Play Small to Win Big: Luring SME Customers

with Needs-Based Segmentation

by Alejandro Snchez, Olazhir Ledezma, Augusto Moronta, and Camilo
Muoz
Small- and medium-sized enterprises play big roles in Latin American
corporate telecoms. Here's how to reach them better.
Telcos typically focus on large corporate and retail customers, paying little attention
to small- and medium-sized enterprises (SMEs), which account for approximately
half of all corporate telecommunications revenues in Latin America. The SME
market's full potential remains untapped in this region in part because of the way
telcos segment customers. Telecommunications is one of the largest expenditures
SMEs make, but telcos often employ simple, revenue-based customer segmentation
schemes for these corporate clients. While useful as a first-cut segmentation, relying
upon revenues alone can cause marketers to miss the very real differences among
SMEs, which as a group, tend to be extremely diverse ranging from hospitals to
fashion boutiques and beyond.
Companies in industries from food production to carmaking have demonstrated that
shifting to a needs-based customer segmentation approach can jumpstart a firm's
ability to capture value. By doing so, a global beverage brand replaced years of sales
declines with consistent growth, for example, while a food manufacturer facing
unsustainably low revenue growth saw its market share expand across the board by
10 percent and by 40 percent for its premium brand. Employing a needs-based
customer segmentation strategy allows marketers to zero-in on the key differences
among customer groups that drive satisfaction and telco profits. In fact, we
estimates that by shifting to a needs-based methodology, the Latin American
telecoms industry could generate up to USD 1.6 billion in additional revenues.
7 Steps to Needs-Based Segmentation
Creating a needs-based segmentation for SMEs involves a 7-step process that
McKinsey has organized under the name WIN SMES:
1.
2.
3.
4.
5.
6.
7.

Widen customer segmentation criteria

Ideate market research tools
Name customer segments based upon the selected criteria
Shape a clustered customer purchasing funnel
Modify the commercial model according to the segment's needs
Expand the segmentation to all SME customers
Sort out the organization for systems, skills, and structure changes

Each of these steps will be examined in greater detail, providing a sense of how this
segmentation approach comes together and what telcos must do to make it a reality.

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1) Widen customer segmentation criteria.

Beyond revenues, a wide variety of criteria can be used for conducting customer
segmentations (Exhibit 1), from demographics to profitability to perceptions to needs
and benefits. The most relevant for SMEs are needs and benefits, behaviors, and in
some cases attitudes. Some of the more tactical criteria, such as demographics, can
also be relevant to SMEs. On the other hand, emotional criteria (e.g., perceptions) are
less important to these customers, because SMEs tend to make more rational
decisions than do, say, retail consumers. The most powerful criteria needs and
attitudes can also be the most difficult to apply. Because of this, we analyzed
international telco segmentation experiences, drew lessons from cases that followed
different strategic goals, and realized that a telco should define its segmentation
criteria based upon its strategic focus. For example, a telco with the goal of retaining
key customers could be best served using "economic sector" or "risk type"
segmentation criteria. Telcos seeking to additionally increase their current customer
"share of wallet" should adopt criteria such as potential telecoms spending, needs,
and attitudes. Those interested primarily in increasing their conquest of new
customers should probably focus mainly on needs and attitudes.
Exhibit 1:

2) Ideate market research

tools.
Once the appropriate criteria
Segmentation Criteria
are selected, market research
Gender
Regional
Age
National
tools should be developed that
Income
International
Considerations to select
ensure the most effective data
Demography
Geography
segmentation types and
Legal
criteria
collection and use of interview
Financial
Market tenure
Communitime. Typically, such a
Restriction
Profitability
cation cost
Strategic business
Customer
decisions:
questionnaire will feature
perception
Growth
towards:
Segmentation
questions concerning: behavior
Perception
Relations
Brand
Defend
Types
Price
Stage of
(e.g., telecoms usage and
Recuperate
Service
relationship
Etc.
Length of
Market objective
awareness); needs and attitudes
Needs/
Attitude
relationship
benefits
Competitive position
(e.g., purchasing behavior,
Life style
Current customer
Product benefits:
knowledge
telecoms sophistication);
Occasions
Behaviors
Tangibles
Emotional
product preferences (e.g.,
Where?
Spending/volume
When?
Price
product and service packages);
How?
Used channels
and image (e.g., the customer's
perception of the distribution
Source: McKinsey Marketing practice
channel). We has found it
useful to conduct workshops with a telco's marketing managers to narrow down a
potentially enormous number of attributes to a shorter list that focuses only on the
needs and attitudes that differentiate the SME market.
Many criteria can be used for customer segmentation

3) Name customer segments based upon the selected criteria.

