Successful Segmentation for

Creating Profitable Customers

Carlos Soares
Head of Customer Insight
October 2008
Contents

1. Introduction

2. Renewing our understanding

3. Profiting through segmentation

4. Investing to action segmentation

5. Making it happen
Introduction

• Renewing our understanding

– What is segmentation really? And why do we use it?
– Communicate the learning and drive understanding throughout the business

• Profiting through segmentation

– Understanding who our customers are? What drives and motivates their behaviour?
– Understanding how to drive value for both parties. Determine risk and value.
– Developing customer and targeting strategies. Strategic and tactical.

• Investing to action segmentation

– What tools and skills are necessary
– What system implementations are there?

• Making it happen
– Demonstrating through action, testing and hypothesising.
– The myth of the average customer
– Internal Passion
Segmentation is needed to drive higher profitability through Renewing our
understanding customer needs and delivering on those needs understanding

Typically customers are not created equal ..and different “segments” need different
customer strategies to exploit their value

Many

Cherish
and tailor Relationship
Development
Number of individuals

Retain and
develop

20-30%
Unprofitable Marginally More Very Manage
profitable profitable profitable
40-50%

20-30%
Few
Low Value per individual High Meet Customer Expectations Exceed

Segmentation is an important tool in becoming customer-centric.

It is a key enabler of CRM.
“Recognise me, remember me, value me.”
Segmentation is an ongoing process for managing Renewing our
the customer base understanding

•A segment is a group of customers who display similar attributes to each other...

•They may react similarly in a product/service offering
•They may provide comparable values (profitability) to the company
•They may bear the same needs or behave in alike ways.

•There is no one right way to segment (not should there be)

•Many different approaches and techniques
•Choosing an approach requires a mix of art, science, common sense, experience and
practical knowledge
•Also depends on market, business needs, availability of data
•The aim is not necessarily to build one holistic model to meet all needs, several
models used in conjunction with each other can work well.
There are many types of segmentation: Renewing our
understanding
Having one type will not meet all our needs
Targeting / Propositions Value
Selections Management
Comments
Development

Key for planning e.g prioritising

Transactional / marketing spend, setting segment
value (RFV), LTV *** * *** strategies & objectives and
prioritising spend & resource
Predictive behavioural models are
Behavioural key for targeting customers for a
Propensities *** * ** behavioural change e.g. buying a
product
Overlays and geography can give
How can we Geography / insight of different regional profiles.
segment demographics ** ** ** Geography allows us to address
specific competitor behaviour.
Likelihood to take up of new
Loyalty / length products.
of relationship ** * ** Level of customer-led contact.

Identifying customer needs and

Attitudinal/ drivers can lead to new
needs * *** * developments or product tailoring
opportunities

*** Nearly always useful ** Sometimes useful * Not that useful alone
Segmentation should be built so as to be used Renewing our
understanding
across all functions of the business

(Not one for retention, one for propositions and another for marcomms)

•Segments may be predictive of value, forecast responsiveness or help with

acquisition modelling, however most are designed to be descriptive
•Predictive modelling can be used in conjunction with descriptive modelling
•Depending on type of segmentation, allocation code should be regularly refreshed
•Segments should pass tests for good marketing AND good business - plus be
statistically sound !

Identifiable Understandable by the business

– From the data available
Differentiated
– Segments should be different from each
other
Viable
– Big enough to warrant attention / resource
allocation from business
–No point having complicated mathematical
solutions that only analysts can understand.
–Use the right language, communicate with
business
Actionable
–Attached to customer records so that action
can be taken at a customer level
Using segmentation for a ‘Customer Driven Organisation’ Renewing our
understanding

Yesterday: Today & Tomorrow:

Company KPIs Volume targets Value targets

Propositions Sell to all Customer-needs driven

Focus Acquisition Retention

Targeting Mass customisation Differentiation

Approach How big is my list? Test and learn

Marketing KPIs Sales volumes Segment objectives (KPIs)

