Digital Alchemy - Customer Segmentation Whitepaper

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Segmentation has been used for decades to empower marketers to communicate to the right
groups of customers. Nowadays, as markets have become fragmented, businesses need to be more
resourceful and effective in reaching and engaging their customers, this forces marketers to come up
with techniques that enable them to segment more precisely.
Jed Kolko of Forrester Research in Demystifying Segmentation succinctly describes segmentation as
‘shorthand for understanding consumers’.
Customer segmentation is an iterative process of identifying distinct groups of people or
organisations that share something in common, based on general attributes such as demographics,
geographics, psychographics, behaviours and so on. Compared with traditional segmentations, today
segmentations are generally more specific and personalised. Fed by a constant stream of information
that reflects changes in customer aspirations and circumstances, the data is highly dynamic and
changeable. In all cases relevant variables for segmentation must be identifiable, accessible and
recordable, examples are: transaction data, usage frequency, response and purchase history. Given
the greater potential for individual data collection, segmentations should not be solely limited to
geo-demographic profiles or other static, passive characteristics. The ultimate goal of segmentation
is that each segment group will respond in an expected manner to marketing and promotional offers
that marketers tailor to them. A secondary aim is to create a competitive edge for the organisation.
Segmentation is not targeting
Marketing now relies heavily on customer initiated contact, the traditional role of segmentation
asthemainmethodoftargetingisessentiallyredundant.Withone-to-oneinteractions,targeting
is largely driven by the activation of specific events and individual customer behaviours. Hence,
in a permission-based environment, involved individuals now self-select themselves as targets.
So, although customer segmentation is no longer the principal driver for targeting, it still plays
an important role in optimising communications for individual target customers.
What is it?
Why do you need segmentation?
Customer Segmentation:
Leverage Communication Through
Personalised Offers

Segmentation in layers
Developing layered segmentation models based on factors such as value, lifecycle and
behaviour can deliver both strategic and tactical benefits. Tailored marketing communications
can be developed for each segment group, the improved targeting and relevance means
that you can contact them more often at a lower overall cost and therefore more effectively.
This helps to reduce churn by improving customer experience, stimulating long-term
engagement and hence customer loyalty.
Segmentation should be dynamic
Traditional segmentation alone is too shallow to generate deep, meaningful results; it focuses
on static criteria like demographics and geographics that lack the nuance and perspective
to define a specific target with any accuracy. Markets now are more mature with constantly
changing trends which also contribute to increased volatility in segmentation variables.
Contemporary marketing revolves around customers’ needs and preferences, causing a shift
from a business-centric to a customer-centric approach, segmentation therefore needs to be
more customised and tailored. Relying on static attributes will not tell you enough about your
customers and increases the risk of wasting marketing resources on the wrong people. A more
comprehensive approach to market segmentation, allowing marketers to analyse dynamic
attributes to disclose behaviour patterns and distinguish customers more accurately is required.
Additionally, where the approach used to be rigid and monolithic with a limited number of
segments, the potential and indeed the need now exists for multiple segmentations to co-exist.
Figure 1 illustrates three different scenarios that firms can adopt as their segmentation strategy, customer value,
product holding and price behaviour.
Figure 1: Segmentation in layers
Low High Low HighLow High
Low High
Younger Older
Product Spam
Customer Value Customer ValuePricing Behaviour
PricingSegment
Demographics
ProductHolding

Segmentation for offers decisioning
Figure 2 depicts the role of segmentation in Event Based Marketing (EBM). The target and timing are determined when
a trigger is activated by a predetermined event; available customer information is analysed and processed using an
appropriate model that decides on the best product to present to the individual; the manner of communication and type
of offer are then determined by the segment in which the customer is categorised. The segment may either be pre-set
or dynamically generated.
Risk reduction
Care must be taken as consumers are less predictable and much harder to classify than in
the past. If segments are too broad, there is a risk that key customers and opportunities are
missed, communication has lower relevance, and the cost of communicating to customers
becomes too high and unprofitable. Conversely with the benefit of rich data, we are able to
segment customers more precisely and effectively, reaching them more often and at lower
cost. For even greater precision, database marketers can employ micro-segments to cater for
the more granular requirements of particular markets.
Keeping up with changes
Segmentation is more beneficial when combined with other techniques such as Customer
Lifecycle Management (CLM). Each transition and other changes within a customer’s lifecycle
affects their segmented criteria, so by identifying the new positions, marketers are able to
re-segment or reallocate customers appropriately. Each change potentially adds more useful
information and precision to the re-segmentation while further aiding marketers to keep pace
with the progression of customer lifecycles.
Figure 2: Applied Segmentation
Triggers
Timing decision
Propensity Models
Product decision
Segment
Offer decision

What needs to be considered?
Organisational change
To be effective, marketing activities must be driven by customers: this alone may require
a paradigm shift in an organisation’s culture. The role of segmentation also needs to evolve
and grow within a customer-centric environment. Now with the use of segmentation at the
‘sharp end’ to underpin and guide offer decisions and communication during the customer
interaction, virtually all marketing activities employ some degree of segmentation. This all
pervasive role means that segmentation must be integrated into key processes to enable it to
work holistically.
Adopting marketing support tool/technology
Segmentation needs to be more granular and personalised. Relevant inputs to each segment
must be determined in advance and procedures implemented to systematically capture and
manage appropriate data. Data inputs for segmentation are dynamic and frequently changing,
hence the requirement for a robust yet flexible technological foundation to serve as a platform
and provide operational support. The system needs to facilitate Event Based Marketing as
the main customer driven marketing tool; incorporate analytics and modeling functions to
support decisioning; and host offer and communications libraries that can be accessed on
the fly. A capability to distribute through all communication channels is essential in order to
implement the triggered output. All processes need to be integrated within the Marketing
Automation framework.

