Management & Strategy
Segmenting customer base

Segmenting your customer-base

The majority of business revenue generally comes from a minority of customers. Should you therefore ignore the majority of your customers to concentrate on the minority? Of course not. Instead, get clever and look at ways of segmenting your customer-base.

The majority of business revenue generally comes from a minority of customers. Should you therefore ignore the majority of your customers to concentrate on the minority? Of course not. Instead, get clever and look at ways of segmenting your customer-base.

Ever heard of the ‘Pareto principle’? It states that roughly 80% of effects come from 20% of causes. To put that in a business context, 80% of your profit will come from 20% of your customers. The Pareto principle – also known as the ‘80-20 rule’ – was named after Italian economist Vilfredo Pareto, who noted in 1906 that 80% of the land in Italy was owned by 20% of the country’s population. After examining other examples – including the observation that 20% of the pea pods in his garden contained 80% of the peas – Vilfredo developed the Pareto principle.

Having employed the 80-20 rule, many businesses conclude that the most efficient route to profit is to concentrate on the 20% that bring in the majority of revenue. Luxury goods brands such as Rolls Royce, Chanel and Rolex have made exceptionally successful businesses by catering exclusively to the top 20%. However, businesses employing such tactics often risk narrowing their options and possibly throwing away potential revenue by snubbing customers who may one day comprise the top 20%.

Overall service

The problem for most businesses is that catering for the wider market means they have to spend more, while only receiving a small return on their investment. However, there is a way of approaching the 80% that allows businesses to keep a little more. The clever solution is to adapt the degree of service to reflect the differing levels of revenue, while satisfying every customer at every level.

A way of achieving this is to ‘segment’ your customer-base and use technology to help shape your offers. For example, call centres are an expensive way of dealing with customers compared to email or the web. Your best customers will naturally want a personal level of service, and won’t be happy if they have to wait too long for their call to be answered. The customers who buy occasionally from you are probably not going to expect a highly personalised service and will most likely be happy to do the form-filling themselves. In this case, a web solution is acceptable. However, if something goes wrong then those same customers will want to talk to someone ASAP rather than wait for an email reply. On the other hand, older customers are likely to be uneasy with the web and may prefer the person-to-person reassurance of a call centre, and therefore are less likely to mind being put on hold for a short while.

If you can not only identify the customers coming to your website or call centre but also correctly stream them, then you can provide a solution that’s acceptable to the 20%, occasional users, older customers, and loyal customers alike, without having to overspend on resources. By using a simple customer relationship management (CRM) package and a rules-based call centre system, you can intelligently route calls depending on the type of customer and their need. So a premium client gets straight through, while other callers navigate an interactive voice response (IVR) system that can be escalated to a call at a later stage, especially if there’s a payment or refund issue that requires a real person to resolve it.

Segmenting via website

Segmenting can also be achieved by linking your website to the same CRM system or a web analytics system. In this case, priority customers see a visible help number on the website and are given a click-to-call option, whereas other visitors will see only a link to an FAQ page, an email address or a web form, with a click-to-chat option that can be escalated to a call. However, it’s important to stress that both sets of customers must always receive the highest possible level of appropriate service.

The segments you choose don’t just have to be the ones mentioned above. There are many different ways of segmenting your current and potential audience that can give you an insight into their prospective behaviour and their potential revenue. Two other segmentation methods include:

  • Segmenting customers by the sites they’ve come from before visiting your website, e.g. Google, Twitter, Facebook, a competitors’ site, etc.
  • Segmenting by their behaviour on your site. Do they keep returning? Do they read all the information on a product? Are they comparing products? What was the value of their purchase? What quantities did they buy? Is this a frequently returning customer?

Segmentation is not an exact science, but applied correctly it can improve the way you deal with customers and reduce the costs of servicing your valued 100%.

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In Brief

  • The ‘Pareto principle’ states that 80% of effect comes from 20% of cause. In business terms, this means roughly 80% of revenue comes from 20% of customers.
  • Some high-end companies focus on the more profitable 20%, but most businesses would benefit from offering differing levels of value, plus an overall level of service that satisfies everyone.
  • 'Segment' your customer-base and use an appropriate platform (web or email form, call centre, etc.) in your communications with each segment, depending on revenue.
  • Web analytics is another way of identifying your customers by type and behaviour.

Focus On

Making it in china

John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK