Using Segmentation as a Competitive Advantage

Segmentation is a critical lever that direct marketers can pull to drive better results from their programs. When performed properly, marketers can use segmentation to customize their offer, creative, and messaging by combining value, life cycle, and demographic data to identify the unique segments within their customer base. Once identified, marketers can then develop differentiated and relevant customer treatment strategies.

Developing and actually deploying a meaningful and actionable segmentation plan is certainly a complex task. Consider the following statistic: According to research performed by the CMO Council (, 86% of organizations surveyed have tried some form of segmentation, yet only 15% have actually deployed a segmentation approach in the marketplace.

Segmentation, if done correctly, will provide a basis for creating customized communication for unique customer groups, which will then drive higher response rates and profitability. A differentiated treatment approach almost always beats the one size fits all approach by allowing marketers to create more relevant offers and communication based on the knowledge that they already have about their unique customer segments.

Despite the challenges, there are many segmentation success stories. For example, a financial services company was able to improve its response rates by 42% by creating customized messaging and creative approaches related to the Hispanic segment. In another case, a brokerage company was able to create a preferred program for customers who have higher lifetime value than remaining customers and significantly increase customer retention.

What does it take to successfully build an effective segmentation approach? Marketers should take the following four steps in any segmentation project:

Step 1 – Creation of segments
You want to create segments that will yield unique, homogenous, and actionable groups of customers. Available options for defining segments include building a customized segmentation solution specific to a business situation, or purchasing segmented data from a vendor.

Coverage, separation, stability, and ease of implementation are the key factors that marketers must consider when deciding which data to use to drive their segmentation approach. In most cases, a customized approach delivers better results than generic “off-the-shelf” segmentation.

During this phase, several hundred data variables are typically analyzed and various statistical techniques, including principal components and factor analysis methods, are used to reduce the total number of variables. The statistical results will then be combined with business and marketing insight to define the final set of variables to be used in the definition of the segments. Database marketers typically use various multivariate statistical techniques, such as two-staged non-hierarchical cluster analysis, to create their segments. Business intuition and marketing knowledge are equally critical as the data and statistics used for creating a successful segmentation scheme.

Step 2 – Analysis and coloring of segments
Understanding, profiling and bringing to life the newly created segments is also a critical step. This involves the use of internal and external data to gain a good understanding of the unique characteristics of each segment. After profiling, direct marketers can decide if the segments are interesting enough to proceed with creating customized creative and offers.

This step, also known as coloring, will provide information as to what the segments look like based on key demographic and other characteristics (e.g., age, income, marital status) and how valuable they might be based on their response propensity and customer profitability.
Primary research can also be leveraged to color the segments. A great use of primary research is to first finalize the segmentation scheme, then sample within the resulting segments to create focus groups that provide in-depth coloring information to the resulting segments.

Step 3 – Definition of differential customer treatments
This step includes reviewing which levers to pull for offer, creative, and messaging, and deciding which ones to implement. Creating differential treatment can be a trivial expense or a large investment depending on the business situation. Therefore, this is a critical step toward testing and implementing segmentation, and should be done in conjunction with the segment creation process.

Almost certainly, part of this exercise should include the creative team so that you can develop precise messages and creative for specific audience segments. In the end, it is important that these specific communication vehicles align with the characteristics of the defined segments, and that messaging is completely tailored to each segment.

Step 4 – Testing and rollout
The testing phase involves evaluating the impact of developing and targeting specialized marketing communications pieces to audience segments. The specifics of the testing strategy then need to be worked out once the segmentation project begins.

Testing involves comparing business as usual versus sending the customized communications to targeted segments. But note that there should be a manageable number of differential vehicles against the key segments. Consider also the cycle of testing, learning, and adapting: For example, there could be a five-month lag between developing a test, collecting all results, interpreting results, and being in the position to impact a future prospect pull.

A full-scale roll-out strategy needs to be formulated after realizing successful results from the initial test phase. Necessary adjustments then must be made to the segmentation approach based on the test results.

Ozgur Dogan is senior director of database marketing solutions for Lanham, MD-based database marking company Merkle.

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