base, have often emphasized their ability to show the names of visitors of their web sites and outbound e-mail messages as personalization. Most often, they where able only to simulate the classic “Dear George” message, which would be followed by content, usually not adapted to the message recipient. Despite the trend to call this ability personalization, use of term personification would have been much more suitable for this capability to address the message recipient by his or her name.

Personalization is a higher degree of content customization within marketing communication. It is dominant within advanced CRM oriented organizations today. Personalized message contains customized content, in addition to the simple addressing the one to which it was intended. There are more organizational and technological ways to solve “recognizing” specific user affiliations towards certain content or his/her eligibility for a particular marketing proposal. The most common, and also the easiest way to identify user preferences are different customer query forms put as part of a contract or a form that would allow access to a protected part of the company’s web site. The customer should be provided by opportunity to express his/her area of interest and communication preferences.

Such inquiries are known as permission-based marketing. The additional information collected allows classification of the customer into one of the segments defined within the organization. Additional data are gathered from the transactional history. From technological perspective, the more demanding part is later processing of customer information for the purpose of classification into segments defined within company’s marketing strategy, and further splitting within sub segments that mark propensity to buy certain products or services. For this purpose, different tools are used to search databases, analyze the stored data and predict future patterns of customer behavior. These tools and methods are database query, OLAP and data mining, known under common name of business intelligence (BI).

Advanced CRM organizations today, usually combine interest areas and preferred channels chosen by the customer with the segmentation parameters from available relevant customer data. Targeted marketing campaigns are conducted by additional selection of potential members from one or more segments by using advanced BI processing.

Dynamic micro-segmentation

The goal of a CRM strategy would be to adapt the business to the customer in an efficient and effective manner. Ultimately, this means that customer’s experience would be marked by an unexpected match of approach, communication, offer and service, still preserving the organization’s business objectives. How to achieve such combination? Organizations that have developed their businesses to the level of personalization filter large customer bases through different BI processes, using combinations of the mentioned parameters, to mark those most suitable for a specific offer or message. Such process is based on visible customer attributes (e.g. demographics) and historical behavior, disregarding the current behavior.

BI tools serve to recognize the potential behavior (e.g. purchase decision) of a targeted customer group, marked by some common features, based on the behavior of a test group or an existing (returning) customer group. Limits of personalization, such as too large segments and research on a case by case basis will be eliminated in the next stage of CRM evolution – the dynamic micro-segmentation. The prerequisite to the dynamic micro-segmentation is large amount of data about a particular customer combined with patterns gathered from a wide customer base. The quality and nature of the customer data is such that it is impossible to collect it through the traditional market research. The only way is to systematically gather information about user behavior during their interactions with the company. It is obvious that this phase of development of relationships with customers is intended only to “mature” CRM companies, i.e. to those that have a long lasting history of processing and storing of customer data.

Remark: to this view from “2002 perspective”, we could add today (2010) that “mature” CRM companies are those that are able to leverage data collection through different means of Web 2.0. as well.

George’s satisfaction

So, what is it all about? The simplest example of a dynamic micro-segmentation will be described on a case of a client of a bank calling its customer care call center. By calling the bank’s toll-free number, the client is greeted by the latest generation of IVR system, with the automated announcement: “Dear Mr. George (Oh, no. Dear George again! 😉 ), we noticed that you where searching for information on housing loans on our web site. Do you want us route you to our credit department or you would like to choose an other service? “. If the user chooses to be routed to the credit department, not only will the system do so, but the clerk receiving the call will be automatically noticed on his screen about George’s solvency and previous credit obligations. And that’s not all. The screen will show the best possible offer for Mr. George: loan repayment period in accordance with his income, and previous habits. This is just an imaginary example, similar to the many that customers of mature CRM organizations are already starting to experience. These organizations are equipped with modern technologies that enable such data processing and managing customer interactions.

Of course, implementing and managing such processes it’s not that simple. Considerable efforts of the organization are needed on the field of data integration from various sources and automation of background processes with systems that participate in customer interactions. A CRM organization in a mature stage will assure the same level of personalization through other channels as well, such as call centers or traditional “brick and mortar” offices.

Some analysts, one of them is Eric Schmitt of Forrester Research, believe that in the future the winning strategy of the majority of CRM organizations will rely on segmentation based on the traditional 10 segments instead of the infinite number of dynamic micro-segments. Schmitt believes that the advanced personalization, which may be based on a very large set of rules, is too complex for most ordinary mortals. Indeed you will not be able to achieve a level of dynamic personalization by a simple business decision. The maturity of business processes, data collection methods and information resources are required. Management understanding and tradition in collection and processing of customer data have no less importance. So why wait? Start today with the systematic collection of information about your customers and their behavior. Get ready for tomorrow’s real time market segmentation.