Finding new growth opportunities

One Size Fits All. Batch & Blast. Spray & Pray. Plainly said, sending the same message to all contacts at the same time. Publicly it’s taboo but privately few marketers and store owners have a solid enough understanding of who their customers are to do anything different. Tracking buyer preferences, needs, and behavioral patterns gets increasingly complex once a brand begins to service hundreds of customers at a time. In today’s competitive online landscape consumers are inundated with ads across social, print, display, and email causing a general apathy. For a brand to grow, it needs to give consumers a reason to pay attention and continually engage. The obvious answer is personalized messaging that is tailored to a consumers individual needs., Unfortunately, how to do that is not so obvious. 

Customer segmentation allows you to tackle both challenges at once. By segmenting your customers, you can begin to uncover the differences between them then use those differences to speak to them in a more receptive manner.

What is Customer Segmentation?

Bain & Company defines Customer Segmentation as “the subdivision of a market into discrete customer groups that share similar characteristics.” In layman’s terms, the separation of your customer base in groups with similar behaviors and preferences. The most common ways for a business to segment its customers are: 

  • Demographic information – gender, age, marriage status, income, occupation, education, and income.
  • Geographical information – city, state, country, zip code.
  • Behavioral patterns – purchase history, engagement history, expressed desired benefits. 

Although these are the most common ways to segment, brands can use whatever data they have to form distinct groups.

 

A brand cannot be all things to all consumers, and it shouldn’t try. Customer segmentation gives a brand the ability to send the right message to the right customer at the right time. It won’t start off as being right, but unique segments will respond in unique ways. Marketers will adjust and over time, there will be a consistent offer, CTA, and messaging strategy that takes the guesswork out of new campaign development.  

Why is Customer Segmentation Important?

Segmenting your customers will reveal your core audience, the customers that are most engaged with your brand. Once identified, brands can fine tune their messaging and product offering to fit the needs of that segment. This focus allows a brand to prioritize resource allocation to extract the highest value from all segments while addressing the needs of underserved groups. As a result, brands get higher ROI from marketing and pricing strategies by using what they know about their segments to acquire more high value core customers.

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How do you implement a Customer Segmentation strategy?

All segmentation strategies start with data. Any online business that has customers has their first, and arguably most important, data set, customer purchase history. If you have sent out any emails then you have your second data set, email engagement history. Rather than diving headfirst into a black box machine learning algorithm provided by an expensive software, work your way into it. The quickest way to fail in your efforts is to overcomplicate things. Start by choosing a single key metric such as customer lifetime revenue or email opens.

  • Which customers have spent at least $300 with us? Which have not?
  • Which contacts have opened my last 5 emails? Which have not?

 

The metric you choose will be your differentiation factor for marketing strategies. Reward your high spending customers with exclusive offers such as the first chance to purchase new product lines or offer expedited shipping for the price of standard shipping. Encourage lower value customers with discounts or free shipping to encourage additional purchases. Measure the results of your different marketing tactics and iterate based on the learning. Once you have formed the habit of simple segmentation, it is time to segment your customer base further.

 

The RFM Framework is a segmentation method used to identify groups of high value customers based on purchase behavior that data driven marketers have used with success since the 1930’s. The acronym stands for Recency, Frequency, and Monetary.

  • Recency – the time in weeks, months, or days since a customer has made a value-add interaction with the business.
  • Frequency – the total number of the customer’s value-add interactions with the business.
  • Monetary – the value of those interactions with the business.

 

The framework is grounded in three guiding principles. The more recently someone has engaged with the business, the more likely they are to do it again. The more frequently someone has engaged with the business, the more likely they are to do it again. The more monetary value someone has created through their purchases, the more likely they are to continue to purchase. RFM can be extended to almost any trackable action. For example, recency can be the time since last page view or website visit while frequency being the total number of views/visits.

