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Customer Segmentation Analysis that Works

All Customers are Not Created Equal

Recent experiences with the executive peer advisory groups that I chair have me thinking about customer segmentation analysis and practical tips that can apply to any business.

Four times a year, the groups set aside several hours to focus on reviewing KPIs (key performance indicators) and financial performance of each of the member companies. Since Vistage groups are deliberately diverse across industries and do not allow any competitors or conflicts, we are able to share these important metrics and get the benefit of new thinking and new ideas.

In December, our Vistage peer executive advisory board had the pleasure of working with Peter Celeste, CEO of PSI Services, Inc, who addressed us on the topic of “Building a Data Driven Culture.”  While KPIs are important to the workshop, another important focus is on customer segmentation analysis with tiering. This approach has worked successfully in a number of organizations of different sizes. This provides a solid starting point that can be built on subsequently as appropriate with more advanced techniques, and is related to the Pareto principle or 80/20 rule.

Customer Segmentation Analysis with Tiering

One approach to customer segmentation analysis that was highly recommended in our meeting was to create tiers of customers. For purposes of example, there might be three tiers. 

The top tier is usually a small percentage of customers, e.g., 10% who drive disproportionate revenues. In an example of a company with high customer concentration, this might mean that the top 10% of customers drive 60% or more of the revenue. The consumption index of the top tier is 600 (60 divided by 10), meaning that they dramatically over-consume your organization’s products or services.

The middle tier may be around 35% of the customers who represent 35% of the revenue.  The middle tier index is 100, i.e., they consumer their fair share of your services or products. And the bottom tier is the remaining 55% of customers who only represent 5% of revenue.  This bottom tier has an index of 9, meaning they dramatically under-consume.  The chart below provides an example of this tiering.

Customer Segmentation Analysis that Works

A similar tiering approach can be applied to different areas of the business; it is not limited to sales. For example, the customers who disproportionately consumer customer service time or resources. In this customer service example, the more desirable customer may not be the heavy user.

Of course, the best approach will vary considerably by industry and company. There may be a different number of tiers. The example of three tiers provides a good starting point for many organizations. There are many approaches, including advanced analytics with multiple factors and predictive modeling (i.e., who is likely to buy more and when?).  But this basic tiering is often a good starting point.

Leveraging Customer Segmentation Analysis in the Business

A basic premise is to treat customers differently depending on their tiering and to focus on the customers who provide the greatest upside. Different quality and service levels (good, better, best) are made available for customers.  

Some organizations make this tiered service and pricing transparent. For instance, Zoom provides Basic service for free, Pro service for $149.90/yr and Business service for $199.90/yr, each with different levels of support and product features.

Customer Segmentation Analysis Example

Customer Segmentation Model for B2B Market

As another example, we can consider how Colonial Life used customer segmentation in the business to business (B2B) workplace market to drive its sales and marketing. In this case, the customer segmentation analysis looked at:

  • Sector – private or public employer
  • Number of employees – 10-49, 50-499, 500-2499, and 2500+
  • Employee type – salaried vs. hourly 

The customer segmentation analysis that combined these factors resulted in nine different market segments. Colonial acted on the study recommendations to restage an existing product and add a new product category to their portfolio.

For more examples of customer segmentation analysis, visit our resources page.  Or contact Insight to Action to discuss customer segmentation for your organization.