Business Segmentation

How to Apply a Business Segmentation Product to Build Relationships and Discover Market Potential

Market Segmentation

• A Market Segment is a subgroup of organizations that have one or more characteristics in common that cause them to have similar product or service needs.

• Market Segmentation is the process of dividing the market into meaningful, relatively similar and identifiable segments and groups.

What Does Segmentation Do?

Decile

%

What issues are indicators of a need for segmentation services? •  Rapid customer base churn •  Product/services sold across a wide spectrum of

consumers or industries •  Multiple channels of distribution (field/telephone sales,

brokers, et. al.) •  Low market penetration •  Unclear understanding of what constitutes the “best”

customer set •  Low response rates on solicitation •  Low approval/acceptance rates

Some Tools for Segmentation • Regression • CHAID • Basic Demographic Profiling • RFM Analysis •  Proprietary Cluster Systems

Which is the “Best” Solution?

• Each method has pros and cons • Any segmentation problem has a marketing

decision or implementation objective • Apply the method that will meet the marketing

requirements ▫  Evaluate customers, prospects, or both? ▫  Require continuous scores or are segment-defined

scores acceptable? ▫  Time and cost constraints?

What’s in it for me?

• Who are our best customers? • Where can we find more of our best customers? •  How can we more effectively reach customers for

our products and services? •  Where should we best expand our market area? •  What characteristics are common in our top

customers? •  How can we tailor our message to each segment of

our customers? •  How can we better allocate our sales resources? •  What segments of the market need our services

most?

Applying Segmentation Tools to Discover Market Potential & Build Relationships

•  Four industries using four different segmentation tools.

•  Tools / applications ranked by segmentation complexity: regression, CHAID, cluster, penetration.

•  All tools are valid. Identification of appropriate tool is dependent upon desired results, available resource, and sophistication of users.


Case Study: Commercial Oil Card

•  Oil card positioned for mid-to-large size fleets.

•  Multiple channels of distribution: sales force, wholesalers, retail POP take one apps.

•  Challenge #1– identify prospects likely to have large fleets that travel longer distances and consume higher volumes of petroleum products.

•  Challenge #2 – pre-approve or prequalify prospect on credit basis for card issuance.


Case Study: Commercial Oil Card

•  Combined customer transactions with external firmagraphics in regression model

•  Regression segmentation tool to predict consumption and pass risk hurdle

•  Reduced credit rejection rate by 60% and increased top line revenue by 35%

•  Major beneficiary of improved relationships were internal sales channels


Case Study: Health Care Insurer

•  Regional heath care insurance organization using direct response to create inbound inquiries for small employer group market.

•  Prospects selection based upon size, SIC, number of employees and geography. Quarterly mailings to all qualifiers.

•  Issue: Are all prospects equally valid?


Case Study: Health Care Insurer

•  Marketer’s dilemma: applying limited budget to get the best results.

•  Marketer’s objective: increase the number of inquiries into the call center.

•  Solution: CHAID analysis of customer set to identify characteristics of prospects most likely to respond to solicitations.

•  CHAID allowed marketer to change mix of prospects: more mailings to organizations most likely to respond, fewer to less likely responders.


Case Study: Uniform Rental

•  Uniform supply organization supporting prospecting efforts of multiple business units and branch offices

•  Telemarketing used to survey and prequalify prospects for local sales offices

•  SIC/size selects used for several years to pull best prospects

•  Challenge #1: prospect pool diminishing due to over-selection

•  Challenge #2: have current business practices for prospect selection left good prospects on the table?


Case Study: Uniform Rental

•  Customer file matched to reference universe file

•  Simple penetration reports generated to look at penetration with existing sic/size select criteria as well as identify opportunities to expand selection based upon management intuition and knowledge

•  Identified new segments for selection and kept the pipeline full


Case Study: Office Products & Equipment

•  National provider of supplies and equipment to retailers and wholesalers

•  Provides marketing support to channels to sell to end-users

•  Challenge #1: All businesses consume products. Who buys more and why?

•  Challenge #2: Retailers and wholesalers own the client relationship. How does the provider help identify salient consumption characteristics of end-users when they don’t have the direct relationship?



•  Solution analyzed ship-to information: host organization often ships products directly to the retailer/wholesaler customer to expedite delivery.

•  Ruf business cluster segmentation tool used to identify characteristics of the ship to locations and segment on basis of size and penetration

•  Rank ordering showed 5:1 lift top quintile vs. bottom quintile

•  New program has prospects selected among records in top quintile


Case Study: Office Products & Equipment •  Business Clusters: a combination of has US business

demographic and econometric information •  Business Clusters create flexible and immediately

actionable segmentation for virtually any measurable objective

•  Mid-range modeling solution provides faster and more economical segmentation than custom solutions


Mission for Business Cluster Product

•  Create a general business segmentation tool for the national business “universe”

•  Provide a highly flexible segmentation solution ▫  Handle multiple objectives with a common tool

•  Incorporate “deeper” data than typical business demographics

•  Generate cluster profile models rapidly and economically •  Provide additional input data for custom modeling using

other statistical tools

Data Used in Formation of Business Clusters • Business demographics ▫  SIC ▫  annual sales ▫  employee size ▫  location type ▫  years in business ▫  business type ▫  etc.

• Econo-metric Footprint variables

Econo-metric Footprints •  Proprietary variables developed by DMS’s partner Ruf

Strategic Solutions. •  Businesses are affected by surrounding areas •  Built using economic data from: ▫  US Dept. of Commerce

  Bureau of Economic Analysis   Bureau of the Census

▫  Consumer data •  Provide unique advantage to business segmentation

techniques

Econo-metric Footprints

Place - Montgomery # Employees - 23

SIC - 5943 Revenues - 5 mil

SURFACE RELATIONSHIPS

Place - Manhattan # Employees - 23

SIC - 5943 Revenues - 5 mil

HIDDEN RELATIONSHIPS

Flat Growth Labor Oversupply Low Crime Impacted by Finance High Tech Younger Consumers Etc. . . .

High Growth Labor Shortage Moderate Crime Impacted by Textiles Low Tech Older Consumers Etc. . . .

Office Supplies

Office Supplies

BUSINESS CLUSTER PENETRATION BAR CHART – Office Products Client

Rank Cluster % of Customers % of Businesses Index

1 7018 0.82 0.11 724.38

2 7029 0.81 0.12 656.17

3 7028 2.28 0.37 622.65

4 7034 1.50 0.26 582.95

Top Performing Business Clusters Office Products Client

Rank SIC Code Description % of Customers % of Businesses Index

1 36 Electronic Equipment and Components

0.94 0.21 438.98

2 38 Instruments and Related Products 0.53 0.13 417.87

3 26 Paper and Allied Products 0.37 0.10 370.81

4 30 Rubber and Miscellaneous Plastics Products

0.58 0.16 362.13

Key 2 Digit SIC codes by market penetration Office Products Client

Industry – Office Products Client

Employee Size – Office Products Client

Years on File – Office Products Client

Census Division – Office Products Client


Implementation •  We’ve analyzed the customers. We see the top prospects

are in the top quintile. •  We communicate this to the distribution channel with

the appropriate collateral that explains how we can identify better candidates

•  We provide the distribution channel a means of ordering these “better” prospects to create relationships using different communications

•  We follow up as best we can to determine if these new prospects are converting at a higher rate

Start with the end in mind! • Understanding the marketing objective drives all

decisions ▫  What behavior do we want to optimize? ▫  What input data will be needed? ▫  How will the results be implemented? ▫  How will we be able to measure success?

• Conceptualize how successful segmentation will impact your ROI

• Competitive Advantage