Customer Segmentation

Customers, and potential customers, are not all of equal value to a company. The process of deciding who is more or less important for future growth is the process of Customer Segmentation (also called Customer Prioritization by some companies).

We have found Customer Segmentation to be the foundation of virtually all Sales Force Optimization and Sales Force Effectiveness initiatives. We recommend you make it top priority to address any concerns you have about your current Customer Segmentation approach.

Here are some key insights we gathered from our Customer Segmentation projects.

“…on average 23% of calls have a negative ROI…”

1. Customer Segmentation Is Important

If a company has a poorly designed (or non-existent) customer/market segmentation, then nothing else will deliver as much value in the short term than a well designed customer segmentation schema. Based on past project work, we have found that if there is not a customer segmentation in place, then on average 23% of calls have a negative ROI, and 29% of customers will have a sub-optimum level of calling. In this case, by re-allocating the calls to the higher potential customers the efficiency of the sales force can be increased by 25%

2. Customer Segmentation Impacts Other SFO Initiatives

This cannot be over-stressed: if you need to address concerns with your Customer Segmentation approach, do it first before you start other commercial initiatives. If you do not, you will most likely need to repeat or redo work later. Imagine that you have mapped all of your sales accounts before creating customer segments for every customer group in your account list. You will have no idea where your potential customers are because each customer group is technically one single segment. If every customer is the same, then you will not be able to support the more important/profitable customer groups and you may be wasting valuable sales rep time providing customer service to accounts that do not want your business. This is why a segmentation analysis is so important at the start of a SFO project.

3. Create Customer Segments Based on Sales Potential

The most common customer segment mistake is to segment based on a single piece of customer data (current sales). This can result in high-potential customer groups being ignored.

It is best practice to segment customers based on sales potential. This could be total market sales for each customer (if it’s available). Or a proxy for potential that will vary depending upon the industry. In many cases, we can use predictive modeling techniques to estimate the market sales for each customer. This measure can be used as the basis of a potential-based segmentation.

4. Create a National Customer Segmentation

Another common mistake is to create local customer segments. For example, each rep may be asked to choose the top ten accounts in their territory. These are designated “A” accounts. This localized approach masks genuine variations in sales potential (especially if sales potential is linked to the climate or a specific demographic). This often results in a poor territory design where the territories look balanced but have a wide variation in sales potential.

Customer Segmentation Case Study: European Vision Care

A European Vision Care company had been segmenting their customer groups based on their own sales. As a result they had hit a plateau and found it difficult to grow in line with expectations. The management identified their approach to customer segmentation as one of the key weaknesses of the business.

We carried out a full customer segmentation re-design. The client commissioned a survey of their customers to assess the market potential (not carried out by us). This was a subset of all of their customers. In addition, the sales force collected visible attribute data for *all* of their accounts. We then created a predictive model which linked the visible attributes to the market potential. This model was used to predict the potential for all of the accounts. The segmentation scheme which was used was a 3×3 grid. Each segment has a letter (A, B and C) to indicate the potential and a number (1, 2 and 3) to indicate penetration or share of the company. The cell A1 has high potential and high share, while C3 is low potential and low share.

We then used CallMix to define the desired call frequencies for each segment and then defined the segments in such a way as to balance the planned calls with the call capacity of the sales force. This was an iterative process facilitated by our team.

The final deliverable had three components:

Precise definition for each segment
Recommended coverage and call frequency for each segment
List of accounts in each segment

In this particular case there was a follow-up sales territory design project, which is often necessary after a change to the customers customer segmentation.

This methodology has been successfully applied in the US, Europe and Australasia.

One-On-One Discussion

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