One of the inherent problems in segmentation is that customers may not conform to the neat market segments that companies allocate them to. Consider the dilemma faced by an airline in allocating a specific individual customer to a market segment and understand- ing their purchasing behaviour.
The airline has only a limited amount of information on this particular customer’s travel with that airline based on details of
frequent flyer or executive club activity. If the airline has records of three business class and three economy tickets for this customer – what are they to make of this?
The airline may then develop a data warehouse that captures all that passenger’s travel with the airline, including travel not regis- tered on the frequent flyer card database (by, for example, requesting details of the passport number each time the customer takes a flight).
As a result, they identify the passenger has made five business class trips and three economy trips – what are they to make of this?
If they incentivize the customer to keep a complete diary of all air- line travel or can collect the information through market research, the picture for this frequently travelling executive may be different.
Suppose the full diary for all airlines shows the following return trips: 2 First Class, 8 Business Class and 12 Economy.
Making sense of this is difficult until you understand that the cus- tomer is a member of a number of different communities. His travel type may depend on whether he is acting as a business executive, a member of a sports club or a family member. Even within a given community he may purchase different types of travel. A brief inter- view with this executive elicited the following ‘rules’ for his travel purchase behaviour within each community (see box).
The airline, armed with this knowledge as well as ‘share of wallet’
information on the relative use of their airline and competitive airlines can then mould their CRM programme on an individual basis to such clients. The challenge is to identify if this information can be
Business executive community member: always travels business class (exceptions: his director sent him first class when he had to travel on his birthday and he had just sold a huge project to a client; when he is on overseas business trip he may be accompanied by family member and travel economy class provided the costs to the company of both tickets do not exceed one business class fare).
Family community member: always travels on cheapest economy fare on vacations as prefers to spend money on quality accommodation on arrival; but only on flights up to 12 hours (exceptions: for trips of over 12 hours to Asia and Australasia the family travel on the cheapest business class tickets available; for his 10th wedding anniversary he travelled on first class with his wife to the USA).
Sports club community member: always travels on cheapest economy fare with his football club (exceptions: none. The club never chooses a location where cheap tickets cannot be purchased for travel to it).
collected and acted upon in a cost-effective manner. Acquiring such customer knowledge on all customers, even the highest value ones, is not likely to be cost-effective in most businesses. However, the insights gained from selective market research can be used to iden- tify customers who are members of such communities.
Focusing on customer strategy
Customer strategy involves taking the business strategy and identifying which customer the enterprise needs to focus on. It starts with a defini- tion of the target market to be served and how it plans to serve this mar- ket. In an intermediated market, the enterprise recognizes that it may have a number of customer groups and each of these needs to be fully considered. Regardless of whether the customer group comprises distrib- utors, intermediaries or final consumers, an effective customer strategy requires each group to be segmented in an appropriate manner.
The market segmentation process involves consideration of the alternative bases for segmenting the market and determining the appropriate level of segmentation – macro-, micro- or one-to-one. In the next chapter we provide an example of a UK electricity supplier that historically had treated all residential customers in the same way. About six mailings per annum were sent to every customer and no attempt had been made at segmentation. The review of customer economics outlined in Chapter 3 illustrates how macro-, micro- and one-to-one segmentation approaches were all applicable depending on the segment or sub-segment economics.
The identification of segmentation bases and the appropriate level of segment granularity should involve a high degree of creativity.
Companies should constantly be considering alternative ways of segmenting the market and seeking ways in which they can create differential advantage over their competitors. Readers needing a more detailed discussion on market segmentation should consult a standard text on market segmentation such as McDonald and Dunbar’s work24or one of the references in the reading list at the end of this book. Once the organization has identified and chosen the appropriate customer segments to target and the level of segment granularity, the enterprise needs to focus on the customer relation- ships within them. Here permission marketing, mass customization and whether a customer fits into more than one segment or commu- nity need to be considered.