RFM and the Ecommerce Customer Lifecycle

The most common use of the RFM framework is to identify customers at various points of their lifecycle based on the value they create for a business. Although this can be done manually, there is software that can short cut the process while still remaining accessible for budget conscious merchants. The framework can be applied in numerous ways, but all seek to identify high value customers inside the customer base. A great way of looking at your customer base would be:

  1. New Customers

    These customers have completed one purchase with the business most recently. The goal for this segment is always to nurture them into repeat purchases. Since they are brand new to the business, they need to be educated on the brand values and everything that it has to offer. Make them feel like their voice is valued early on by getting feedback on their purchase. A common way to weave this together is a New Customer Welcome Campaign spread out over 4-6 weeks following their first purchase.


  2. Promising Customers

    Not all New Customers will make a repeat purchase but those that do become Promising Customers. This segment shows the initial signs of becoming high value customers but there is still a high chance for them to churn. Keep these customers engaged with your brand by paying attention to their buying behavior. Provide coupons for those that need an extra push while promoting the products that produce the highest customer satisfaction across your full customer-base. Use a variety of tactics so that customers in this segment begin to self-select into a more specific segment. From here, customers usually split into the next two segments.

     

  3. Loyal Customers
    Customers in this segment don’t spend the most but they purchase on a regular basis. These customers have established a buying habit and despite the modest monetary value, there is still a lot of brand value to be extracted. These customers will respond well to requests for testimonials, reviews, and product feedback. For some brands developing a loyalty rewards program to keep these customers engaged is a great tactic. Mixing with the loyalty rewards program or a tactic by itself is a steady stream of product recommendations including new product launches and back in stock notifications. This segment will make up the bulk of any referral program that you put in place. Maintain their loyalty by staying consistent with the quality of the product and customer service.

  4. Big Spending Customers
    Unlike the Loyal Customers, Big Spenders do not always make regular purchases but when they do make a purchase, they spend the most. Do not drive these customers away with constant communications. Take note of their average days between orders to keep them on a messaging schedule that is just enough to keep them engaged, and increase your message frequency as their expected repurchase date approaches Given that these customers have already shown a high propensity to spend, do not waste margin on discounts. Focus on cross-sell/up-sell of highly rated products. If you have luxury/premium versions of your products, this would be the segment you market them to. Keep this segment satisfied by matching quality with price and giving them a good reason to continue to spend at levels they have.

  5. Champions
    Champions are your core customer segment, these customers have the highest lifetime value. They are a combination of customers that have spent the most on a few orders and those that have purchased most frequently. Understanding the motivations and buying habits behind this segment is well worth the effort. This segment can impact your messaging and outreach strategies while guiding your nurture tactics. Often these customers won’t need a discount to purchase and will respond favorably to your promotions. A way to reward them for the value they provide would be a VIP program which doesn’t have to be complicated.

Besides uncovering the current and potential high value customers, Customer Segmentation also reveals points of concern in your customer base (like in this article about New Customer segmentation). Some of these customers can still be acted on, moving them to the one of segments above, but others should be referenced as areas for future improvements

  1. Drifting
    Customers who were part of the previously mentioned segments that have passed the normal repurchase timeframe have started to drift. These customers are not a churn risk just yet, so this is not the time for aggressive win back strategies. Rather, depending on their main segment, re-engage Drifting customers with relevant product recommendations and social proof to keep your brand top of mind. There is still an opportunity to bring these customers back into the fold without losing margin to discounting.

  2. Churn Risk
    At this point, customers are quite a ways past their optimum repurchase timeframe and they have not responded to the previous engagement tactics. Marketers should keep the communication frequency low but consistent. Remove these customers from all other automated campaigns besides your Win Back campaign and send no more than 1 email a week. The obvious goal is to make a repurchase, but these customers may not see your brand in a favorable light, so you do not want to cause them to ‘Unsubscribe from All Communications’. Combine a variety of tactics such as surveys, ‘We Miss You’ emails, and time boxed coupons. Some merchants take the direct route and ask the customer why they have not purchased in a while.