 Profiting
Turning Data into Actions through
Segmentation

Understand who Segmentation & Develop Customer /

our customers are Overlays Targeting Strategies

 Inputs:  Set segment strategic objectives  Develop customer

 Product Holdings,  Identify key business activities to programmes based customer
Usage, Payment Type, influence action or feedback (acquisition
Channel, Debt Costs,  Provide Management Information & retention)
Defection Risk, & Monitoring  Offer tailored propositions
Potential  Triggers: based on trigger events (e.g.
 Who are we building a  Life events (Home move, reason to leave)
relationship with (Profile) family, etc.)  Develop your pricing strategies
 What do customers need  Customer Contact (Complaints
 Identify what support our
from us are a gift, opt outs, service)
people need & focus our
 Intercept &  Profile: systems and training on giving
Communicate  Customer Data it
 What value can we get (Demographics, Life stage /
 Remove blockages –PEOPLE
 Current v potential style, region)
MAKE IT HAPPEN …
value  Behaviours (Channels Technology enables it!
 High risk defection & preference, propensities to
debt purchase, loyalty, value)

Using Segments to understand our Customers
HEARTS
STRATEGY: Connect with these customers to retain, grow value and win-back
INSIGHTS SUMMARY
• Demanding & smart segment
• Need convenience and VFM propositions to
manage their daily lives
ACTIONS
• Brand: Trust the brand / traditional
• Proposition: Deliver the best deal for me (VFM)
• Experience: Hassle free – not hard work – value
add self service
• Contact: Work and leisure opportunities, new
technology/internet channels
Profiting
through
Segmentation

WHO ARE THEY?
• These households tend to be a mix of single
occupants and families with the majority falling
within the mid to low affluence range of the FSS.
Customers are more likely to have become a British
Gas customer during the last couple of years and
the majority are owners of 2 or 3 bedroom
dwellings.
 27% have a customer vintage of 2007 (1.6 times
more likely to fall under this vintage than the base
 More likely than the base to have a BG consent
status of ‘Opt In’ (63% of customers)
 Over half have a boiler that is less then ten years old
(38% more likely)
 Significantly more likely to pay for their gas and /or
electricity by cash/cheque and less likely to pay by
direct debit
 The 23% that have a price protected tariff for their
gas are over represented compared to the base
 Significantly more likely to be classified as ‘Elderly
Deprivation’, ‘Ageing Workers’, ‘Credit Hungry
Families’ or ‘On the Breadline’
 Tend to live in ‘East Midlands’ (14%), ‘Norweb’(13%)
and ‘Yorkshire’ (12%) electricity regions
 Profiting
Developing Customer Strategies: Driving Value through
Segmentation

THE BUSINESS CHALLENGE THE CUSTOMER ISSUE

1. Retain high value customers Understand me and provide me with reasons to stay
(e.g. Next Best Action, Loyalty recognition – discount)

2. Cross sell valuable customers Provide me compelling reasons to purchase again

(e.g. VFM - account review for best ‘package)

3. Broaden the relationship Understand my needs & make more competitive offers
(e.g. Use customer feedback – research & response to tailor props)

4. Acquire the right customer Understand me & make relevant, competitive offers
(e.g. Exclude high defectors, debt risk, relevance to customer type)

5. Improve the margin of value Can I be satisfied more cost effectively

destroying customers (e.g. Intercept & Communicate)
 Profiting
Developing Customer Strategies: Driving Value through
Segmentation

THE BUSINESS CHALLENGE STRATEGY OBJECTIVES

1. Retain high value

customers Recognise & Reward

2. Cross sell valuable

customers Increase Value
Set objectives for each
segment. Remember
3. Broaden the
Leverage Benefits you are managing a
relationship
customer P&L, not
products.
4. Acquire the right Drive Engagement /
customer Target the right customer

5. Improve the margin

of value destroying Increase Value /
customers Manage costs
Developing Customer Strategies: Applying segments to Profiting
through
Sales and Marketing Segmentation

May 2008
Customer Losses
April 2008
Segment High Value Medium Value Low Value Loss Making Live
Segment 1 Segment 2 Segment 3 Segment 4

High Value
Segment 1
1,000 15 10 - 25 1,050
April 2008

Medium Value
Segment 2
25 1,000 5 - 50 1,080
Low Value
Segment 3
5 50 1,000 - 75 1,130
Loss Making
Segment 4
15 50 20 1,000 100 1,185

Gains 100 75 50 25 250

May 2008 Live 1,145 1,190 1,085 1,025 250

April May % Change % Loss % Gain

High Value
1,050 1,145 9.0% 2.4% 9.5%
Segment 1
Medium Value
1,080 1,190 10.2% 4.6% 6.9%
Segment 2
Low Value
1,130 1,085 -4.0% 6.6% 4.4%
Segment 3
Loss Making
1,185 1,025 -13.5% 8.4% 2.1%
Segment 4

Total 4,445 4,445 0.0% 5.6% 5.6%

What movements in customer segment would we ideally like to influence?

