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DataNov 13, 2019

Customer Segmentation Explained in 10 Minutes or Less

Jenna Swinney, and Adrienne Arndt

Not all customers are created equal. Some prove to be extremely loyal and passionate about your brand, while others may be sporadic purchasers at best. While managing marketing and advertising budgets, it’s important to be strategic about your investment across your customer base. The ability to segment customers based on defining characteristics can enable better investment of marketing dollars in the largest drivers of revenue growth.

What do we mean by characteristics? These are simply attributes that can be used to distinguish and group your customers. One example of a demographic characteristic that is often utilized for this purpose is state or ZIP code based on a customer’s address. Recommending seasonal or winter clothing more to customers living in colder states, rather than to all customers, is a simple way a retail clothing company could apply this information. Another useful way to segment your customers could be by the recency of their last purchase, and then launch a win-back journey to regain customer loyalty. By combining multiple characteristics together, you can create more detailed pictures of your top customers, allowing you to target them more specifically and effectively.

At Credera, one way we help our clients is by creating useful ways to segment their customers, optimize their marketing dollars, and effectively target their customers using data. To further explain how powerful this can be, we will explore one simple example of segmentation based on customer spend deciles that can be applied to any customer base. This is a great place to start exploring customer segmentation and customer analytics within your company.

creating customer spend deciles

Sales deciles are subsets of your customer base by every 10% of sales over a given timeframe. This can directly help you tie your customers to revenue to see which customers are contributing the most to your company’s success and growth.

One powerful way to visualize sales deciles is the distribution chart below. The most loyal and top-spending customers are at the top, while infrequent shoppers are the large population at the base. Likely, you will not see an equal distribution of your customers over each of the 10 deciles when you segment them in this way. In this example, you can see that the top decile (decile one) contains only 0.5% of your customer base and accounts for 10% of the revenue, a pattern we frequently see.

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CALCULATING THE SALES DECILE FOR YOUR CUSTOMERS

Let’s look at an example retail company, Customer Segment Co., with 1,000 customers and $5 million in revenue over the past year.

1. Determine the start and end points for each of the 10 decile buckets, based on your total revenue for the chosen timeframe. Here’s a breakdown of how to turn total sales into 10 decile ranges using data from Customer Segment Co.

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Remember: Each decile bucket should contain 10% of your total revenue.

2. Aggregate sales at the customer level (i.e., calculate the sales associated with each customer for the chosen timeframe). 3. Rank customers in descending order based on individual sales. 4. Determine the running total of cumulative sales. 5. Finally, group customers in decile buckets between which upper and lower bound they fall. Based on the above example, customers ranked one through five will all be in decile one. This will continue until the cumulative sales total reaches $500,000, at which point those customers will be in the second decile:

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effectively utilizing deciles in customer segmentation

Once you know which decile your customers fall into, you can utilize this data to market to them effectively and align with your revenue growth strategy. One example of how to accomplish this is by targeting your middle deciles in hopes of increasing their frequency of purchase. It may be a waste of marketing dollars to target your top decile, those who are already incredibly loyal to your brand. Likewise, it may be tough to increase frequency with one-and-done customers. The middle-tier of the second through fifth deciles of customers tends to show large opportunity for revenue growth.

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Source: Credera

combining segmentation characteristics

The real power in segmentation and targeted marketing campaigns comes from combining and layering multiple segments and attributes together (e.g., deciles and email engagement, day-of-the-week shopping preferences, time between purchases, etc.). If, for example, you know that customers in deciles two through five normally purchase every six to eight weeks, and you want to increase their frequency, you can target them with marketing materials to drive another purchase three to four weeks after their last transaction. Once you identify useful segments of customers for your brand, you can monitor how effective your targeted campaigns are at achieving growth and then tweak strategies as needed, providing a more structured approach to revenue growth.

Strategically focusing campaigns based on this data-driven approach can maximize both the likelihood of a customer to make one additional purchase and the number of customers who make an additional purchase. That combination can fuel revenue growth. In the case of our example company Customer Segment Co., if they were able to successfully convert 25% of their second through fifth decile customers (only 21 people in total), that would lead to over $30,000 in revenue growth.

high potential customers and higher revenues

This is one example of how utilizing segmentation to identify high potential customers to target can translate to monetary value in your company. Which customers at your company behave similarly? If you could get 10, 20, or even 25% of them to make one more purchase in a year, how could that impact your company’s revenue?

We hope this post has helped you gain a high-level understanding of customer segmentation and how it can be applied to drive revenue growth. If you’re looking to develop more strategies to effectively target your customers, Credera can help—reach out to us at findoutmore@credera.com.