Segmentation on a Shoestring

Rob O’Regan -- Expert Business Source, 3/19/2007 3:34:00 AM

Customer segmentation may strike small business owners as one of those “perfect world” strategies – as in, in a perfect world I would have the time and energy to learn more about my customers so I can earn more of their business.

Unfortunately, the real world and the perfect world are often, well, worlds apart. But that should not deter owners from exploring ways to segment their customers. The payoff could be worth it.

“Any company of any size should at least be sensitive to customer segmentation,” says Michael Greenberg, vice president of marketing at Loyalty Lab, a San Francisco-based developer of customer loyalty programs for the retail industry. “The 80/20 rule is alive and well in the retail space.”

In other words, it’s very likely that 80 percent of your business comes from 20 percent of your customers. “Segmentation is key to understanding where your profits are coming from,” says Greenberg.

And the key to good segmentation is collecting the right information at the point of sale. Greenberg offers these tips:

Decide what you want to learn. Look at your business and the things that will help you understand the differences among your customers. Do they have kids? Do they work? Are they local? How often do they come into your store?

Typically, you will have one of three objectives in mind: Increase a customer’s frequency, increase the volume of each transaction, or increase retention. Understanding which of these behaviors you can influence the most is an important first step.

Determine what you need to collect. During a transaction, you want to collect the person’s name, postal and email addresses, and some sort of tracker for the items purchased. “This will allow you to do direct mail or e-mail promotions for special customers, and you can segment accordingly,” says Greenberg.

The goal is to create a unique identifier that will enable you to connect transactions to individual customers over time. “That’s really the most difficult step,” Greenberg says.

Don’t ask for too much. “There’s almost always a trade-off between the depth of data you’re collecting and the breadth of customers who will respond to your request,” says Greenberg.

There’s another trade-off as well: Is the data you capture worth the time it adds to the transaction? If your business depends on getting people in an out quickly – a coffee shop, for instance – slowing down the sale may hurt business more than the data you’re collecting helps it.

Once you’ve gathered the information, do something with it. “If you’re not going to use the data you’re collecting, you’ve wasted your time and effort,” says Greenberg.

Where to start? First, rank your customers from top to bottom in terms of dollar sales. Split them into equal groups, and then consider what’s different between the top 10 percent, the next 10 percent, and so on. Do they skew older, live closer or have higher incomes? “You can learn this stuff quickly with basic reporting tools,” Greenberg points out.

Typically, you can break the customer base into four main groups: top customers, next-best, casual and new customers. “The way you approach each group will be different,” says Greenberg. For example, because it’s often difficult to increase revenue from your top customers; it may be better to take steps to defend them against competitive threats.

If you’re comfortable that those top customers are relatively safe, it might make more economic sense to focus first on the next-best customers on your list. “They have the potential to be top customers but are still splitting their behavior with another competitor or some other option,” Greenberg explains.

For this segment, examining frequency patterns can turn up some useful insights. “If they come in every three weeks, look for ways to shorten that cycle,” says Greenberg. Sending them a coupon that expires in two weeks could entice them to come in more frequently – and might just turn those infrequent shoppers into your new best customers.

Rob O’Regan is a freelance writer based in Londonderry, N.H.