Welcome back to our three-part series on Data-Driven Customer Experience (CX) Transformation. In Part 1, we outlined how a master data management (MDM) solution is critical to understanding a holistic view of your customer.

But now that you have a master list of all your customers, what’s next?

Insight-driven organizations (IDOs) dig deeper and profile their customers using customer segmentation.

Segmentation (breaking up your customer base into smaller groups that are similar in particular ways) has long been a staple of corporate marketing departments. Using demographic data and other information, marketers create segments of potential customers who are likely to respond to marketing efforts in a certain way.

But in recent years, many organizations have realized the value of segmenting their current customers. Creating customer segments is particularly important for organizations focused on transforming the customer experience. Before you can map the customer journey and start changing your operations, you’ve first got to figure out how many different types of customers you have. If you identify 4 key customer segments, you have 4 customer journeys to map!

Segment with the end in mind

While segmentation is ultimately a data exercise that will be tackled by your business intelligence (BI) or IT group, the most important part of segmentation is defining the business need for segmentation and designing an appropriate methodology for that business need. In other words, what are you going to do with the segmentation, and based on that, what factors do you need to include in your segmentation model?

In our work helping organizations transform their customer experience, we’ve seen dozens of segmentation strategies. But the most successful CX programs typically leverage one of the following three segmentation methodologies (or a hybrid):

Profitability-Focused Segmentation breaks down your customer base into smaller segments based on profitability per customer. In other words, how much revenue is the customer generating and how much cost is attributed to that customer?

Figuring out the revenue part is fairly easy: sum up the product or service fees the customer is paying over a given period of time. But calculating the cost component can be more challenging. In addition to any cost of goods sold, you’ll have to figure out what portion of your operating costs are tied to that customer. For example, is the customer calling your customer service center often? Do they require in-home technician visits? Are they routinely failing to pay their bill? All of these factors will affect a customer’s profitability.

Profitability-focused segmentation gives you a clear picture of your best and worst customers from a financial perspective and allows you to focus your efforts on attracting and retaining those high value targets through customer-focused product and service development as well as a differentiated customer service model.

Churn-Focused Segmentation looks at customer churn risk factors. Instead of looking at how much profit the customer is generating, you look for certain events or characteristics that may signal the customer is thinking about canceling their product or service.

In subscription-based service models (think telecom and utilities), these churn indicators may be the number of times a customer has called in a given week or the number of times their product has required repair. If a customer has called your billing or repair department 10 times in a week, they’re probably not satisfied!

From a CX perspective, segmenting your customers based on these churn indicators allows you to differentiate the way you treat your most at-risk customers (expedited repair service, special offers, etc.). These insights can be used to automate alerts to the call center. A customer care representation can now be aware of the customer’s mindset and tip them off to demonstrate additional empathy to the caller (“I’m so sorry you’ve had to call in so many times this week”).

Customer Type Segmentation may be the hardest type of segmentation to execute, but the most valuable if you get it right. In his book, What Customers Crave: How to Create Relevant and Memorable Experiences at Every Touchpoint, CX expert Nicholas J. Webb champions the concept of customer type segmentation. This approach groups customers based on what they love and what they hate vs. demographic or profitability data.

Imagine you’re the store manager for a technology company and you try using traditional methods to segment a group of ten middle-aged white males. It’s likely all ten would end up in the same bucket, and you’d be tempted to create a one-size-fits-all customer experience for the group. But that’s an old-world approach in this new world of customer-centric thinking.

If you follow Webb’s advice and get to know those ten people based on what they love and what they hate (customer type segmentation), you’d see something far different:

  • 3 customers may be eager to spend hours in your store trying out the latest gadgets; we’ll call them our “Techy” segment.
  • 4 customers may be busy working professionals who want speedy service without all the frills; let’s call them “Corporate.”
  • The remaining 3 customers may be focused just on cost; we’ll call them “Thrifty.”

With these three segments clearly defined, you can create relevant and memorable interactions for each one. Whether Techy, Corporate, or Thrifty walks in the door, you’ll have an experience tailored to their buying journey.

Southwest Airlines is a great example of a company using customer type segmentation to build an incredible customer experience. On every flight, they’re delivering specific, relevant experiences for frequent flyers (priority boarding, Wi-Fi), families (low fares, family boarding), and casual travelers (free TV, snacks, and drinks). While this type of segmentation can’t be easily achieved by mining your data (you actually have to talk to your customers!), it can be a powerful tool in your efforts to differentiate based on the customer experience. If you do it right, you’ll be flying high just like Southwest!

No matter which segmentation model you choose, invest the time up front to define your business need for segmentation and think through the various ways you’ll integrate segmentation into your CX strategy. Understanding why you’re segmenting your customers will help you pick the right strategy and guide the implementation of your segmentation solution.

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