PRODUCTS
MARKET
(a) Regional (b) National
(c) International expansion
Present New
NewPresent
Market development Market penetration
1. Increasing number of users (a) attracting competitors’ users (b) converting non-users into users 2. Increasing purchasing frequency 3. Increasing average quantity purchased per transaction 4. Increasing lifetime value (customer retention)
1. Increasing number of users in new market segments in present geographic market 2. Increasing number of users in
new market segments
Product development
Diversification 1. Product improvement 2. Product quality extensions 3. Product line extension 4. New product development
1. Concentric 2. Conglomerate
Figure 2.8 Review of product/service and market/customer segment options Customer strategy is not only concerned with which customer segments to serve but also what products and services to sell to them. Although the latter is primarily a concern of product policy and marketing planning some brief discussion should be made here.
Product and service options for a company can be conveniently divided into existing products and services and new products and services. When these options are placed in a matrix with present and new products on one axis and present and new markets or customer segments on the other this gives rise to the following four broad product/market options:
● concentrating on marketing existing products or services to existing markets
● developing new products or services for existing markets
● developing new markets or customer segments for existing products or services
● diversifying into new products for new markets or customer segments.
Each of these broad customer strategies represents a number of specific opportunities. These are shown in Figure 2.8.
A final issue to consider under the heading of customer strategy is the need for creativity and innovation. In an era of unparalleled change
● Launched in August 2002, Starbucks’ ‘T-Mobile Hot Spot service’ offers wireless Internet connectivity in about 2,000 locations in the US and Europe.
● Uses technology to enhance its core offer – the Starbucks experience.
● $5 for a cup of coffee and $49.99 per month for a wireless access connection.
● The average network customer is in the store 45 minutes, which exceeds average, 90% outside peak times; they buy more products and create revenue from the wireless network subscriptions
● Starbucks is becoming the ‘other place’ in people’s lives where they want to be connected to the Internet.
and ‘hyper-competition’ managers need to pay special attention to this, as the traditional approach of identifying and responding to new cus- tomer needs is not enough. Figure 2.9 illustrates the dangers of an approach that is highly dependent on traditional market research as a source of new initiatives. Here the value opportunities are greatly restricted. Companies such as 3M and Sony rely just as heavily on their own creativity and intuition with respect to new market developments as they do on customer research. Customers often cannot clearly articu- late their future needs. Companies who do not think outside their traditional mindset will find their customers going to those who do.
New value
opportunities Existing
value opportunities
Supplier initiated Future
Present Customer initiated
Present Future
Figure 2.9 The danger of ‘current focus’
A good example of such creativity is the initiative launched by Starbucks when they introduced their mobile wireless service that enabled customers to have wireless Internet connection in Starbucks retail coffee outlets (see box).
This initiative resulted in a significantly enhanced revenue stream through a subscription service as well as increased revenue in its core business. Further, many customers using this service did so out- side peak times. The challenge in the years ahead will be for Starbucks to retain this advantage as wireless LANs (local area networks) become more common.
Aligning business strategy and customer strategy
As noted earlier, alignment and integration of business strategy and customer strategy should be a high priority, especially where they are developed within different functions of the business. This lack of alignment between business strategies may be more common than expected. The author was recently running a CRM workshop as part of a ten-day senior management development programme for a group of country heads and senior executives for a well-known consumer durables brand. One of the country heads reported that the contents of a workshop on business strategy held on the pre- vious day, given by the Group Strategic Planning Director, ‘had absolutely no connection to the real-life customer strategy issues and problems in his country’. His colleagues from other countries unanimously agreed with him. Subsequent discussion showed major gaps in alignment between the business strategy and cus- tomer strategy and the specific needs of the customers in many of their markets.
Experienced observers of industry, be they managers, consultants or academics will have their own examples of instances where busi- ness strategy and customer strategy are not clearly aligned or where they come into conflict (see box for an example).
CRM strategy development
Business and customer strategy represent the major components of CRM strategy. From this earlier discussion it is clear that a given