Fundamentals and advanced concepts in customer segmentation. CLV (customer lifetime value) and specific implications in Telecoms. Approaches in operational deployment of customer segmentation.

1. Vladimir Dimitroff
London Oct-2010
IIR – Customer Segmentation and Intelligence

2. IIR – Customer Segmentation and Intelligence
1. Segmentation Fundamentals
- Types and Purposes of Segmentation
2. The Value Chain
- Why value? What value?
3. Understanding Costs
- Directly attributable costs and allocating
aggregate costs
4. More Dimensions
- Loyalty, Social weight
5. Customers Adding More Value
- Feedback value, Engagement
6. The Big „So What?‟ Question
- Applying insight for business performance

3. IIR – Customer Segmentation and Intelligence
Granularity Level and Dynamics
Addressable Entity
Objective Level (Purpose)
Strategic
Segmentation
Tactical
Segmentation
Operational
Segmentation
Market
Segmentation
Customer
Segmentation
Macro-
Segmentation
Core / base
Segmentation
Micro-
Segmentation

4. IIR – Customer Segmentation and Intelligence
By Objective and Purpose
 Strategic: broad segments for long-term orientation and goal-setting
 Operational: stable customer groups for consistent decisioning
 Tactical: dynamic segments for ad-hoc actions
By Addressable Entity
 Market segments: large anonymous groups of customer and non-
customers, statistically studied and extrapolated from smaller,
representative groups
 Customer segments: contain uniquely identified individuals, with
explicit attributes for each person
By Level of Granularity and Dynamics
 Macro-segmentation: high-level customer segments similar to market
segments, used predominantly for long-term strategy
 Micro-segmentation: highly granular customer segments for tactical
purposes
 Operational customer segmentation: (sometimes referred as „base‟ or
„core‟) In the middle with overlaps (can also be used for strategy or
tactics)

5. IIR – Customer Segmentation and Intelligence
Our Business and Our Customers
They have needs and are therefore critically important
We have capabilities and satisfy their needs creating value
They reward us (pay for the product /service provided
The Investors and Our Business
We didn‟t always have the capabilities to satisfy needs
They invested to create those capabilities
We return to them the value received from customers (ROI)
Other Stakeholder Entities
Suppliers provide essential stuff so we can address customer needs
Employees contribute their time and talent
Partners take our product to market, acting as a channel
Community (society) is an environment in which we operate - extracting
and delivering value in interactions

6. IIR – Customer Segmentation and Intelligence
Prepaid subscribers: Identical Value
 Both top up always for € 5.-
 Both fully consume this credit in
6-8 weeks
 Each has a monthly ARPU of € 3.-
0987654321 0123456789

7. IIR – Customer Segmentation and Intelligence
Identical Value
 Both top up always for € 5.-
 Both fully consume this credit in
6-8 weeks
 Each has a monthly ARPU of € 3.-
But:
 Names are different
 Gender is different
0987654321
Adam Smith
0123456789
Eve Smith

8. IIR – Customer Segmentation and Intelligence
Identical Value
 Both top up always for € 5.-
 Both fully consume this credit in
6-8 weeks
 Each has a monthly ARPU of € 3.-
But:
 Names are different
 Gender is different
And:
 Usage is different (!)
0987654321
Adam Smith
0123456789
Eve Smith
90 SMS x € 0.05
25 SMS x € 0.00
5 mins x € 0.10
(3 calls, 1 to Eve)
Free Internet add-on
50 mins x € 0.10
(12 calls, 4 to Adam)
Internet not activated

9. IIR – Customer Segmentation and Intelligence
Identical Value
 Both top up always for € 5.-
 Both fully consume this credit in
6-8 weeks
 Each has a monthly ARPU of € 3.-
But:
 Names are different
 Gender is different
And:
 Usage is different
 More different behaviours -
0987654321
Adam Smith
0123456789
Eve Smith
90 SMS x € 0.05
25 SMS x € 0.00
5 mins x € 0.10
(3 calls, 1 to Eve)
Free Internet add-on
Tops up online, ATMs
Never calls CC
In MBM program
50 mins x € 0.10
(12 calls, 4 to Adam)
Internet not activated
Tops up in shops
Calls CC often (free)
Not in MBM program

