Using Value and Fit for Costumer Segmentation.
By Laura Patterson is president and co-founder of VisionEdge Marketing, Inc.
Thursday, 4th December 2014

Customers are the lifeblood of any business and your question about developing a customer segmentation schema is a good one because we all know that not all customers are created equal and some customers are better than others:

Exactly what determines a better customer? Most experts suggest that you evaluate and segment customers on a minimum of two attributes: their value and their fit.

Value is a bit different than just sales revenue, which is why we discourage segmentation schemas designed specifically around revenue, a common approach used by sales-centric organizations to create a customer pyramid.

Value is determined by the net present value of a customers expected stream of future contribution. Generally, this is determined by quantifying and calculating a customers lifetime value (information about calculating LTV is in the TIPS Archive).

Value takes into account not only revenue and profit, but also the impact of the customer on their and others future purchases, their share of wallet, as well as your overall cost to service overtime. We hope one of the reasons you are developing a customer segmentation schema is to ascertain which customers to invest in and which customers you can capture more business from as a result of changes you make in your marketing mix (product/service, price, promotion, place, etc.) and service.

Once you understand the customers needs, your goal is to develop and deploy strategies to impact the customers future behavior. Be forewarned, calculating customer lifetime value can be a bit tricky.

The second attribute needed to segment customers is based on fit. Fit considers a variety of factors, such as, how well the customers needs and wants match up with you capabilities, how well the customers business processes match up with yours, and/or how the customers buying criteria fit to name a few.

As you can see, fit is about much more than demographics. There are many dimensions of fit so you will have to do some homework. What you trying to understand with this attribute are the different reasons customers buy the category and buy from you so you can have a clear view of the customers actual needs and motivations.

With these two attributes you can build a needs-based market-centric customer segmentation model. By deploying the model you will be able to segment your customers and develop appropriate strategies for each customer group.

Ultimately, you will have different strategies for each group designed to be relevant to that group as well as improve the profitability associated with the group.

By zeroing in on the profitability and growth potential of each customer, you will be managing your customer base just like any other income producing financial asset of the organization.

Laura Patterson is president and co-founder of VisionEdge Marketing, Inc., a recognized leader in enabling organizations to leverage data and analytics to facilitate marketing accountability. Laura’s newest book, Marketing Metrics in Action: Creating a Performance-Driven Marketing Organization (Racom: www.racombooks.com ), is a useful primer for improving marketing measurement and performance. Visit: www.visionedgemarketing.com 

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