How should you segment your customers? The first question I would ask, what is your business objective?
Do you want to understand when to promote to a customer? If your answer is yes, then I would recommend studying your customer behaviour.
What do I mean by customer behaviour? We have to acknowledge that not all customers are the same. Some customers buy more often than others, some buy more consistently than others, some need a ‘push’ to buy, some will not buy no matter what you do…
So we need to understand our customers in terms of…
1. Which customers will buy
2. Which customers need a ‘push’ to buy
3. Which customers, no matter what you do, will not buy
There are various customer metrics that can help you to understand your customer behaviour. Two top of mind metrics for better understanding customer behaviour is:
1. RFM (Recency, Frequency, Monetary Value)
2. Latency (The Average Time between Purchases)
These two metrics are extremely good as they are actionable metrics…they indicate to you WHEN TO ACT. Very important!
Never compute metrics that do not indicate to you when to ACT or DO NOT assist you in making proactive decisions.
Today, I will speak a little on RFM. RFM allows you to score every customer based on:
1. When last they bought from you (Recency)
2. How often they bought from you (Frequency)
3. How much they have spent from you (Monetary)
Each customer, is scored on a rating from 1-5 for each metric Recency, Frequency, Monetary Value, where ‘5’ is most favourable and ‘1’ is least favourable.
The customers with the highest scores, for example, ‘555’ are your most valuable/profitable customers (They have bought most recent, most frequent and spent the most with you). These customers are likely to buy again on their own and do not need a ‘push’. They are probably your loyal customers. Customers who are already in love with your products. Pampers these customers.
The customers who were scored previously, for example, ‘111’ and now are scored ‘333’ are probably fairly new customers, you need to give them a ‘push’, promote to them through a ‘Cross Sell’ or ‘Up Sell’ Campaign. These customers may not be familiar with all your products as they are fairly new customers so by using ‘Cross-sell’ or ‘Up-Sell’ Campaigns, you are likely to get them to spend more with you & increase their likelihood of becoming loyal customers.
On the other hand, customers who have been previously scored, for example, ‘333’ and are now being scored a ‘111’, it is likely that these customers are about to leave you. Promote to these customers as this is where you are able to get high impact ROI, help these customers to spend more with you before they leave you. Send these customers a campaign, probably an anti-defection campaign.
Customers who have previously been scored ‘111’ whom you have promoted to since, and they still have not bought, these customers are likely to have left you already. Do not promote to these customers.
Does the above make sense? Let me know….If you have any questions, please feel free to ask them