Combining Customer Value Measurement and Spending Segmentation to Better Manage Customer Base

The Issue

Our client, a leading B2B professional services company, had traditionally delivered the same level of service to most customers, saving some extra effort for big spending customers in particular. As competition intensified, this strategy was producing poor returns. Recognizing implicitly that its customer base could be segmented and targeted with more cost-effective tiered service strategies, it decided to embark on a customer segmentation study.

With limited data for customer segmentation, our client initially tiered its customers based on revenues from sales. The resulting segmentation was a classic 80/20, where 80% of the revenues were generated by 20% of the customers. The strategy of providing a superior level of service to the big spenders seemed well directed. In contrast, a streamlined customer call centre was planned to handle the much larger volume of low-revenue producing customer service requests.

We cautioned our client about the risks of using a revenue-based segmentation approach to tier customer service. Specifically, we urged them to better understand:

• what customers' valued in the service; and
• category spending and share of wallet.

Why? First, not all big spending customers may want a higher level of service from this specific alternative, perhaps because they are receiving that elsewhere. Second, some lower volume customers may be giving this company all of their business in part because of the high levels of service it provided. Might our client not risk alienating such customers and losing market share?

The Solution

For this client, Phase 5 integrated customer data from several sources to provide a customized solution and pragmatic, actionable advice for its service segmentation strategy. For a sub-set of its customers, we collected category spending data. Combining this with sales data, we were able to derive share of wallet metrics and assign customers to one of four spending / share of wallet segments (see diagram on right). We then modeled survey data from our value measurement study to identify value drivers for the four different segments. As noted in the diagram, some high revenue customers were using our clients’ services because they valued high efficiency for a lower price rather than value-added services (see cell D). They were using another leading brand for most of their business and expected that player to provide the value-added services. Not surprising, these customers reacted favourably to the call centre concept proposed by our client. The initial revenue-based segmentation model implied targeting these specific high volume customers with a higher tiered level of service, something we learned they didn’t really want from our client.

Results

By understanding that they have distinct customer segments, our client was able to develop service strategies tailored to each one. They also were able to focus resources on those customers that provided the best long-term ROI based on their growth prospects and competitive position.

The Outlook

Our client now has a framework to map customers into key service segments and deliver services to them based on evidence of what they value. They also have the knowledge (and power) to effectively allocate their service resources in such a manner as to provide the best return to them, while providing the best value to key customers.

To Learn More

To learn how Phase 5 can help with your segmentation challenges, please contact Sam Fiorino at (613) 241-7555 ext. 116, or via email.