10. IIR – Customer Segmentation and Intelligence
Identical Value
 Both top up always for € 5.-
 Both fully consume this credit in
6-8 weeks
 Each has a monthly ARPU of € 3.-
But:
 Names are different
 Gender is different
And:
 Usage is different
 More different behaviours, and
 Age is different
Customer Value is different!
 Different costs (!)
 Different social contribution
 Different growth potential
Therefore – different lifetime value
Adam Smith Eve Smith
90 SMS x € 0.05
25 SMS x € 0.00
5 mins x € 0.10
(3 calls, 1 to Eve)
Free Internet add-on
Tops up online, ATMs
Never calls CC
In MBM program
Age: 19
50 mins x € 0.10
(12 calls, 4 to Adam)
Internet not activated
Tops up in shops
Calls CC often (free)
Not in MBM program
Age: 72

11. IIR – Customer Segmentation and Intelligence
From revenue to profitability
 Pure spend-based models: straightforward and easy
 Introducing cost elements: allocation methods
 Detailed individual customer costing
From past to future value
 Historic value: recent history
 Historic value: total cumulative history („lifetime‟)
 Future (potential)value: different predictive methods
 Net present value (NPV): discounted future value
 Lifetime Value (LTV) or CLV (customer lifetime value)
“The net present value of all future profit streams from an individual
customer’s relationship with the company”

12. IIR – Customer Segmentation and Intelligence
Predictive techniques
 Regressions (linear, multiple, logistic)
 Classification trees (regression, CART, CHAID)
 Advanced techniques (neural networks, genetic algorithms)
Definitions of „lifetime‟
 Strictly referring to a future period
 Need for consistent predictability and actionable/manageable
 Techniques to calculate LOS (length of service); survival analysis
(LIFEREG, PHREG procedures in SAS)
Alternative models and techniques
 the RFM (recency, frequency, monetary value) model as a
segmentation tool
 Rapid identification techniques („golden questions‟)

13. IIR – Customer Segmentation and Intelligence
Customer loyalty
 Clear business case of loyal customers being more profitable
 The importance of a good definition of Loyalty
 Measuring Loyalty (NPS, Loyalty Index), scoring and segmenting
Social weight
 Implicit social value (size of network, intensity of activities)
 Explicit social value (evidence of referrals or advocacy)
 Community participation and role(s)
Direct customer contribution to the business
 Feedback value (Do you love your complaining customers?)
 Co-creation participation (new products, content)
 Engagement in functional roles (customer care, decision making)

14. IIR – Customer Segmentation and Intelligence
On what principles?
 Equal % of customers in each segment
or..?
 Pareto principle: equal % of total value
 Adjusted Pareto: business case (value
portions of comparable magnitude, viable
segment sizes)
How many value segments?
 When just a “20:80” is good?
 Sufficiently different to merit a different
approach
 Manageable - by proportionately allocated
resources
Issues of migration
 When to upgrade (or downgrade) a
customer?
 Choosing a „buffer‟ period
 Where to place new customers?

15. IIR – Customer Segmentation and Intelligence

16. IIR – Customer Segmentation and Intelligence
CUSTOMER-FACING FUNCTIONS
• Marketing
• Sales
• Customer Care
OBJECTIVE-DRIVEN ACTIVITIES
• Acquisition
• Retention
• Value Development
TIME: Phased Maturity Evolution
Differentiated approaches in:

17. IIR – Customer Segmentation and Intelligence
MARKETING
• Proposition
• Messages
• Channels / media
• Targeting
PHASING
• Immediate steps: simple differentiation, focus on high value
• Medium-term: optimal / viable differentiation, expanding portfolios
• Long-term direction: granular differentiation, P&L management
SALES
• Channels
• Sales force
• Process
• Merchandising
CUSTOMER CARE
• Service levels
• Processes
• Frontline staff
• Touchpoints
Differentiated approaches in:

18. IIR – Customer Segmentation and Intelligence
PHASING
• Immediate steps: simple differentiation, focus on high value
• Medium-term: optimal / viable differentiation, expanding portfolios
• Long-term direction: granular differentiation, P&L management
ACQUISITION
• Setting strategic
priorities
• Mapping and
developing
propositions
• Targeted promotions
• Segment-aware sales
RETENTION
• Prioritization of
efforts and resources
• Segment-relevant
incentives
• Balanced OEN
toolkit
• Lifecycle
management
VALUE DEVELOPMENT
• Needs-aware
cross-sell
• Managed internal
migration
• Social group
accounting
• Share of customer
Differentiated approaches in:

19. IIR – Customer Segmentation and Intelligence
THANK YOU!
vdimitroff@prism.ch
+44-7947-034 944