Customer segmentation entails grouping customers based on common specific characteristics. It is an essential role for anyone responsible for identifying new market opportunities or for anyone responsible for customer acquisition and retention. While we know segmentation can be very helpful, many of us haven’t invested the time and effort to identify the variables and collect the data needed to do segmentation well. However, segmentation plays a critical role in uncovering trends in sales cycles and purchasing patterns.

Create a Customer Segmentation Schema

Customers are the lifeblood of any business but not all customers are created equal. It is not uncommon for companies to learn that 80% of their business is coming from just 20% of their customers. Knowing who these are and profiling them can be very helpful in serving them and finding more customers who are similar to this group.

Traditional approaches to segmentation include using attributes such as industry, revenue or size, geographic location, and growth rate. Needs-based segmentation is another approach.  Hence the importance of creating a customer segmentation schema depends on quality data.

To create segments you will need data that answers these kinds of questions:

• What are the common demographics among your most profitable customers? Is it age, title, or industry?
• How recently have your best customers purchased?
• How frequently do your best customers purchase?
• How much do your best customers purchase?
• What products/services are the profitable customers using? How often (what is the buying cycle)?
• How are the profitable customers using your product/service? What problem are they solving with it?
• Who else did they consider buying the product/service from? Why didn’t they buy from them? Why did they buy from you?
• What else are these customers buying and how are they buying them (direct, indirect, systems integrator, VAR, etc?)
• What prices are they willing to pay?
• What are the common complaints from your best customers regarding your product and other products they use?
• What is their typical spending and budget for products such as yours?
• What kind of adopter of new products are they (early adopter vs. laggard)?
• How hard or easy is it for them to substitute products?
• What is the depth of your experience/relationships in their industry?

The answers to these questions help you determine what constitutes a good customer, and craft segments and will impact your pricing, positioning, and packaging strategies.

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How do You Acquire the Data?

When it comes to understanding budget you may be able to use data from your win/loss analysis or insights gleaned from conversations with the sales organization. For example, the sales team usually captures information about spending budgets and signature authority. Combine this information with the title, industry, and size of the deal and you can probably estimate the actual budget.

Consider adding some questions to your customer surveys regarding the last major product adoption and when they made the last upgrade for this product. This will reveal information about their technology adoption rate and their buying cycles.

A company’s SEC 10-K filing can provide great insight into an organization’s purchasing process. The Form 10-K provides a comprehensive overview of the company’s business and financial condition. It provides a structured breakdown and the Business, Risk Factors, Market and Management’s Discussion sections in the document will yield valuable insight. For example, a company that is focused on cost reductions and business efficiency will talk about money saved in operations whereas innovation-focused companies will tout the number of patents and R&D investment and growth.

Now that you have the data, how do you build a model? We have found that it is helpful to start with two dimensions: value and fit.

The Value Dimension of Your Model

Value is a bit different than just sales revenue, which is why we discourage segmentation schemas designed specifically around revenue, a common approach used by sales-centric organizations to create a customer pyramid. Value is determined by the net present value of a customer’s expected stream of future contribution. Generally, this is determined by quantifying and calculating a customer’s lifetime value.

Value takes into account not only revenue and profit but also the impact of the customer on their and others’ future purchases, their share of wallet, as well as your overall cost to service over time. We hope one of the reasons you are developing a customer segmentation schema is to ascertain which customers to invest in and which customers you can capture more business from as a result of changes you make in your marketing mix (product/service, price, promotion, place, etc.) and service. Once you understand the customer’s needs, your goal is to develop and deploy strategies to impact the customer’s future behavior. Be forewarned, that calculating customer lifetime value can be a bit tricky.

The Fit Dimension of Your Model

The second attribute needed to segment customers is based on fit. Fit considers a variety of factors, such as, how well the customer’s needs and wants match up with your capabilities, how well the customer’s business processes match up with yours, and/or how the customer’s buying criteria fit to name a few. As you can see, fit is about much more than demographics. There are many dimensions of fit so you will have to do some homework. What you trying to understand with this attribute are the different reasons customers buy the category and buy from you so you can have a clear view of the customer’s actual needs and motivations.

With these two attributes, you can build a needs-based market-centric customer segmentation model. By deploying the model you will be able to segment your customers and develop appropriate strategies for each customer group. Ultimately, you will have different strategies for each group designed to be relevant to that group as well as improve the profitability associated with the group. By zeroing in on the profitability and growth potential of each customer, you will be managing your customer base just like any other income-producing financial asset of the organization.

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