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PROFITABLE CUSTOMER SEGMENTATION requires treating different segments differently. If different segments are treated the same, what is the point of having different segments? Knowing why and how to treat each customer segment requires understanding of the secrets in marketing data. |
The most valuable data for marketers is buried in their own databases. The problem is that marketers may not know how to look at their own data to unlock the secrets that will help them communicate more effectively with their customers and prospects.
Finding the secrets is half the challenge. The other half is knowing how to use them to improve profitability. Fortunately, once the secrets are understood, knowing what to do with the knowledge follows almost naturally. Here are 19 of the most common secrets and how to use them to improve profitability. All of them won't apply to any one company, but some of them apply at every company.
SECRET #1
It costs eight to ten times as much to make the first sale to a prospect as it does to make another sale to an established customer. In fact, we often find this ratio is even higher! Spending twenty times as much to sell a prospect as to re-sell a customer is not uncommon. Consider this if you contact prospects and customers in the same way.
SECRET #2
A re-mailing or re-contact can get 50% of the response of the initial contact. Segments that are responding at twice break-even or above should be contacted more often even if the communication is basically unchanged. Re-contacting top-performing segments is often the best way to use over-run materials
SECRET #3 & #4
Two-time buyers respond 40% to 60% better than one-time buyers. And, three-time buyers respond 40% to 60% better than two-time buyers. Customers who buy more frequently can be contacted more frequently. Their higher response may justify a more personalized means of communication even when it's more expensive. Not only that, but a re-contact to better buyers will likely outperform an initial contact to marginal buyers and substantially outperform a prospect effort.
SECRET #5
Alan's Rule of Half-Life: A segment of customers will drop in response by 50% each year they do not buy. Typically, buyers who just made a purchase are twice as likely to respond to a new offer as buyers from one year ago. One-year-ago buyers are twice as likely to respond as two-year-ago buyers and so on. This explains why a smart marketer will contact new customers more often.
SECRET #6
The biggest single segment in any database is usually one-time buyers of popular items. Most marketers know that 50% to 60% of their customers are one-time buyers. What they don't know is that about half of them have bought only one of their leading items. This tends to be a huge group -- 25% to 33% of their entire database. They are easily identified and they are much harder to re-sell than one-time buyers who initially purchased more than one item. Having a strategy to deal with them is crucial to gaining more two-time buyers.
SECRET #7
Buyers who spend a small amount on their initial purchase are likely to continue to spend less than average on future purchases. The amount (per order) that customers have spent in the past is usually an excellent indicator of how much they will spend in the future. Past average order size is often a better predictor than overall monetary value!
SECRET #8
One-time buyers who made small purchases are often unprofitable to re-contact in 18 months or less. Many companies follow all buyers for three years or more but don't segment out one-time buyers with lower first orders. They are often shocked to find they've been marketing to low-potential customer segments unprofitably for years without realizing it. Even if one-time buyers as a whole can be contacted for several years at a profit, that does not mean small-order one-time buyers can be.
SECRET #9
One-time buyers are more likely to buy again soon after their first purchase. Some marketers are reluctant to follow up quickly with new buyers, perhaps thinking that they won't need anything for a while. Others leave gaps in their re-contact strategy for several months. Usually we see immediate re-contact succeed. Better to communicate now, while the first sale is fresh than to wait until the relationship with the customer is stale.
SECRET #10
Sales per contact is a more important indicator than response rate. This is true for two reasons. First, buyers who spend more are more likely to buy again. Second, buyers who spend more are likely to continue to spend more with each order in the future. Generally speaking, it is more profitable, both now and in the future, to get one $100 buyer than it is to get two $50 buyers.
SECRET #11
There is no relationship between acquisition cost in different media and the future value of customers acquired through different media. Many marketers measure only acquisition cost and ignore lifetime value. But quite often, there is a big gap in follow-up purchase behavior between customers acquired through retail, catalog, the web, etc. Remember, profits come from repeat sales. Be sure that those who come from different media stay and become good customers. Do not assume customers from new media will behave in the same way as customers from older, tested media.
SECRET #12
The future value of a customer who makes a return may be the same as other first-time buyers. For some companies, if a customer returns his first purchase, it is not worth marketing to him again. For others, it makes no difference to future behavior at all. It may have to do with the category of product or it may have to do with how they are treated when they make a return.
SECRET #13
When selling to businesses and consumers, businesses typically have a higher acquisition cost but also typically have a lifetime value eight to ten times higher than consumers. Businesses are harder to gain as clients but the payoffs can be much higher. Businesses spend more per purchase and are more loyal. Measure follow-up sales with businesses, not just acquisition costs. Also, mark customers as business or consumer in your database so you can track them separately.
SECRET #14
A four-line address does not distinguish a business from a consumer. When consumers and businesses are mixed together in the customer database, we've found that segmenting businesses by finding records with a four-line address is only about 50% accurate. There are much better ways to identify businesses and it usually takes several combined methods to be usefully accurate.
SECRET #15
The lifetime value of customers can be very different when viewed by type of customer than when viewed by original source. Different kinds of customers can respond to the same key-coded effort. Businesses and consumers often respond to the same space ad. So do homeowners and renters, singles and large families. However, once they become customers, they may behave very differently. Look at lifetime value from the standpoint of type of customer as well as how the customer was acquired.
SECRET #16
"Best customers" are often heavy users and aren't loyal to one supplier. Marketers assume that if a customer is buying a lot from them, their customer isn't buying elsewhere. Quite often this is not the case and it spells opportunity. Rather than having bought all they can, quite often "best customers" can easily be swayed to buy more. Increase "share of customer spend" with heavy users is often the cheapest and fastest way to boost sales.
SECRET #17
Buyers are less upscale than you may think. People like to sell their products as upscale and aspirational. While this works well for the creative component of a sales effort, it doesn't work well for list selection. Quite often, "high end" lists are chosen without thought and thus perform worse than expected.
SECRET #18
Consumers are usually older than you think. Just as products are sold as being upscale, they are also sold by models and actors a few years younger than the "real" user. That may be the Madison Avenue way, but don't use that logic to select your target market segments. Most direct marketers struggle to sell people under 30. Rarely when we review consumer data do we find a product with an average buyer age under 49!
SECRET #19
Buyers are not all alike. One company may appeal to very different buyer types. Knowing about the "average customer" helps very little because there is no "average customer". In fact, there is usually a much greater difference in buyer segments within companies than between them. Typically, list and media selection (as well as creative) needs to be very different to reach each target group. There is rarely a single audience for any one company.
CONCLUSION
Dig into your database to find which of these secrets applies to you. Then change the way you communicate with your different customer segments. It's a sure way to increase profits!
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