We are living in the Age of the Customer!
What this means is that businesses now have to consider not only profit numbers and operations, but the experience of their customers or prospects as well.
The trend of “Customer Centricity” – is a concept researched, taught, and promoted by Wharton Professor Peter Fader. Fader makes a key distinction between “customer-friendly” companies (e.g. Starbucks, Apple, Nordstrom) and “customer-centric” companies (e.g. Amazon, Netflix, Capital One).
“A requirement behind customer centricity is the ability to understand customers at a fairly granular level and to be able to identify the customers or the segments of customers who are valuable from the ones who aren’t. If you can’t sort out your customers — if you can’t look at them and know who is good and who is bad — then you can’t be customer centric. That’s step one. Step two is having an operational ability as well as an organizational capability to be able to deliver different products and services to different kinds of customers. That’s tough to do. For the most part, we think about the most customer-centric companies being online firms such as Amazon and Netflix. Those are great examples. But by no means is this limited to e-commerce firms: Capital One, Harrah’s and even IBM are also examples of companies that are fairly customer centric.”
How do we sort out customers into segments? That’s where the traditional Marketing technique of Segmentation comes into play.
Demographic Segmentation – segmenting by age, gender, income, etc. In many cases this type of segmentation does not yield very novel or actionable insights. Using this approach one usually may find that wealthier people spend more money. Enlightening!
Behavioral Segmentation – segmenting by product usage, spending habits, frequency of certain behaviours of interest. This approach is more useful and insightful than demographic segmentation. The pitfalls are in that behaviours can change frequently, so the segments are not very stable. For example, somebody gets a better job and a salary raise, so they start spending more. All of a sudden, they jumped from one segment into another and now you have to change your tactics of reaching them and communicating with them.
Attitudinal (Psychographic) Segmentation – this is the most actionable and insightful type of segmentation. Using it, one discovers segments based on deeper psychological drivers of behaviors. These segments are more stable and can be very actionable.
The Science of Customer Segmentation:
- Large, statistically representative respondent samples
- Surveys constructed by trained professionals
- Data analyzed using sophisticated statistical techniques, e.g. K-means Clustering
The Art of Customer Segmentation
- Starting with a business objective in mind
- Involving key business stakeholders from the very beginning of the project
- Selecting the right segmentation variables to inform the business objective
- Selecting the segmentation solution with makes the best sense for the business
- Selecting which segments to target and which to de-prioritize
The author of this article is Alex Genov. He is the head of Customer Research at Zappos, the biggest on-line shoe retailer in the world. Alex was speaking in Belfast on December 6th as part of InterTradeIreland’s All-Island Innovation Programme.