Portals eNewsletters Web Seminars dataWarehouse.com DM Review Magazine
DM Review | Covering Business Intelligence, Integration & Analytics
   Covering Business Intelligence, Integration & Analytics Advanced Search
advertisement

RESOURCE PORTALS
View all Portals

WEB SEMINARS
Scheduled Events
Archived Events

RESEARCH VAULT
White Paper Library

CAREERZONE
View Job Listings
Post a job

Advertisement

INFORMATION CENTER
DM Review Home
Newsletters
Current Magazine Issue
Magazine Archives
Online Columnists
Ask the Experts
Industry News
Search DM Review

GENERAL RESOURCES
Bookstore
Buyer's Guide
Glossary
Industry Events Calendar
Monthly Product Guides
Software Demo Lab
Vendor Listings

DM REVIEW
About Us
Press Releases
Awards
Advertising/Media Kit
Reprints
Magazine Subscriptions
Editorial Calendar
Contact Us
Customer Service

Segmentation:
On Average

  Column published in DM Review Magazine
May 2001 Issue
 
  By Doran J. Levy

Have you heard the joke about the two statisticians on the front line of a battle? Crouched in their foxholes, they spied an enemy soldier coming down a hill. Taking careful aim, one fired 10 feet below and the other fired 10 feet above the target. Smiling, they turned to each other and said, "We got him!"

Well, on average, they did. However, averages are convenient fictions that often mislead us more than they give us information. In spite of this, customers are often evaluated relative to averages.

For review, let's think about what an average is. We all know how to get an average; add up a column of numbers and divide by how many numbers are in the column. What most people forget is that an average makes sense only when it comes from a particular kind of distribution of numbers. If the things that are averaged don't come from a normal distribution - one that follows the bell-shaped curve - the average makes no sense. For example, average income is usually a worthless number. Anyone looking at the distribution of income will see that, in most cases, there are a lot more poor people than rich people.

I don't suggest one abandon using averages. Use them where they are appropriate. However, in this and subsequent columns, I will explain why segmentation is a better alternative to averaging and how it can add a whole new dimension to understanding your customers. Segmentation is the key to successful customer relationship management (CRM) because it provides the most efficient mechanism for target marketing and customer care.

Essentially, segmentation is carving up your customer files in ways that group the people into categories. What kind of categories? You decide, as long as the categories make sense to you and help you run your business profitably.

One simple and useful way to segment your customer files is with a Pareto analysis. It provides a way of dividing customers according to their value to the organization.

To construct a Pareto diagram, select a criterion scale, such as customer sales. Next, rank and order the customers from the one who spends the most with the company to the one who spends the least. Finally, divide the total list into deciles, those 10 percent of customers spending the most, second most, and so on. Plotting the data will produce a distribution as illustrated in Figure 1.


Figure 1: Sample Pareto Distribution

In this Pareto chart, 70 percent of sales come from the top two deciles. This group of customers is a segment. This analysis has many different implications. For example, applied to CRM, these 20 percent of customers providing 70 percent of revenues obviously must be given the best treatment. They are the best customers. Manage-ment should know who they are and what they are buying.

This segment gives management insight into what it is doing best. By comparing its characteristics to the attributes of the three deciles below it, a segment constituting 21 percent of sales in the chart, management may learn what it has to do to increase sales to the middle-tier segment.

Additionally, the remaining deciles may be costing the company money. A company may use this type of analysis to control calls to its service center. Upon initiating contact, the customer is asked to type in his customer number using his telephone keypad. Depending on the customer's decile, he is either moved to the head of the call queue or forced to wait until it is his turn. In other words, good customers get the best treatment. If low revenue customers hang up and leave to do business with the competition, so much the better.

Most, if not all, businesses have similar distributions of customer sales. The common term is the 80/20 rule. Eighty percent of sales come from 20 percent of customers. These "heavy users" constitute a segment that is vital to the business.

Segmentation represents a more accurate and informative way of examining your customer database. The Pareto method is just one example of segmenting your data into groups that give you insight. Future columns will examine other segmentation schemes, analytic methods and ways to use segments to increase your marketing effectiveness.

The important thing to remember is that there is no average customer. Each customer represents a different set of challenges and opportunities. Segmentation is the only viable way to cope with today's dynamically fragmenting consumer marketplace. By using segmentation, marketers are more effective in channeling resources and discovering opportunities.

...............................................................................

For more information on related topics visit the following related portals...
CRM and Data Analysis.

Doran Levy, Ph.D., is an internationally recognized expert in market segmentation. His work has focused on the application of segmentation to market strategy, product development and CRM. Levy and Carol Morgan are coauthors of the recently published book, Marketing to the Mindset of Boomers and their Elders. For more information, visit their Web site at www.attitudebase.com. Currently executive vice president of Strategic Directions Group, Inc., a strategic marketing company specializing in segmentation, Levy can be reached at dlevy@strategicdirectionsgroup.com.

Solutions Marketplace
Provided by IndustryBrains

Intuit Track-It! Help Desk & CRM Software
Intuit IT Solutions provides Track-It! - the leading help desk software solution for employee & customer self-help, call tracking, problem resolution, remote control, asset management, LAN/PC auditing, and electronic software distribution. Free demo

Customer Relationship Management for IT
Web-based CRM and more with Autotask: Great business management software optimizes resources and track billable project and service work. Get a demo, then try it free with sample data. Click here for your free trial!

TopLine Leadership Sales & Sales Mgmt. Training
Offering two customized workshops. One for sales managers to improve coaching and leadership skills; and one for sales people to improve consulting/solution selling skills.Visit our website to download free report.

Strategic CRM Analytics White Paper
This white paper explores how companies can extend their CRM applications by using BI tools to turn CRM data into actionable information to drive strategic decision-making and improve ROI.

SAP Master Data Management
Learn about SAP Master Data Management to easily consolidate, augment, store & distribute master data w/ NetWeaver. Manage complex & rich product, customer, supplier, & employee info w/ SAP.

Click here to advertise in this space


View Full Issue View Full Magazine Issue
E-mail This Column E-Mail This Column
Printer Friendly Version Printer-Friendly Version
Related Content Related Content
Request Reprints Request Reprints
Advertisement
advertisement
Site Map Terms of Use Privacy Policy
SourceMedia (c) 2005 DM Review and SourceMedia, Inc. All rights reserved.
Use, duplication, or sale of this service, or data contained herein, is strictly prohibited.