Using Nectar data, Sainsbury’s was able to identify and group together different purchasing
behaviour patterns. Data segmentation enabled them to generate discount coupons highly
customised to each user’s needs, improving its customers’ shopping experience and loyalty.
While the company’s present mantra is to keep offerings as simple as possible for shoppers,
behind the scenes data integration, mining and analysis involves 15 billion lines of data. After
segmentation and modelling, business rules are applied to create nearly 1,200 different
coupons, each targeted by type of offer, strength of discount and other key dimensions. This
is delivered in real-time whenever a customer swipes their Nectar card.
Outcome:
Better customer understanding: Sainsbury’s was estimated to have achieved a 50% efficiency
improvement in their understanding and segmenting of customers. (According to Heather J.
Anderson, Teradata)
Response rate: Response to targeted mail and email increased 300% compared to Sainsbury’s
previous general mailings. (H.J. Anderson)
Sales Increased: Five times more sales from direct marketing than was achieved 2 years
earlier. (Richard Zanetti, Customer Segmentation Manager, Sainsbury’s)
Sainsbury’s received a Data Strategy Award for Best Use of Data in Retail in 2010.
“It is easier to get somebody to carry on with an
existing behaviour than it is to try to get them to
change to a new behaviour”
Andrew Mann, Director of Insight and Loyalty at Sainsbury’s
Solutions:
In response, Sainsbury’s adopted data-mining software to analyse customers’ buying
behaviour through its Nectar loyalty card, with the purpose of spotting future buying trends.
Data was generated from loyalty card applications, demographics including age, gender,
number of children, lifestyle data and mailing history. Additional transaction data showed
what people bought, when they bought, how they paid, how frequently they visited each
store, whether the product was on promotion and so on.
Case Study from Sainsbury’s (UK)
Challenge:
Sainsbury’s, which had been one of the UK’s most successful retail chains until the year 2000,
found its market share diminishing and profits eroding in the face of fierce competition.
The retailer’s access to customer intelligence was restricted by cumbersome data retrieval,
manipulation and analysis, limiting their ability to generate meaningful offers for each
customer group. Moreover, its corporate structure did not facilitate the necessary emphasis
on local preferences, unlike Tesco who came out with a more successful loyalty program.

In conclusion, while segmentation plays a significant role in structuring the customer
base, it is the underlying analysis and application of each segment that determines what marketing
is actually presented to the customer. Segmentation is one component in a range of techniques that
enable marketers to reach the right customers in the most effective way. More importantly, building
a relevant dialogue with appropriate customers enhances relationships and improves customer
experience. Hence, segmentation needs to be fully aligned with the other techniques in order to
play its part in both the strategic and tactical implementation of database marketing. The capability
to meet customers’ short-term needs benefits both customers and the organisation in the long run.
About Digital Alchemy
Digital Alchemy Limited (DA) is Asia Pacific’s leading Database Marketing Services Provider. DA’s
team of professionals are dedicated to working with clients to improve their marketing efficiency
and to capture latent customer value. Established in 2003 and operating in Sydney, Melbourne,
Auckland,Bangkok,HongKong,Nanjing,andSingapore,DAhasbeencontributingtothesuccessofan
expanding breadth of clients including leading companies in financial services, telecommunications,
motoring services, media and other industry sectors.
“This document has been prepared for the purpose of providing general information and should not be relied on in substitution for individual
professional advice. Copyright in this document is owned by Digital Alchemy Consulting Pty Limited, and except as permitted under the Copyright
Act 1968, no part of it may be reproduced by any process, electronic or otherwise, in any material form or transmitted to any other person or stored
electronically in any form without the prior written permission of Digital Alchemy Consulting Pty Limited.”

Reference Cited
http://www.marketingweek.co.uk/disciplines/data-strategy/the-data-guru-who-uses-simplicity-to-
get-results/3023339.article
http://directmag.com/mag/marketing_nectar_feeds_sainsburys/
http://www.silicon.com/i/s/wp/spnsr/sas/Sainsburys_analytics.pdf
http://www.merkleinc.com/user-assets/Documents/Research/Merkle-DMA%20Webinar%20-%20
Operationalizing%20Enterprise%20Segmentation.pdf

Digital Alchemy - Customer Segmentation Whitepaper

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Digital Alchemy - Customer Segmentation Whitepaper