How we do Customer segmentation — Customer science & Analyticspraveen govindarajBlockedUnblockFollowFollowingFeb 9In any sector, Customers are the king of the business life cycle.
It is essential for any analyst or data scientist professional to know better about them & It helps to add more values to their business insightWhy we need to Segment CustomersCustomer segments enable you to understand the patterns that differentiate your customers.
However, collecting and analyzing data just to understand patterns and differences is not useful unless you’re going to do something with the information.
Analyzing customer segments enables you to customizeIdentify the most and least profitable customersAll customers are not created equal.
An examination of revenue by customer segment usually reveals that a minority of customer segments is responsible for the majority of profits.
This is called the Pareto Principle.
Identifying more profitable segments allows you to focus your efforts on keeping these customers happy while increasing their purchases.
What’s more, segmenting can reveal underserved customers for whom specially designed and marketed products or services can be created.
Improve marketing focus.
Segments often have different interests, values, tastes, and reasons to purchase what you offer.
Vastly disparate segments may not respond to the same marketing messages or campaigns.
Predict future purchase patterns.
Knowing that certain customers are more likely to purchase other products based on past purchases helps with planning and marketing.
If you’ve ever watched a show on Netflix or purchased a book on Amazon, then you’ve seen the value of segmenting to predict and encourage future purchases.
This practice is called predictive analytics.
Build loyal relationships.
Fully meeting the customers’ expectations through customized service and uniquely designed products at a price they can afford helps build customer loyalty.
Loyal customers are more likely to do business with you again and recommend you to their friends and colleagues.
In addition, segmentation may reveal what kinds of incentives cause each segment to choose your business over the competition over and over again.
Price products differently.
Why lose money by reducing prices if some customers aren’t motivated by price?.By acquiring an in-depth knowledge of customer motivations and gauging how much they are willing to spend (price sensitivity), you can develop more effective pricing strategies.
Develop better products and customize products or service features.
Segmentation provides the knowledge you need to tailor your products and services to maximize your profits within each segment:Do you lose sales because your product lacks prestige for the target segment?Is the product’s large number of features making its price prohibitive?Are customers more interested in the competition’s products because it has better features?Do you need to develop a whole new line of products?Segmenting by the Five W’sWhoAt the most basic level, you should know the demographics of your customers.
Characterizing customers based on demographics is the simplest and easiest way to start segmenting.
Demographic questions are not subjective: They give you real, verifiable information about your customers.
The core “who” demographic subjects include:GenderAgeIncomeEducation levelOccupationMarital statusNumber and ages of children & dependents in their familyKnowing these basic demographics is interesting in itself.
For example, an airline company interested in determining who the most frequent users of its company-brand credit card are may find that they are high-paid men who travel for business.
This type of information helps with identifying effective sources of advertising or products that this group is more likely to purchase.
WhereKnowing where customers live isn’t just an exercise in placing pins on a map.
Instead, it’s about understanding the geographic diversity or concentration of your customers.
It helps with locating better business locations, decreasing delivery time/distance, and so forth.
If most of your customers live far away from your physical location, you may decide to open a new location that is closer to them.
Geographic attributes can include:Rural versus urbanDomestic versus internationalCity names and market size (for example, Chennai vs Bangalore)Regions and statesZip codesMy company conducted a study for an India-based mobile phone carrier to understand the problems customers had when purchasing phones and paying bills online.
As part of the study, the company wanted to understand the geographic breakdown of its online customers so it collected the zip codes of the participants.
Which helps the companies see the urban connection and geographic diversityWhatIn thinking about the “what,” you should think about the past, present, and future.
What have customers done, what are they doing, what are they thinking, and what are they likely to do?.What they have done The easiest place to start in the past.
What have customers done that distinguishes them?.If helpful, think in terms of recency, frequency, and monetary value (revenue and profits) for segments:Most recent purchaseTotal number of transactionsProduct experienceTotal revenueTotal profitTime spent with supportThe actual number of referred customersFrom the answers to these questions, you learn how your customers interacted with your business in the past, and who your best customers were.
Comparing this data with the data from other W’s, you will be able to the characteristics of your least and most profitable customers.
What they are doingUnderstanding the context, goals, and motivations of customers will help you to identify gaps in product features and opportunities for improvement.
Use segmenting to define key areas such as:Motivations: Business or pleasureExperience level: Power versus novice userGoals: Perhaps looking for a lawyer versus getting answers to a legal questionA customer who uses only a few features of a software product has different needs than a “power user” who uses all the functionality.
Power users may be more interested in new features and upgrades than the more occasional or novice user.
What they thinkLook to identify attitudes and psychographics that differentiate the following:Lifestyles: Traveler versus homebodyValues: Frugal versus spendthriftTechnology: Early adopter versus tech laggardPersonalities: Risk seeking versus risk averseOverall product satisfaction: Low versus highInvesting habits: Active versus occasional investorThese questions are more subjective than objective but are nonetheless fundamental.
For example, if a majority of your customers typically wait until all their friends have technology before making a purchase (tech laggard) then marketing that emphasizes cutting-edge technologies won’t be appealing.
What they are likely to doYou also want to think in terms of long-term relationships and the lifetime value of a customer.
Using a combination of surveys and past behavior can help you estimate:Likelihood to recommend to friendsLikelihood to repurchaseThis helps you identify the customer segments with whom you can reasonably expect to benefit from long-term relationships.
Identifying loyal customers is instrumental in keeping them.
Offering perks such as discounts when using your company-brand credit card, participation in sweepstakes, or free products and services for their loyalty is an effective way to get customers to choose your company over the competition.
WhenThere are often significant differences in the types of customers you have, based on when you measure.
Seasons: Christmas shopping versus ordinary timeWeekends versus weekdaysLife events: After a baby, marriage, or moveDaytime versus eveningPeriodic activities: Get haircuts and buy toothpaste every five weeksWhyThe “why” is pretty obvious, isn’t it?The customer wants or needs what you have to offer!.customer segmentation can help answer many business questions.
Among these include:What are my customer segments and how are they defined?How many distinct groups do we serve — and how are they different?What customer segments deliver the most revenue and profit?What products and services appeal to which customer segments?How can I tailor communication to better address customers’ needs?Which consumers tend to shop/interact exclusively online and why?How and where should I leverage my customer loyalty program further?HowHow do customers interact with the product or service?Online versus in storePhone versus in personThrough a reseller versus directKnowing how customers already interact with your business gives insight into what can be improved and what is already working to its full potential.
For example, say you are trying to improve the sales of your software and you realize that most users buy it from a reseller.
Perhaps that means that your website is difficult to use and so less tech-savvy people, therefore, turn to a third party.
This is very valuable information and could indicate that your website needs improvement in order to meet the needs of your less tech-savvy customer segment.
It isn’t essential to collect every one of these attributes about your customers: Some may not apply and some may not make a huge difference.
It all depends on the kinds of products or services you offer and the goals you have in mind.
Are you looking for an optimal store location to reach wealthy clientele?.Focus on geographical and demographic questions to identify where the well-to-do segment of your customer base resides or shops.
Use your judgment and knowledge of your own business to pinpoint the attributes that are the most meaningful to your study.
ConclusionCustomer segmentation is a nugget from customer science & Analysis.
Hope this blog post will be helpful for a Data Scientist / Data Analyst / Business Analyst to ask the right questions at requirement gathering.
To make insight from data-driven approaches either they need more details about customers to confirm their intuition is correct.
To make the blog post concise, details shared in this blog post is not exhaustive and Customer segmentation may involve other parameters too.