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THE ABILITY TO MARKET TO CUSTOMERS WITH DIFFERENT NEEDS, in different ways, requires what marketers call “House File Segmentation.” But what many marketers don’t realize is that house file segmentation isn’t so much a technique or a tool as it is the result of goals, strategy, and research all coming together. |
House file segmentation fits into a strategy to grow the customer base, increase loyalty and customer "spend". In some ways it drives the strategy. In other ways it reflects the strategy. For example, an organization whose goal is trying to grow rapidly would look more at lifetime value and future potential sales than an organization whose goal is to maximize cash flow today.
Using a database to create effective house file segmentation should help marketers answer basic questions such as:
- Who should be contacted?
- What offers are appropriate?
- Which customers are most valuable?
- When should contacts be made?
- Where are best customers coming from?
- Why are segments different?
- How should contacts be made?
Answering these basic questions and fitting house file segmentation together with strategy and goals demands understanding. For these reasons, a “black box” approach to scoring or ranking customers, no matter how statistically accurate, is not sufficient by itself.
Like great lines in a play, which don’t reduce the role of the actor but rather makes the actor more engaging, great research does not reduce the marketer’s role. Rather, it enhances it and allows the marketer to engage the customer more effectively.
Each basic question the marketer must answer has several components. Here is a “what to look for” guide for each of those questions:
WHO SHOULD BE CONTACTED?
For marketers to know who should be contacted, they need to be able to predict three basic behaviors:
- How likely is someone to respond?
- If they respond, how much are they likely to spend?
- Are they likely to continue to respond in the future?
As a general rule, $/name (how much was sold on average to each name contacted) is a better measure than response rate alone. It is a combination of #1 and #2 above, and marketers who measure results both by response rate and $/name tend to rely more heavily on $/name.
An understanding of Lifetime Value ("LTV") will help target customers and potential customers that may not be short-term winners but who will pay off in the long run even if response rates and $/name look sub-par in the short run.
WHAT OFFERS ARE LIKELY TO BE APPROPRIATE?
Constructing different offers for different segments requires understanding the needs and behaviors of each segment. It leads to testing and defines reasons to test different offers. Here are some of the questions marketers should be able to answer to have these “reasons to test”:
- Is the Average Order substantially different among segments? In other words, should buyers who have been spending $50 with each purchase get a different offer than buyers who have been spending $500 with each purchase?
- Are different segments buying different things? In other words, are “best buyers” simply buying expensive items, and “average” buyers buying cheaper items?
- Are different segments buying more types of things, while some buy only one or two things? In general, customers that buy a greater variety of things are more valuable.
Offers can then be fit to specific goals. If a segment is buying one item and loyal buyers are buying many items, then offers would be constructed to get buyers to try different items. If a segment has a low average order, offers would be constructed to raise the average order by a reasonable increment. For example, $50 buyers might get an offer of free shipping on orders over $75, while $500 buyers might get 10% off order over $750.
WHICH CUSTOMERS ARE LIKELY TO BE MOST VALUABLE?
Knowing which customers have potential to become more valuable helps marketers to grow loyalty within the house file most effectively. Here are some of the things marketers need to look for to identify a segment with good “move-up” potential:
- Does the customer “look like” (demographically in B2C or firmagraphically in B2B) a “best customer”?
- If they are buying only one or a few items, could they be sold a greater variety of items?
- If the marketer has only one contact name or no contact name (not unusual in B2B), would reaching more people in the organization increase sales potential?
Similar logic can be applied to prospects. It is important to first define where profitable customers come from and what they look like, before targeting markets because they are large or easy to reach.
WHEN SHOULD CONTACTS BE MADE?
The best timing of offers often varies substantially among segments. To know when to test, the marketer should understand:
- How seasonal is the market by segment? Typically, seasonality takes on two components that marketers often ignore. Best customers tend to buy more regularly, and often less seasonally than occasional customers or first-time buyers.
- How often do customers buy? The more often they buy, the more appropriate it is to contact them more frequently. The less often they buy, the less appropriate it is to contact them frequently.
- How soon do they buy again after a purchase? For most consumable goods and services, customers are more likely to return sooner rather than later. A quick follow-up offer is generally most effective.
As a general rule, the better the customer, the less seasonal and more frequent the contact.
WHERE ARE MY BEST CUSTOMERS COMING FROM?
Many marketers seem to believe the new best customers come in from the outside. However, this is usually not the case. Research shows that instead, they move up from within the house file. To devise a strategy to most effectively increase best customers, the marketer needs to know:
- Are best customers moving up in the database, or just dropping in from outside?
- Is enough emphasis placed on keeping customers, or are current customers being ignored while the organization chases prospects?
- What is the right “balance” of marketing efforts between prospecting and retention?
It is important to note that Retention drives Prospecting, not the other way around. Retention increases Lifetime Value, which increases the value and potential of prospects. Retention is the horse, prospecting is the cart.
WHY ARE SEGMENTS DIFFERENT?
It is not enough to segment customers based on total spending. There are nearly always specific customer behaviors that correlate with high or low spending, and marketers need to understand which “triggers” are most effective. Some typical differences include:
- Average Order. Some customers make a lot of small purchases, some make a few large purchases. In general, Average Order is a more effective segmentation tool than total “Monetary” (overall spending.) A Recency-Frequency-Average Order segmentation will nearly always be substantially more effective than a Recency-Frequency-Monetary segmentation.
- One Item vs. Many. In general, the greater variety of things customers buy, the greater the likelihood they are to return. By contrast, a large customer that buys only one item often has a high likelihood of defecting.
- Time on File. “New” customers often behave differently than customers who are set in a pattern. New customers often try many different things, and are ripe prospects for cross-selling.
Note how each difference in the customer leads to a different response by the marketer, and how the customer’s response could move them into a different segment.
HOW SHOULD CONTACTS BE MADE?
Marketers often select a favorite media to reach buyers and prospects,
and tend to rebel when that media is deemed ineffective for certain offers.
For example, a marketer sending out 500,000 direct mail prospecting pieces
is usually disappointed if they find out that only 250,000 are likely to
be profitable and mailing size should be reduced.
Rather than testing another media such as print, e-mail, or broadcast,
they may struggle to avoid reducing their favorite media. However, especially
with the Internet, there is certainly a “media mix” that is
appropriate for even classic direct marketers. To pursue that mix, some
of the questions to answer include:
- Does a combination of media produce better results? For example, will a letter and e-mail outperform a letter alone?
- Do some customers prefer one media over another? For example, can some customers be eliminated from certain mailings, and given e-mails instead without a loss in sales?
- Does general media, like magazines or radio, produce good prospects or information requests?
Many direct-mail catalogers now get most of their new prospects from their website. Knowing which media customers come from, respond to, and prefer is critical.
CONCLUSION
The best strategy for House File Segmentation requires the marketer to understand the customers, their behavior, and why segments are unique. It places a high demand on research not only to uncover complex patterns but to explain it to the marketer so well they can understand it, internalize it, and create new offers and strategy with it.
As a marketer, look for information that supports understanding and allows you to know when and how to change strategy. Don’t be afraid to seek a partner with experience to help develop the research. In the end, House File Segmentation based on understanding is not only more effective, but easier and more fun to do!
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