The value of customer knowledge and having a single view of a customer`s interactions with your organisation is the ability to group certain customers together in order to treat them differently, according to their potential value to your company.
Once you can segment your customer base into groups that share similar characteristics, you can begin to target customer segments with the right messages at the right cost to your organisation, thereby maximising the return on your sales and marketing efforts.
The main objective of customer relationship management (CRM) is to maximise the value of the customer to your organisation. This is a dual task involving the optimisation of revenue from that customer and the management of the cost of selling to and serving that customer.
In order to do this, the company must have sufficient information about the customer to understand where on the scale of "most attractive" to "least attractive" each customer sits.
But most firms have a large enough customer base to make it impractical to research each individual customer and devise sales and marketing plans on a one-to-one basis.
The next best option is to group customers according to common criteria and then to treat the groups differently. There are many ways in which you can approach the segmentation of your customer base.
This involves an understanding of what criteria make up customer value within your particular market offering.
Sliding scale
Companies are usually able to group customers according to historical revenue to the organisation. Which means you can place customers on a sliding scale from your top revenue generators down to the low purchasers. While this is valuable, it is not a good indication of the future potential value of a customer. Treating clients solely according to how they have behaved in the past could prove to be shortsighted.
Also problematic is grouping customers according to revenue without an understanding of the costs associated with bringing in that revenue per customer. It is more telling to know the profitability of your clients if you have sufficient knowledge of the cost to serve. But this is also an historical view.
A better measure is the lifetime potential value of the customer which involves an understanding of how much business that customer is likely to do with your organisation over the period that the customer is likely to remain a customer.
The lifetime potential value of a client should be a composite of multiple measures that indicate which customers are likely to generate the most revenue over the longest period of time, according to certain criteria. Demographics could be part of this measure, should demographic characteristics influence the repeat purchase of your products or services.
Product or service extension could also be part of this measure. This involves an understanding of how many products or services your customers currently purchases from you, and an indication of the potential to extend the product/service depth within the customer.
Whichever way you approach the segmentation of your customer base, once you have identified your customer segments, you can start targeting your marketing and communication campaigns intelligently.
According to your criteria, you now know which are your most valuable customers, and you can ensure that your CRM strategy focuses on retaining those clients. You will also know which are your future growth customers, and can devise communication plans to grow those customers in either revenue or product depth.
You will also know which purchasers are not attractive to your organisation. Either the cost to serve these customers is too high meaning they are not profitable, or their potential lifetime value is low. This enables you to decide whether you politely encourage these customers to go to your competitors, or bring down the costs to serve these customers through alternative, possibly electronic self-serve channels in order to make them profitable.
The key to segmentation of your customers is to start with the end in mind. Use segmentation criteria that will produce groups of clients with which you can achieve measurable retention, extension or diversification results.
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