Customer Segmentation

All world is not your customer! It is very important for any organization to identify different groups of their customers to target with specific products or services and meet their needs better. This exercise helps companies go deeper into the lives of their customers and give them more and more personalized treatment.

Segmentation is a mix of science and art. The reason behind the failure of most of the segmentation exercises is that the derived segments are not actionable for business. Hence it is very important to carefully study the segments and calibrate them so that they can be used in respective business environment.

There are four major ways to segmenting customers –

1. A Priori Segmentation:

A-priori (pre-existing) segments are the most basic way of creating market segments. In A-priori segmentation, the market is split according to pre-existing demographic criteria such as age, sex or social economic status. A priori segmentations are very simple to apply and use but even the most sophisticated A priori segmentations are quite crude.

2. Usage Segmentation:

Usage Segmentation is also known as Decile Analysis or Pareto Analysis. This analysis can be either conducted on the weight of use (heavy vs. light users) or on the time and place of use (same users but in different preferences at different time). This segmentation can be easily carried out and extremely helpful in focusing activity based on value to business. This focusing of market activity on groups that are similar to heavy users gives rise to measures such as "uplift" - the improvement possible over a purely random approach.

3. Attitudinal Segmentation:

This segmentation usually complements usage studies to understand commonalities in attitudes and opinion for different group of customers. To understand how attitudes affect purchase statistical techniques such as "cluster analysis" are used where people with similar attitudes are combined together. This information can then be used to target groups by what they think and how they feel, rather than just who they are. This is particularly valuable in determining branding strategies and keeping a brand in tune with consumers.

4. Need Based Segmentation:

Most needs-based segmentation uses Conjoint Analysis to split a category into different levels of functional performance (see Conjoint Design). By understanding what elements are key drivers for individuals, specific needs and requirements can be identified from the trade-offs that each person makes.Needs based segments are typically the most actionable forms of segments as you know what drivers and performance the product or service has to satisfy. These are normally more stable than attitudinal groups as they should directly reflect and predict existing market share.

Knowledge Excel Services has helped a big Retail Company see the uplift of 20% in their customer acquisition by targeting customers based on their usage and attitudes

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