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Ten Things You Should Know
About Consumer Segmentation
By Kevin Hillstrom, President of MineThatData
Overview
Perhaps the most powerful and underused marketing tool available today is segmentation: the ability to identify
high-opportunity customer groups within your marketplace. As competition heats up, marketers must get
smarter and more creative about whom they are targeting for new acquisition and retention programs. The use of
segmentation is a fundamental strategy for companies that wish to increase sales, uncover new opportunities
and improve customer retention.
1. What are the latest trends in segmenting? What’s working, and what’s
not working?
Segmentation needs to be actionable. In the old days, you segmented customers on the basis of recency,
frequency, and monetary value. Today, you segment customers based on what is meaningful to your business. If
new customers behave differently than existing customers, then that simple level of segmentation makes sense.
It is the job of the analyst to do a lot of ad-hoc research, looking at which segmentation attributes seem to result in
the segmentation of customers with fundamentally different behaviors. For instance, the simple segmentation of
customers into Men’s merchandise shoppers and Women’s merchandise shoppers made a big difference. It is
important to do the research ahead of time, find the three or four things that really separate customer behavior
into unique segments, and then drill down within the three or four attributes.
2. What are the advantages and disadvantages of utilizing established
segmentation models like Prism (Nielsen) or Cluster Segmentation
(InfoUSA) vs. hiring a consulting firm?
Nielsen and InfoUSA do a nice job of creating segmentation models. However, the segmentation models they
create are pretty “generic”. They categorize people on the basis of national behavior, and as a result, they cannot
ever have the power that your own segmentation strategy will have. In any test I’ve ever done, in-house
segmentation strategies significantly outperform generic segmentation tools like Prism.
3. What is your process to determine what your segments should be?
This is a personal bias. I prefer to have a lot of customers in each segment. If you have a segmentation strategy
that has 1,000 customers in one segment, 100 in another segment, and 10 in a third segment, you won’t get as
much benefit from the segmentation strategy as you will get by having 400, 310, and 300 customers in each of
three segments. Try to find attributes that cause you to segment customers into large groups. Small segments
are best approached through statistical models, which identify trends at a customer level.
4. How do you weigh the ROI of segmenting markets vs. the costs
involved (e.g. hiring more specialists). That is, what if your market has
seven segments you are currently treating as one?
Anything you do with segmentation must be done with an eye to return on investment. Your analysis can be as
simple as offering different landing pages to customers in different segments, comparing the performance of
customers against a normal landing page, or sending different trigger-based e-mail messages based on the
segment a customer resides in as opposed to one e-mail blast. Calculate the profit you generate (or expect to
generate), and then use that as the deciding factor for making a case for subsequent segmentation efforts.
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5. How is targeted marketing best used in the nonprofit sector?
One of the best applications is direct mail and e-mail marketing. By simply filtering out folks who are unlikely to
donate money in the future, as an example, a non-profit can save a ton of marketing expense. The non-profit
segments donors who are likely to donate in the future (multiple donations, high-dollar donations) from those who
are unlikely to donate (only one donation, a donation from more than 18 months ago, low dollar donations), and
then executes direct mail and e-mail and telemarketing on this basis.
6. How do you use social media to market segments?
I once saw a retailer who captured information about the social media websites that customers visited from.
Customers who visited from social media websites were fundamentally different shoppers, and were far less
responsive to classic direct marketing strategies. If some of your customers/users are active users of social
media, you might give those customers/users access to inside information, partnering with those users to
evangelize new activities.
7. How do you know if you’ve over segmented? What’s the optimal “level”
of segmentation? How can you be sure that you’ve segmented correctly
(parameters)?
There really isn’t a right or wrong answer to this question. There are two levels of segmentation that I advocate.
There is a high level of segmentation, four to sixteen segments that you use to communicate to Executive
leadership. Your Executive team probably cannot handle reporting that explains how 225 segments performed.
So I like to have a small number of segments that I use to communicate results. On the execution side, you can
have hundreds or even thousands of segments, as long as your analytics team can manage them and provide
the right marketing strategies, business rules, and analytics to increase profitability. Like with all things in life,
there is a law of diminishing returns. You’ll get 80% of the benefit from 20 segments, 90% from 200 segments,
and 100% from 2,000 segments.
8. How do you advise tracking the migration of an email recipient from
one segment to another? Is there a “self-segmenting” tactic/tool you’ve
seen used with good success?
It has been my experience that there are a small number of folks on an e-mail list that are worth tracking. I would
segment my e-mail list based on inactives, on clickers, and on purchasers or customers who exhibit an action
that you want to encourage. 65% of the list will be inactive, 30% of the list clicks but doesn’t do what you want
them to do, and 15% actually purchase or exhibit an action that you desire. I use this as a starting point in my
project work.
9. How do you imagine linking customers across different media (mobile,
web, offline, etc) without impacting the quality of their navigation
experience forcing a login? Or do you think in the future customers will
not mind a login trading off for the benefits?
The customer does not have to necessarily log in. Depending upon the business model, there are many different
ways that information can be linked together. Home phone number, name and address, cell phone number,
e-mail address, twitter id, Facebook account, PayPal account, cookie on website with e-mail embedded or other
methods of cookie identification, all of these can be linked together to obtain a holistic view of a customer across
channels. Capture what you can capture; a partially incomplete view of the customer is better than a highly
incomplete view of the customer.
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10. Where should you draw the line with segmenting to avoid erosion of
overall brand communication efforts?
Try to keep segmentation as simple as possible. That being said, a lot of complexity can be embedded within a
small number of segments. Create “Digital Profiles” about sixteen segments that combine channel and
merchandise and website activity. Customers within each of the sixteen segments can receive any specific
message. By the same token, you can segment customers into four segments, or three segments, and as long as
your brand communication strategy can take advantage of segmenting customers into a couple of groups, you
will get benefit. Start simple, and add complexity as you generate a return on your investment.
About Kevin Hillstrom
Kevin is President of MineThatData, where he helps CEOs understand
the relationship between customers, advertising, conversion, products,
brands, and channels. Kevin spent 20 years in multichannel retailing at
Nordstrom, Eddie Bauer and Lands’ End. Kevin is the author of “Online
Marketing Simulations.”
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