  3. Lost and Low Value
    Despite your best efforts and offers, you won’t retain all your customers, nor will you attract 100% high value customers. For the most part, this segment of customers should be used to focus your efforts elsewhere. Lost customers should be left to the automated newsletter list and low value customers should ultimately be removed from your mailings. A good practice is to use the list of low value customers as an exclusion parameter for new customer targeting. Some non-monetary value this segment can provide is product learning. Give these customers some incentive so they can tell you why they stopped purchasing and what you can do to improve your offerings.

There are many ways to segment your customers at varying difficulty levels. Using the RFM framework and focusing on these groups in your customer base is a great head start for anyone looking to be more data driven in their marketing approach. If you're short on knowhow or time, there are tools like SegLogic that will do the heavy lifting for you. It will automatically generate segments from your customer base and then sync them to your marketing platform for immediate action.

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Optimizing your Customer Lifecycle

Segmenting your customers is more than just a tactic for understanding your customers better, it is the foundation for scaling your customer marketing program. You have the potential to reach millions of people across the world, and will never be able to scale 1 to 1 communication. Take your deeper understanding of the segments and form a system of automated campaigns that will constantly communicate with your customers. As always, start simple and as your bandwidth and/or resources increase, invest in more complex systems.

The segments described above form a general customer lifecycle. Prospects become New Customers. With proper nurture, New Customers become Promising. After self-selecting, Promising Customers become Loyalists or Big Spenders, and then ultimately achieve the revered Champions status. Along the way customers drift, churn, and turn out to be a poor fit for the brand. For those that need a bit of inspiration for setting up their initial system, some tactics are as follows:

  1. Prospects to New Customers
    1. 3 touch Abandoned Cart Campaign with expiring coupon code
    2. Short/Long Term Lead Nurture Campaign
    3. New Subscriber Welcome Series
    4. Dynamic Retargeting Ads on Social and Display Networks
    5. Onsite popup promotions
  2. Convert New Customers to Promising Customers
    1. 3 touch Abandoned Cart Campaign with expiring coupon code
    2. Dynamic Retargeting Ads on Social and Display Networks
    3. Product Specific Post Purchase Welcome Series with Product Recommendations
    4. Newsletters with new product announcements
  3. Retain Promising Customers and move them to either Loyal or Big Spender
    1. Product Specific Post Purchase Email Series
    2. Newsletters with new product announcements
    3. 3 touch Abandoned Cart Campaign with expiring coupon code
    4. Seasonal Promotions
  4. Retain Loyal and Big Spender Customer while nurturing them into Champions
    1. Product Specific Post Purchase Email Series
    2. Newsletters with new product announcements
    3. 3 touch Abandoned Cart Campaign with expiring coupon code
    4. Seasonal Promotions
    5. Dynamic Retargeting Ads on Social and Display Networks
    6. Loyalty and VIP Rewards Programs
    7. Segment Specific Coupon Offers
  5. Reengage Drifting Customers
    1. ‘We Miss You’ campaigns
    2. Repurchase Reminders
    3. ‘How Can We Help?’ feedback surveys
    4. Dynamic Retargeting Ads on Social and Display Networks
  6. Recover Churn Risk Customers
    1. Win-back campaigns with expiring coupons
    2. Abandoned Cart campaigns with Winback coupon offers
    3. Dynamic Retargeting Ads on Social and Display Networks
    4. New Product Line Announcements
    5. Segment Specific Offers such as free upgrade to expedited shipping

Take advantage of the power of data driven segmentation today

Customer Segmentation can impact every touchpoint in your business. It’ll focus your efforts around your customer’s journey and providing value at the right time. Although you can go about it on your own using the tactics written today, there’s a better way to start growing with our Free Customer Journey Analysis.

 

 

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