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Customer segmentation. Are you missing a trick?

Customer segmentation is a valuable tool when you are developing your commercial trading plan and optimizing your sales delivery for your retail and other trade partners. It's also sometimes an under-utilized asset as many businesses may not always be aware of the advantages segmentation brings to their sales team and bottom line.

(Retail) Customer segmentation helps in understanding better the level of service needed for a customer or collection of customers. It provides you with a more in-depth understanding of your entire customer base. It therefore enables you to provide differentiated, but equally relevant, services to all customers.

Yet, well-executed customer segmentation is not being fully exploited by many businesses.

What do we mean by well-executed here?

To me, this means getting together with your leadership team and spending the time to better understand your customers and also decide what options your business has to offer. Can you identify and provide differentiated services or activities without bringing undue complexity? You can then realize the highest value of sales from your entire customer base by re-deploying your resources and activities appropriately.

How does segmentation achieve this? Segmentation forces you and your team to fully analyse and understand your customers. You must drill down to interpret how they operate and their key success factors. For example in key accounts, one customer group may respond better to a particular promotional offer. EDLP may appeal to one type of customer but not another, some customers may view logistics as a necessary function while others view it as a source of competitive advantage and already have it integrated with their digital strategy.

Within pharmacy, customers are traditionally segmented by potential but adding further dimensions may provide a source of competitive advantage. After all, why would a high potential high street pharmacy with a transient patient/consumer base react the same to your sales approach as a high potential pharmacy located in the heart of the community with a much more stable patient/consumer base? Does this difference provide an opportunity for a differentiated selling call and HCP engagement.

Adopting a segmentation approach may result in differentiated service provision, but also, in many cases, a better response to your customers' requirements, thereby increasing their satisfaction and your long-term sales figures.

Customer segmentation can also be done for any number of customers for example, in key accounts, segmentation may be limited to 15 - 20 customers and be similar to how marketers create brand portfolios. For those operating via a large field force, such as dentistry or pharmacy, there could be thousands of customers.

How do you segment customers?

The critical part is determining your segmentation criteria. This must be conducted in a thorough yet pragmatic way that results in a change in your team's response to how they engage their customers. This is no mean feat.

Let's look at what good segmentation looks like now.

Essentially, segmentation involves clustering one set of customers into a specific group and creating an understandable distinction to another group. Your business can then identify not only the value of each segment but also the steps to succeed and allocate resources accordingly.

Identifying criteria that can be clearly defined or measured is vital step.

For key accounts, a simple set of criteria may include: size, profitability, growth (historical or future), coverage (national or local), logistical aspects (central warehousing or direct delivery), method of commercial interaction or range purchased, together with promotional mechanics. More subjective measures such as attitude (collaborative or transactional), price positioning or buyer empowerment can also be built into the criteria. But care needs to be taken to objectively rate and then weight these criteria compared to more objective factors. For the large field forces mentioned, criteria could include size, potential, physical location, ownership, promotional mechanics or even more advanced factors such as local socio-economic demographics or proximity to competitors or Healthcare centre. I have even seen attitudinal factors incorporated.

There are many models, but my preference would be for a simple four or nine box grid approach. Time needs to be to be taken to determine the X and Y axis for your segmentation model. For example, 'Y' could represent the strategic fit or commercial symmetry and 'X' could be the long-term growth potential. Naming the segments can also help to provide your sales team with more understanding and bring them to life.

If you then identify three to five major themes with around three to five questions, you will begin to locate the customer on each axis. Some experience is required when it comes to weighting the customers so their absolute size is adequately scored, but does not completely dominate the output. This usually requires a couple of iterations, and then the model is ready to be used.

For those considering their own customer segmentation strategy, here are two points to watch out for:

1. Over scoring. Some sales team members may over score customers as a way to get more resources to help achieve their targets, rather than the right resource for their segment. One way to overcome this is to allow everyone to independently score the objective factors (such as size, distribution systems or payment terms) but collectively debate and score the more subjective factors (such as strategic fit or the customer's ability to deliver on their commitments). This can be carried out as a team in a facilitated session.

2. Criteria shift. Time is taken to weight the criteria, but if the output does not conform to a senior manager's expectations, the input or weightings may be arbitrarily amended. If you don’t like the output, do not change it on an ad hoc basis. Use it to facilitate a discussion within your team and only move the criteria weighting with careful thought.

In conclusion, completing a robust and thorough segmentation process will enable you to deploy your resources more effectively and appropriately. This will result in a more knowledgeable sales team driving increased sales and customer satisfaction.