In a prior post I discussed customer segmentation, a topic renowned for producing headaches and mild bouts of anxiety among even the sharpest of business people. The makers of Tylenol might want to consider becoming a sponsor for seminars on the topic; of course, providing free samples for those in need throughout.
In that earlier post I promised that I would discuss some of the ways in which segmentation can be used; in this post I'd like to talk about one such way - segmenting customers by profitability, and then using this knowledge to significantly improve your prospect targeting, and hence your ROI.
The concept behind segmenting your customers by profitability makes intuitive sense. Wouldn't you want to know which of your customers are providing you with your profits, and how to find prospects who look just like them?... wouldn't you also want to know which customers say adios to your service mere days after signing up for it - especially after you've spent so much effort & money acquiring them?
The friendship analogy
The analogy that always comes to mind when I think about this topic is that of friendships. Did you ever have a friend who would constantly borrow money from you and never pay you back? And, of course, whenever you needed a favor, he was nowhere to be found. My guess is that such a friend would likely not be the best man at your wedding, if he received an invitation at all.
On the opposite end of the spectrum we have the angelic friend. The friend who would give you the shirt off his back. The friend who carried you miles to the nearest hospital after you twisted your ankle during your annual camping trip.
To ask the obvious follow-up question, which of these two friends did you prefer? And, for future "friend-making", if you could buy a crystal ball that would allow you to discern "the angels" from "the moochers", would you purchase it? I know I would.
Bringing it full circle
Segmenting your customers by profitability, and using the insights to improve your prospect targeting is a lot like picking new friends.
When picking new friends you want to look for people who have the same qualities as those of of your closest, dearest friends (i.e., "the angels"). So too is the case with your prospect targeting - you want to target those prospects who share the same qualities as your most profitable customers (e.g., have similar information profiles in your database). And in addition, you want to limit or stop targeting those prospects who look like your unprofitable customers (i.e., "the moochers").
Plenty more on segmentation to come in future posts. Please feel free to email me if you have any questions or would be interested in discussing the topic in more detail.
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More posts on segmentation:
- Using the 5Ws for segmentation & marketing innovation
- Using segmentation to develop your marketing strategy
- What is customer segmentation?
Great books & articles on segmentation:
- Making Segmentation Work (PDF)
- Market Segmentation: How to do it, how to profit from it
- Counterintuitive Marketing: Achieve Great Results Using Uncommon Sense
(One of the best general marketing books with an excellent chapter on segmentation)
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