Segmentation Based on Customer Profitability

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Some business owners have a 'been there, done that' attitude towards customer segmentation. They have collected data, grouped their customers into segments based on age, income, geography or purchases. They occasionally create offers based on their customer segmentation and that is pretty much it. Unfortunately, these business owners have no idea how much they are limiting the profit potential of their own business by this base line customer segmentation approach.

You want to start segmenting in a 'top down' approach - based on customer profitability (not customer spending). You want to approach customer segmentation based on specifics of behaviour NOT generalities of demographics. You want to start small. Create your customer segmentation, implement a few strategies, test them and adjust accordingly. You want to include unmet needs and future potential as part of your customer segmentation. As you can see, each of these approaches requires a kind of 'top down' approach. Start with specifics. Once you get them right, the flow on effect will move easily down your customer segmentation pyramid. Let's look at each one a little more closely.

Your most profitable customers are your most valuable customers. They are a unique segment that deserves special attention and nurturing. And once you get into the habit of customer segmentation based on profitability you will find that will change the kinds of offers you create and even the kinds of customers you attract. Both will increase in value and overall worth.

It is unwise to assume anything based just on demographic. You are better off creating customer segmentation around observed patterns of behaviour, past responses to campaigns and current behavioural trends. RFM (recency, frequency and monetary) is a useful acronym that will help you segment customers based on what they ACTUALLY do rather than what you imagine they might do.

Don't wait for your customer segmentation to be perfect. Once you have some...
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