Segmenting on Value

We have discussed natural selection in a business context previously. Natural selection is driven by competition, and competition is being created by more companies selling more products to the same number of people living in deregulated economies with no geographic boundaries. In such a world it becomes much more productive to increase the value you extract from your existing customer base rather than attract new, unknown customers. To increase the value of a company’s customers, there are three avenues to pursue.

Your options are to:

  • Ø Keep the customer longer
  • Ø Sell a customer more products
  • Ø Sell to the customer in a more cost-effective manner (cheaper!)

Firstly, a company must try to keep its customers longer. If a customer spends $100 per year and it cost $100 to acquire him in the first place, then it is obviously important to keep him for a minimum of one year – every year he stays after the first represents opportunity for profit. Secondly, a company must sell more products or services to a customer to increase profitability. This seems incredibly obvious but is often overlooked. Selling a second product to a happy customer is usually fairly easy, and the more products a customer has, the more ‘loyal’ he is to the provider. Thirdly, a company can service a customer in a more cost-effective way and for this, customer preferences must be understood and a variety of technologies deployed, from call centres to internet commerce, as we shall see later.

However, all of these strategies are predicated on one thing, and that is the ability to understand who is a good customer in the first place, and this can be startlingly difficult. Broadly speaking, there are three types of customer: those that are always profitable, those that will never be profitable and those that are marginal. Whilst identifying these people based on current behaviour patterns is difficult enough, the intelligent business concentrates itself on what the future value of its customer base will be. This predictive modelling demands the help of technology. The business that can predict which of its current customers will be profitable over their lifetime (and the converse) is at a massive intellectual and operative advantage over anyone

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About bibongo

I'm a consultant in the field of Business Intelligence and have been since the mid 80's which gives you some idea of my age! I'm priviledged to have held senior positions with Teradata, Oracle, Hp and EMC. I have an English son and a Swedish daughter seperated by some 18 years which is another type of welcome challenge!
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2 Responses to Segmenting on Value

  1. Keith Prince says:

    Mr Bongo, I do miss your ‘direct to the heart of the matter’ approach in my working day. I’d like to add one new avenue that is being built in the customer village to the three you have listed – selling to a customer’s friends, family and followers. The avenue is being built right now but the challenge is to make sure it leads to value for the customer and the enterprise alike. But, I’m seeing very shaky foundations being laid by too many brands that just don’t ‘get it’.

  2. bibongo says:

    Keith, you are absolutely spot on, thanks, but I illustrate my three points with a PPT slide and I just dont know how to add another dimension but I must figure it out. I also agree about the shaky foundations and simply dont get why these type of initiatives seem to come under the Big Data banner when in fact the social data often being used for such analysis is pretty much memory stick size.

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