Naming a customer segment requires marketers to form a hypothesis about that
segment, thus helping the telco to focus on the key questions relevant to the segment.
Segments result from grouping customers in terms of similarities among selected
criteria. For example, in Colombia, SME customers that spend little on telecoms and
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require low service levels become part of the "low maintenance" cluster, which
represents about 23 percent of the market and spends, on average, roughly USD
28,000 per month on telecoms. Heavy "international users," as the name implies, tend
to spend much more on telecoms (i.e., over USD 130,000 per month) and thus,
require higher levels of service. Among SMEs, this latter group is the most desirable
making up nearly one-fifth of the market, their total telecoms spending is very high
and while more demanding in terms of service levels than "low maintenance"
customers, they are by no means the most service-oriented customers.
4) Shape a clustered customer purchasing funnel.
The questionnaire developed during step 2 should include sections on product
preferences and image, which are designed to yield insights that help telcos focus
their marketing efforts on specific stages of the customer "purchasing funnel." This
funnel tracks the customer decision-making process as they shop for, buy, and repeat
purchase telecoms products and services. Stages include awareness, consideration,
trial, and/or loyalty (Exhibit 2) . Understanding why a customer within a given
customer segment decides not to proceed to the next funnel stage can provide
powerful clues for boosting a company's overall funnel performance. New telcos, for
example, tend to pour money into awareness-building efforts and then often find that
customers who may be aware of the telco's products do not end up actually trying
it or remaining loyal to it.
Exhibit 2:

5) Modify the commercial

model according to the
ILLUSTRATIVE
segment's needs.
Bottleneck
% of customers at each stage
Telcos should adjust their
product and service models to
Awareness Consideration
Trial
Loyalty
cater to the needs of SMEs. An
1
27%
indirect sales force, for
Heavy
international
83%
80%
62%
17%
users
example, is critical in the SME
In segments 1, 4,
5,
the
operator
76%
market. It is a viable
2
should focus on
Fixed
94%
74%
56%
50%
increasing its
alternative to relying upon a
demanding
customers
call center which is
loyalty, while in
3
61%
segments 2
inexpensive but does not build
Serviceand 3 focus
85%
68%
41%
38%
oriented
should be on
relationships or to employing
increasing trial
4
68%
a direct sales force which
levels
Loyalty plan
and promo
92%
73%
69%
47%
seekers
would be too costly. Telcos
should define differentiated
5
65%
Low
products based upon segment
Maintenance
91%
67%
62%
40%
preferences and needs. SMEs
Source: Market research
in the heavy "international
users" cluster, for example, might be most interested in product bundles (e.g., fixed
local and mobile service, and broadband Internet), while service-oriented customers
would value loyalty programs as well as detailed and accurate invoices. However,
this type of differentiated model must also consider the cost of service. Customers
with low service requirements can be served with non-personal channels (such as call
Shaping the customer funnel by segments is required to
focus commercial activities on bottlenecks

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centers). Higher-cost channels (such as direct or indirect sales forces) can be limited
to complex and high-value interactions.
6) Expand the segmentation to all SME customers.
Initially, a telco must use the information it already has in its databases (e.g., the
customer's name, address, and the telco services already being purchased) in order to
segment customers. Although this type of segmentation is far from ideal, in the short
term, it allows the company to roughly classify its current customer base and take
appropriate action. Waiting until the segmentation interviews are completed would be
too costly. Beyond this level of data, the use of a "reverse scoring" methodology can
be very useful, particularly in call centers. The typical reverse scoring process uses
five key questions to allow for assigning customers to segments based upon
correlations with like companies. An agent receiving an inbound call can simply ask
the five questions in order to classify the caller into the appropriate customer segment
and then tailor the offering accordingly.
7) Sort out the organization for systems, skills, and structure changes.
The seventh and final step of the process seeks to fully integrate the new
segmentation approach into the telco's organization. This often requires making
changes to the company's organizational structure, the systems it employs, and the
skills it requires.
y Structure: The goal is to move from a product-based organization to one that is
aligned with customer segments, with dedicated managers overseeing the unique
needs of specific types of customers.
y Systems: Follow-up systems must be established in order to facilitate the market
research that will periodically be required to update and monitor segmentation
results. Overall customer purchasing funnel updates should be scheduled
annually, for example, with critical data updated more frequently.
y Skills: Improving sales techniques and tools are the key skill-building
requirements. Actions can range from improving sales scripts to initiating
targeted sales and account management training to introducing development
management tools.
* * *
McKinsey's 7-step process provides the necessary rigor for creating a robust and
actionable needs-based segmentation of the highly diverse SME customer base. This
sophisticated but accessible approach can help Latin American telcos meet what
are often unique SME customer needs, while improving both top- and bottom-line
performance.
About the authors:
Olazhir Ledezma is an Associate Principle and Augusto Moronta is a Manager in
McKinsey's Caracas office, Camilo Muoz is a Manager in McKinsey's Bogota
office, and Alejandro Snchez is a Principle in McKinsey's Caracas office.
Copyright 2006 McKinsey & Company, Inc.
All rights reserved.
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