How often do you assume that what works for one customer will work for all your customers too? Unfortunately, a blanket approach for improving customer spending and loyalty simply does not work. Here’s an easy and smart way to segment your customer base so that you can undertake specific, results-orientated actions!
Prefer to read rather than watch and listen? No problem – here’s everything I said in the video as text:
Hi! This is Shweta and today, I’m sharing with you the importance of customer segmentation, and how this segmentation can actually help you take very targeted actions and get maximum impact from each one of your customers in a positive way. Now, I’m sure you will agree with me in that most businesses are built not just by acquiring new customers but also by retaining and nurturing existing customers. Otherwise, it’s a continuous treadmill exercise and very tiring.
Trust me: quite a few of the businesses end up doing that. Now, in my working with clients, what I’ve realized is that not very many businesses actually look at their customers’ spend analysis frequently enough or in the right way. And therefore they miss out the trick, and generally, if there’s a stress, they will talk about one blanket strategy for all the customers. Now, what I’ll share with you is an exercise that I did very recently with one of my clients because that’s what we do on a quarterly basis. We actually look at the customer base and we analyse the spending and see what strategies are required for each segment.
The 80-20 Technique
Now, just one quick pointer here, which will really help you. When you are looking at your customers, depending on the number of customers that you have, you might not be able to segment all of them. We’re looking to get quick results in a short time – that’s the whole idea of leverage. You might want to apply this technique of “80-20”. This is Pareto’s technique and what it really means is that you take look at the customers who are contributing 80% to your turnover. Generally, roughly 20% of your customers will be contributing 80% to your turnover. So what you really need to analyse is that 20% of customer base. That’s what you need to focus on because that’s what is giving you the biggest impact.
The Segmentation Matrix
Now, what we did together, this client and myself, was that we put this 20% into a very simple matrix. And on the X side, which is the horizontal axis, we wrote “Customer Spending” – the money that the customer is spending with you. So it’s the pounds. We set the left side as (Low) and the right side as (High). On the vertical axis we put “Margin”: the percentage that you are making with that client, the profitability of that particular client or customer. So this is the percentage and so the top was (High) and the bottom was (Low). So the first thing was: we looked at our 20% of customers which impact, more or less, 80% of the turnover.
So our top kind of set of customers and we plotted those customers here. So if a customer has spent high value with the business and that business has good margin, obviously that customer sits in the top right quadrant. So you write the name of the customer there, let’s call them (A). Now, there would be another customer who has actually spent less and actually also given very low margin. So that could be your (T) customer in the bottom left quadrant. There could be another customer who has actually spent less but the money that they have spent with you and your business would actually be giving you a good margin. So let’s say that is (B) in the top left quadrant. And then there’s the customer who has actually spent a lot with you and your business but every transaction that they make with you actually doesn’t give you much margin. So let’s call it (C), and put them in the bottom right quadrant.
The Star Customers
Now the customers who are sitting in the (A) section, and you will hopefully have multiple customers sitting here, are your STAR customers. They are the customers that you want to have more and more of. You want your (B)s, and (C)s and (T)s to all move towards this star class. They are giving you a good spend and they are giving you high margin as well. Now, once you’ve got them here, think about it practically. Do they need deals? Do they need some kind of loyalty strategies? Yeah, maybe… maybe not. They surely need some solid relationship management strategies here because they are your top-notch clients. They give you good spend and good margin.
The Increase Margin Customers
Now think about (C) category clients, which are actually spending high with you but the margin that you are making with them is low. Now, they are already doing good business with you but we are not making high margin from them. We decided, me and my client, that here we need to have more Operational Efficiency Strategies. And the idea of Operational Efficiency Strategies is to basically increase the margin on the business that we were already getting. So this is the idea to increase the margin so eventually these (C) clients move into (A) clients.
The Increase Spend Customers
When you’re looking at the (B) segment, which is my low spend and high margin, you want to get more business from them because anytime they give you business, your business or makes good money. So when you are looking at this category, you want to try to keep it simple, so the main thing you’re trying to do is increase the spend of people. There’s one main concept here you need to remember – attrition is not just when your customers stop spending money all together. There are 3 kinds of attrition.
- When they stop altogether.
- When they are actually spending less frequently with you. So they are spending money but they it’s just the number of times you do business with them is less.
- They are spending frequently with you but every time they spend, they are actually spending a lesser sum. So the average pound value is going down.
So once you have your customers sitting in this (B) bucket, you need to analyse further. People are spending less with you because they are not giving us business more frequently? Or is it because they are kind of giving us business, but they are not giving us the right value? What’s happening here? Once you split this further, you will say: “Okay, to increase the frequency, you will have more loyalty strategies kicking in, communication strategies kicking in.” If the issue is that they are coming to you very frequently but they are not spending enough. Then you need to be focusing on average pound spend strategies which could be cross selling, upselling and designing your strategies around that theme. So the whole idea is not to have one blanket strategy if you feel that your customers are not spending enough with you, or if there’s a little bit of inefficiency in your business. You have to think smart and act smart.
Split it! Segment it! Know which customers need what activation from you, what activation strategy is required, and what action is required. Because at the end of the day if you can measure in a very concrete manner, you can manage better and you can improve. And that’s the whole idea.
Your Action Point
So, here’s an action point that I would like you to implement from this discussion today. You need to have this matrix in your business and I want you to get your top customers who are contributing to around 80% of your business. Have a list of all those customers and put your customers in this matrix, once you know the margin that that customer is giving you. Plot those customers in this matrix and that should give you the answers. The same strategy is required for each segment. Once you do that you will see better actions happening in the business and more targeted results. Take massive actions for massive results.