Moneymaking customer segmentation requires treating different segments differently. If different segments are treated the same, what is the point of having different segment Knowing why and how to treat each customer segment requires understanding of the potential in marketing data.
The most precious data for marketers is hidden in their own databases. The dilemma is that marketers may not know how to look at their own data to release the potential that will help them communicate more effectively with their customers and prospects.
Finding the right segmentation is half the challenge. The other half is knowing how to use them to improve profitability.
Here are 11 of the most valuable tips to improve customer segmentation to increase profitability. All of them won’t apply to any one company; but some of them apply at every company.
Segmentation Tip # 1: A re-mailing or re-contact can get 50 percent of the response of the initial contact.
Segments that are responding at break-even or above should be contacted more often, even if the communication is basically unchanged. A re-contact to top-performing segments is often the best way to utilize overrun materials.
Segmentation Tip # 2: Two-time buyers respond 40 percent to 60 percent better than one-time buyers. And three-time buyers respond 40 percent to 60 percent better than two-time buyers.
Customers who buy more frequently can be contacted more frequently. Their higher response may justify a more personalized means of communication, even when it’s more expensive. Not only that, but a re-contact to better buyers will likely out-perform an initial contact to marginal buyers, and substantially out-perform a prospecting effort.
Segmentation Tip # 3: Rule of Half – A segment of customers will drop in response by 50 percent each year they do not buy.
Typically, buyers who just made a purchase are twice as likely to respond to a new offer as buyers from one year ago. One-year-ago buyers are twice as likely to respond as two-year-ago buyers and so on. This explains why a smart marketer will contact new customers more often.
Segmentation Tip # 4: The biggest single segment in any database is usually onetime buyers of popular items.
Most marketers know that 50 percent to 60 percent of their customers are one-time buyers. What they do not know is that about half of them have bought only one of their leading items. This tends to be a huge group-one-quarter to one-third of the database. They are easily identified, and they are much harder to re-sell than one-time buyers who initially purchased more than one item. Hasing a strategy to deal with them is crucial to gaining more two-time buyers.
Segmentation Tip # 5: Buyers who spend a small amount on their initial purchase are likely to continue to spend less than average on future purchases.
The amount (per order) customers have spent in the past is usually an excellent indicator of how much they will spend (per order) in the future. Past average order size is often a better predictor than overall monetary value!
Segmentation Tip # 6: One-time buyers are more likely to buy again soon after their first purchase.
Some marketers are reluctant to follow up quickly with new buyers, perhaps thinking they won’t need anything for a while. Others leave gaps in their re-contact strategy for several months. Rarely do we see immediate re-contact not succeed. Better to communicate now, while the first sale is fresh, than to wait until the relationship with the customer is stale.
Segmentation Tip # 7: Sales per contact is a more important indicator than response rate.
This is true for two reasons. First, buyers who spend more are more likely to buy again. Second, buyers who spend more are likely to continue to spend more with each order in the future. Generally speaking, it is more profitable, now and in the future, to get one $100 buyer than to get two $50 buyers.
Segmentation Tip # 8: There is no relationship between acquisition cost in different media and the future value of customers acquired through different media.
Many marketers measure only acquisition cost and ignore lifetime value. But quite often there is a big gap in follow-up purchase behaviour between customers acquired through retail, catalogue, the Web, etc. Remember, profits come from repeat sales. Be sure that those who come from different media stay and become good customers. Do not assume customers from new media will behave the same as customers from older, tested media.
Segmentation Tip # 9: When selling to businesses and consumers, businesses typically have a higher acquisition cost, but also typically have a lifetime value eight to 10times higher than consumers.
Businesses are harder to gain as clients, but the pay-off can be much higher. Businesses spend more per purchase and are more loyal. Measure follow-up sales with businesses, not just acquisition cost. And mark customers as business or consumer.
Segmentation Tip # 10: “Best customers” are often heavy users and are not loyal to one supplier.
Marketers assume if a customer is buying a lot from them, she isn’t buying elsewhere. Quite often, this is not the case, and it spells opportunity. Rather than having bought all they can, quite often “best customers” can be easily convinced to buy more. Increasing “share of customer” with heavy users is often the cheapest and fastest way to boost sales.
Segmentation Tip #11: Buyers are not all alike. One company may appeal to very different buyer types.
Knowing about the “average customer” helps very little. There is no average customer. In fact, there is usually much greater difference in buyer segments within companies than between them. Typically, list and media selection (as well as creative) needs to be very different to reach each target group. There is rarely a single audience for any one company.
Dig into your database to find which of these secrets applies. Then change the way you communicate with different customer segments. It’s a sure way to increase profits!