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 or store owners have a solid enough understanding their customer base to do anything different. Tracking buyer preferences, needs, and behavioral patterns gets increasingly complex once a business begins to service hundreds of customers at a time. To add to the complexity, consumers are inundated with ads across social, print, display, and email causing a general apathy for what new businesses have to say. To break through the noise, businesses need to give consumers a reason to pay attention by providing the value that they’re looking for. Not only in the checkout process but across the complete customer experience. 

The answer businesses hear the most is personalize, personalize, personalize but true personalization engines are often out the reach of businesses just getting started or with tight budgets. Regardless of the business’ constraints, the fact is personalized interactions convert better. In the customer cultivation methodology, we discuss the benefits of providing a personalized customizer experience. By personalized, we aren’t referring to using the consumers first name in the intro. We’re referring to messaging that takes into account the consumers interests and buying behaviors. In 

Fortunately every business has access to one data source that they can use to begin their personalization journey, the purchase history. Using the purchase history, businesses can get started with customer segmentation. Segmenting customers by their purchase behaviors provides a simple way of getting tremendous value from your personalization strategy without investing a large amount of time and energy.

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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, businesses can use whatever data they have to form distinct groups while beginning with purchase history.

A business cannot be all things to all consumers, and it shouldn’t try. Customer segmentation gives you 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.  

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Why is Customer Segmentation Important?

Segmenting your customers will reveal your core customer base, the customers that are most engaged with your brand. Once identified, businesses can fine tune their messaging and product offering to fit the needs of their core customer base. Business can then focus on getting the most customers purchasing consistently at their preferred level while addressing the needs of potential core customers. As a result, businesses get higher ROI from marketing and pricing strategies by using what they know about their segments to acquire more high value core customers.

How do you implement a Customer Segmentation strategy?

All segmentation strategies start with data. Like we spoke about earlier any online business that has customers has their first data set, the 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 core 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 to 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.

If your business is ready to dig deeper, you can perform a buying behavior analysis. In buying behavior analysis, you use compare your customers’ individual behavior to the rest of the population to determine your business is performing as a whole. The analysis can show you how well you’re attracting and retaining high value core customers, if there are gaps in your cultivation strategy, and if you have areas of revenue concentration. Even if you’re not ready for the complete analysis, getting a free customer segmentation report will jumpstart your efforts.

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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. The framework can be applied in numerous ways, but all seek to identify high value customers inside the customer base. With the right segmentation, you can implement various customer cultivation strategies to customers at various levels to make sure they have a great experience. A great way of looking at customer cultivation strategies for various segments in the lifecycle is:

Non-Core Customers

  • Low Value - Lost customers with one purchase of a low order value. Despite your best efforts and offers, not all your customers will be a good fit for a long term relationship. These customers might have come from really good promo or found something on your clearance rack. Regardless, they generally aren’t worth effort beyond good customer service. 

Potential Core Customers

  • New Customers - First time buyers with a normal order value. You have one chance to make a great first impression. Something most businesses don’t think about is doing a New Customer Onboarding campaign. Not a new customer welcome, which generally consists of an introduction, follow us on social, and take 10% off your next order, but an onboarding. We’ll expand on that later.
  • Promising - Customers who have recently become repeat buyers. Many businesses consider it a success once they’ve gotten a second order from a customer but we challenge businesses to go further. In reality, customers in your core look quite different from the promising customers. Your onboarding campaign often carries your customer from new into promising so be sure to give them a great experience at all other touchpoints. Exclude them from other automations while they’re enrolled in onboarding so the brand value messaging isn’t diluted by other promos.

Core Customers

  • Loyalists - Customers who spend normal amounts on a regular basis. 
  • Big Spenders - Customers who spend the most on each order.
  • Champions - Customers who have spent the most and most often.