How can we achieve that? What objectives can we set ourselves in order to
test our hypotheses?
Developing Customer Strategies: We need to be customer Profiting
through
centric and not just product centric Segmentation

• Customer-centricity drives revenue and profit, but for offers to work a

business must align both its marketing strategy and resources with
customer opportunities rather than product-driven goals
• CHANGE is required in the CULTURE - working together as one is
necessary because it enables a more bottom-up and customer focused
approach to marketing Isn’t it my
choice
about
what I
want?
You can’t do that, it
will hit my P&L
and I won’t get a
I will sell product B bonus this year
at a discount to
Customer
get a sale of my
product
 Needs / desires
 Ability to pay
Product
Manager  Channel preferences
Product  Timing
Manager
 etc

Working
together
Developing Customer & Targeting Strategies: Identify Profiting
through
proposition weaknesses & design propositions to make them Segmentation
effective

High DD
Free Extra kit Illustrative only
migration Service Sample Tenure
Product offers
Pay up front premium Based
On-line offer
3,6 months Extra kit
Product Service Optimised Service
upgrade offer New kit Full price Optimised Product
deal upgrade offer 2 Extra kit
£XX offer upgrade
Optimised Full price
Optimised upgrade offer Sample
upgrade offer 3 New kitpremium
£XX offer
Free content Free LTC Fairly well
Churn Risk

(14 days, free) Optimised content Bundle covered, but only

upgrade offer 2 Free
with introduction of
Extra kit Product Product
Free content new propositions
Weekend (free) offers upgrade Service
Optimised (green)
Free Extra kit upgrade offer Extra kit Tenure
On-line
Product Full price offers Based
Optimised
New kit upgrade offer 2 Extra kit offer
Product Service £XX offer
Service
Full price
deal CONTENT Sample
Sample Existing
£5 for x months premium
Sample premium New kit proposition
DVD £XX offer
CONTENT New – product
£5 for x months Sample based
Free DVD New – Sample
content
BOGOF Replace based
BOGOF content BOGOF
content content Old New – pre
Mid tier equipment payment
Sample
Free Tenure
Free New –
Service Service Product Service Based
content anniversary
offer

Low
Customer Value High
Developing Customer & Targeting Strategies: Profiting
through
Which proposition? Which channel? What time? Segmentation

•Bundling or offerings can make customer targeting very complex without

the right targeting systems and methodology

Campaign? Channel? Timing? Customer?

(hundreds) (multiple) (any day/time) (thousands/millions)

Offer “A” Minimum Transaction

32,000 leads Event
triggertrigger Preference?

Offer “B”
£450,000 budget 100,000 mail Saturation?
volume End of Term
Enquirer

Product “C” Wrong timing?

Contact Up-sell
frequency? Life-stage
opportunity
Product “D”
25,000 volume
Channel Competitor
Competitor
usage? Product
product
Action “E” Renewal
renewal
10% ROI Missed opportunity?
Channel Market
Recent contact
preference? inflection
Action “F”
1,200 sales
Optimisation can solve the difficulty of targeting
customers with many different product combinations
 Profiting
Developing Customer & Targeting Strategies: through
Key messages for bundles or offering strategies Segmentation

1 Put the customer and not the product first

2 Understand your different business objectives and use different varied offers or bundles strategies to suit

3 Bundles can pose a significant risk to your P&L as well as offer many benefits

4 Pricing and proposition is critical and can take several months to get right

5 Make sure there are no proposition gaps in your portfolio, otherwise your offers or bundles will be weak

6 Remove the business silos and work together. The common goal is the customer
 Investing to
action
Investments to action segmentation Segmentation

• If you have customer data, you CAN have segmentation…

– Access to data
– Start small and learn as your customer knowledge grows

• ...HOWEVER…
– Garbage in = Garbage out !!
– To ensure segmentation is actionable, certain capabilities need
to be in place

• A truly integrated approach takes a greater investment

 Investing to
An integrated approach to segmentation action
Segmentation

Total CRM would include an integrated approach to segmentation

Regular feeds of data from
operational systems
Ongoing process to update and
refresh segments once built
Processes to operationalise
segments - providing customer
data at the customer
touchpoints
Communication of insight
Business knowledge - what is
the strategy? What is the
current product portfolio?
Data knowledge - availability
and limitations
Statistical / Analytical skills -
Processes inhouse or outsourced.
People
Knowledge transfer
Usage of segments

