The Importance Of Customer Segmentation

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Why should you think about customer segmentation? The Amazon threat is real. With the goldmine of information on customer transaction pattern and online behavior Amazon can understand behavior and predict spending patterns down to an individual customer level. How can brick and mortar stores compete? Customer segmentation holds the answer to some of these questions. By its very nature, it is difficult to understand and predict the customers in an offline environment. But when we aggregate customer data over time and numbers, patterns emerge. Customer segmentation helps retailers in understanding the broad groups of customers and their spending pattern and behavior. It can help a business understand the characteristics of the most profitable…show more content…
Clarity about goals of the exercise is of utmost importance and should be in line with the strategic goals of the organization. THERE IS A LOT OF DATA AVAILABLE – DECIDING WHAT IS RELEVANT CAN BE CHALLENGING With oceans of data available, it becomes more and more important to not get lost and isolate key variables which drive customer behavior. Some of the commonly used variables are: • Demographic variables – Age group, gender, income, education, region – metro vs sub-urban. • Typical shopping trip – Average trip spend, lifetime value, number of items bought, number of different departments explored in a typical shopping trip and lifetime, returns. • Nature/Quality of Engagement – Frequency of visits, tenure of acquisition, time since last visit. Business judgement must be applied depending on the context to consider variables apart from these commonly used variables. For e.g. during a segmentation exercise for a book retailer, we discovered that the % or revenue contribution and number of café item purchased were very strong indicators of customer…show more content…
It is a good idea to shortlist a few representative customers from each cluster and build “personas” around them. This helps the business team make concrete mental pictures of the segments and any obvious fallacies can be removed. REGULAR REFRESH OF DATA AND METHODOLOGY IS IMPORTANT TO IDENTIFY SHIFTS IN CUSTOMER BEHAVIORS All businesses know that customer behavior changes over time. But how can a business effectively understand and measure changes? Tracking migration of customers from one segment to another can hold the key to understanding changes in customer behavior. The segmentation methodology and selected variables need to be revisited periodically as well – a variable which was previously unimportant could become significant or assumptions about demographics could no longer hold true. For e.g. number of hours spent on browsing internet would have been an unremarkable variable in the past, whereas now it is a key indicator for online businesses to understand how tech-savvy the customer is. RETAILERS NEED A BUSINESS INTELLIGENCE TOOL INCORPORATING CUSTOMER

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