Getting your customers in anyone of these segments is your goal. Not everyone will be a champion, and from our experience, champions are often less than 5% of your business. Taking customer cultivation approach, rather than trying to squeeze every penny out of every customer, focus on getting the most customers purchasing consistently at their preferred level. Your customer base is where you’ll focus the bulk of your marketing efforts to ensure you are keeping a healthy core customer percentage. There are a number of tactics you can use to keep this segment engaged and one of the most effective is a customer loyalty program. Your customer loyalty program should go beyond points for purchases. Show that you value more than these customers money by encouraging engagement. Reward points for social follows & shares, customer referrals, feedback, just because it’s Tuesday. With everyone trying to compete for consumer attention, you’ve got to make your program a joy to be part of. 

After the number of orders and the value of orders, the third component in the RFM framework is the recency of the purchase. Recency relates most closely to retention which most merchants view a single metric, customers are either active or lost. A more accurate way to is to place your customers on a retention spectrum which gives more chances to act before you customers are lost. The retention spectrum consists of active, drifting, churn risk, and lost. 

  • Active - Customers who have purchased more recently in the spectrum. In general, you want to keep your customers active. Some of the best ecommerce businesses do this by leading value for the customer rather than constant purchase pressure. Value takes the form of content around using your products, educational videos about the industry you’re in, creating a community around your brand. Anything that helps your customer feel like they’re getting more from your brand than product purchases. Aim to make the customer feel like they’re getting 10x what they’re spending.
  • Drifting - Customers who have purchased recently enough to be still aware of your brand but have fallen out of the active bucket. As your customers begin to drift, it isn’t time to panic. Little nudges such as content or product recommendations work well here. The goal is to drive them back to the website to reminded of your value and make the next purchase. 
  • Churn Risk - Customers who have purchased quite a while ago and are losing touch with your brand. At this point, most brands introduce discounting or point bonuses in their loyalty programs. Here you will recognize the “We Miss You!” emails or “We haven’t seen you in a while”. I’d recommend a steady messaging at a low frequency culminating in a time boxed offer. Experiment with what converts the most customers by balancing margin with how aggressive you are on the discount. A word of caution for the customers in this segment, you don’t want to create the habit of only purchasing at a discount. Completely a business decision but many let customers churn after a set numbers of customer churn winbacks. 
  • Lost - Customers that purchased the furthest away from active in your time frame and will need a lot of incentive to reconvert. Lost customers are somewhat of a polarizing segment. Some businesses like to give a hail mary discount in a last ditch effort to recover the customer. Many others, like to leave lost customers alone considering there are three levels of retention messaging before they reach lost. If things are set up correctly, customers who reach lost are genuinely, lost.

There are many ways to segment your customers at varying difficulty levels. Using the RFM framework oriented around your customer’s buying behavior is a great head start for anyone looking to be more data driven in their marketing approach. As you get more bandwidth, you can begin to splice in more details such as website activity and demographic data to create more specific segments for unique promos. 

Although this can be done manually there is software, such as SegLogic, that can short cut the process while still remaining accessible for budget conscious merchants. SegLogic dynamically generate segments from your customer base and then sync them to your marketing platform for immediate action. 

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Segmentation in your Customer Cultivation Strategy

Segmenting your customers is more than just a tactic for understanding your customers better, it is a foundation for scaling your customer cultivation strategy. A core tenant of customer cultivation is ensuring that your prospects and customers get the value they’re seeking from your business. Your various segments will show you the value their seeking if you take the time to look. Take your deeper understanding of the segments and use it to guide your marketing automation plans. Create different versions of your campaigns based on the segmentation. 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 a continued great customer experience, Promising Customers become Loyalists or Big Spenders. Ultimately some achieve the revered Champions status while others remain valuable as Loyalists or Big Spenders. 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 customer segmentation today

Every marketing blog will tell you that you need to segment your list. Customer Segmentation will have a massive impact  on every touchpoint in your business. Even basic segmentation will give you a better understanding of who your customers so that you can use that understanding to better deliver value to them. While these general suggestions can give you a major boost, getting a strategy tailored specifically to you will change the way to do business and ignite growth. The buying behavior analysis provides you with a deep understanding of your customers and leaves you with a detailed customer cultivation strategy that will help you grow your core customer base. It starts with a free customer segmentation report where you’ll get a view of how your customers distributed across the lifecycle and the retention spectrum.

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