Technology

Marketing database to provide data

Analytical tools and platforms to create
single customer view
Decisioning tools, channel
implementation capability
Segmentation is just a part of the customer insight Investing to
action
process Segmentation

• There must be a balance to maximise business value:

•Generate insight through understanding customer needs (Research) &
behaviours (Customer Analytics)
•Optimise Customer Interaction through relevance, personalisation, optimisation
and campaign management
•Create and maintain an integrated view of the customer using the customer
database, external data and integration the insights into one

PROFITABILITY LIFESTYLE
What is the customer What is the SEGMENTATION
worth to us? customer like?
Why don’t they buy or What are their needs
use more? and attitudes?
Can we change their What do they think
behaviour to make them about us?
more profitable?

PROPENSITY
BEHAVIOURAL
MODELLING
CLUSTERING
Low Energy Value (PTEC r5) High
Low

SEGMENT 4: Low SEGMENT 2: Low

SEGMENT 5: Risk, Medium Value Risk, High Value
Low Value 4,164,180 Customers
Risk of Energy Loss

1,961,843 Customers
£143 Ave. Energy LTV £356 Ave. Energy LTV

What will they buy?

SEGMENT 1: High
3,354,529 Customers
SEGMENT 3: High
Risk, Medium Value
Risk, High Value What is the Why will they or
£-51 Ave. Energy LTV
309,000 Customers 1,393,284 Customers customer doing? won’t they buy?
£298 Ave. Energy LTV
£66 Ave. Energy LTV
Why are they doing Product or offer
High

it? positioning.
Additional needs.
Dispelling the myths - how can data help? Making it
Happen

Company X knows that... But what if they knew that...

• The average customer spends £192.45 • No customers actually spend £192.45

• Half of the customers spend less than
£50

• A typical mailing response rate is 10% • For certain groups of customers the
mailing response rate would be 40%

• Most of my customers come from • Marketing activity mainly in the South

South East East - actually the best take up of
product A is in South West

• We have a good reputation and our • 1% of recent purchasing high value

customers generally like us customers have had a serious
complaint

Examples only
What effect will this action have on the bottom line? Making it
Happen

• Need to quantify expected outcomes based on:

– Testing and/or typical results seen in other companies
– Value it will generate for the business
– Impact it will have on retention and costs

% Response Rates Return on Investment

891K opportunities available for mailing in Using financial marketing costs, along with our
the top decile of the model, for these we expected response rates by model segment, we can
would expect an average response rate of calculate an ROI for each model group, ensuring that
1.3%. only the most profitable customers are targeted.

Building a Business Case…
Without With - Tactical
•Target 1 million •Customer contact planning
customers, 0.2% uses segmentation
response with average –know who to contact when
spend £100 about what, mailing sizes
–£200,000 revenue drop (100,000)
–costs £400,000 (40p –costs reduce (£40,000)
per mailing) + –targeting right customers -
fulfilment + …. 2000 respond - 2%
•No planned customer response.
contact –Profits higher
–potential unhappy •Quantify
customers, quantify... –if 10% Medium value
•New products driven by customers become High
research but unable to be value customers - inc
applied to customer revenues £1,600,000
base…. (H=£100, M=£60)
–If churn reduced by 2% for
High value customers….
Examples only
Making it
Happen
With - Strategic
•Segmentation drives customer
knowledge throughout business
–media and channel
choices
–product bundling
–propositions and key
messages
–demonstrating knowledge
drives customer satisfaction
•Quantify
–3% more customers will
buy product X if sold on
price promise….
–NPS / CSATdrives LTV...
Planning around the customer will not come overnight...

Continue to plan for and …whilst ensuring targets fit

measure sales volumes... with planning at customer level

…BUT essentially, we need to ensure that:

• The segment strategies are defined and clear.
• We have customer segment KPI’s for everyone who ‘touches’ the customer
Conclusion & Summary

• Customer segments are the starting point but we need to learn to

manage the customer P&L
• Products, Propositions and Channels do not drive the value of the
business. It is CUSTOMERS - acquisition, mix, loyalty development and
retention.
• Buy-in at all levels and usage is fundamental. We have failed in the past
because there was no buy-in to the Customer P&L.
• Investment in technology is important but PEOPLE are critical.