How to Diversify Your Customer Portfolio

Apr 08, 2008 12:25 AM  By

Can you get better sales out of all your customer segments— your high rollers, your online shoppers, your multi-buyers and your single-item purchasers?

Yes, you can—by taking two steps. First, you have to recognize that you don’t have one customer segment, but a portfolio of segments. Second, you have to diversify your investments to get the best return from each group just as you would do to get the best return from a wide range of stocks.

You can identify your customer segments through a customer portfolio analysis. This defines what and how your customers buy in four dimensions: channel, value, merchandise and lifestage. All you need to do this is the order history you already have and the demographics you can overlay on your file.

The first dimension is channel, which you can determine by flagging your direct mail and online customer records before sending them to your service bureau. When you examine the output file you will be able to identify the records that only show up as direct, as online and the overlapping records that are multichannel buyers.

The second dimension is customer value. You start this calculation by combining the transactional history of orders, merchandise categories and order dates with your channel file. Summarize each account’s history by calculating its recency, frequency and monetary value in an RFM model. From this information you can sort your customers into value segments ranging from casual (infrequent with low sales), to moderate (frequent with order sizes near the overall median), to elite (high frequency with large order sizes.)

The third dimension is merchandise. If you only sell one category of merchandise such as basketball shoes, this will be easy. However, if you sell a wide variety of items you should use the inventory categories already in your product tracking system which should have been appended with the transaction history.

You can sum up your customers by the frequency with which they have bought from each category. Your final merchandise groups could go from jewelry to cosmetics to apparel to home goods with large numbers of customers in each category. You should also consider creating a special elite segment for customers who shop in every category.

The fourth dimension is lifestage. Some customer files can be put into a simple sequence by cross tabulating their values for age, income and household size to identify singles, young families, full houses and empty nesters.

If your customer file is more complex you might need to start with some cross-tabs in an exploratory analysis. Then you will be able to see if you need to perform clustering or decision tree analysis or other grouping programs to develop your lifestage segments.

You will want to end up with segments that are large enough to be worth preparing mailings for and diverse enough to capture the differences in your customers’ stages of household formation, family growth and disposable income.

When you are ready to start working with your customers in four dimensions (4D) you will have to summarize them in two phases—the first to count your segments and the second to make them workable.

Start phase one by numbering each of your dimensional categories, i.e. 1-Direct Channel, 2-Online, 3-Multichannel. Then do a cross tabulation of your 4D numbers.

If you have three Channel factors, three RFM levels, five merchandise categories and three lifestage groups you will have 135 final segments. Each final 4D segment will uniquely define their channel, value, merchandise and lifestage.

Start phase two by thinking tactically about how you can communicate with your 4D segments. You have to be able to develop and mail a finite number of offers and messages to meaningful segments.

If 135 is too many, consider combining two or more of the codes for a dimension. An apparel marketer might reduce the RFM levels from three to two and the merchandise categories from five to three to produce 54 segments.

You don’t have to market to each one separately. If you have been spending your marketing budget on a series of general offers and messages to all of you customers you will be able to change your tactics.

Your 4D segments will enable you to select your direct channel-high RFM-high margin merchandise buyers with high incomes and invest more in them because you will expect a proportionately high return on your investment.

The full array of all of your customer segments is your customer portfolio. Your business should address the needs, wants and desires of all of your customers to be successful.

However, if you use customer portfolio analysis you will be able to get the most out of your low and your high average order customers, your full-range and single item shoppers, your direct mail, online and multichannel responders. You will be able to adjust your investment in each segment to maximize the return it will give you and be more successful than you are today.

Bill Singleton writes “Show Me The Data” each month for Lists and Data Strategies. He is a Manager of Analytics and Consulting Services at The Allant Group in Naperville, IL. He can be reached at: bsingleton@allantgroup.com and 630-579-3448.