Oops! The input is malformed! The Importance of Customer Segmentation by Bill Inmon - BeyeNETWORK India


The Importance of Customer Segmentation

Originally published 8 December 2005

Virtually all of you have heard about CRM and understand the importance of understanding your customers. Clearly, there are many advantages to forming personal relationship these customers. While most of you know it is easier to sell to existing customers than to new ones, other factors are not so obvious. With all this attention on the customer, an activity called customer segmentation is possible.  

Customer segmentation stems from the idea that 20% of your customers are responsible for 80% of your profits. This idea also assumes that as much as 10% of your customer base actually costs you money. In regards to segmentation, however, all customers are not equal. To paraphrase a popular saying, “Some customers are more equal than others.”

Because of this, corporations search to determine which customers fit into which categories or segments. Customers can be classified in many ways. These are: 

  • By number of transactions
  • By profitability of transaction
  • By length of relationship

How many transactions did Mrs. Jones do last year? Mr. Wilson only did one transaction last year, but it was a very profitable one. Ms. Tyson has been a customer since 1992. This data can be useful to organizations trying to learn about customer segmentation.

The maturity cycle is one popular way to effectively segment customers. The maturity cycle typically works like this:

  • An individual enters the system. It probably actually cost the organization money to find this customer;
  • The individual then becomes active. After making one transaction, they eventually make another. These customers are not very profitable;
  • The individual becomes an active participant. They regularly make transactions. Depending on the business, customers here may generate a lot of profit;
  • Certain individuals advance to super customers. These customers make many transactions, some of which are very profitable. This is the bread and butter for most organizations.

These four stages of life for a customer are known as:

  • Entry level
  • Established level
  • Active level
  • Super level

Of course, your goal should be to have as many customers at the super level as possible.

But customer segmentation does not stop there. Segmentation analysts know that people either progress or decline from different levels everyday. While an individual is at the entry level on Monday, he could graduate to the established level on Tuesday. Similarly, an individual could ostensibly fall from the super to the active level after a period of inactivity. 

When examining customer segmentation, we must ask ourselves three questions:

  • How many people are at each given level?
  • At what rate are people either graduating or falling?
  • If we are losing money on any level, what can we do to reduce that level?

These three key measurements are the basis of understanding the customer base. They also indicate whether the company is headed for clear skies or stormy seas.

This simple model of segmentation is repeatedly used in many business contexts. Whether the customer is a large corporation or an individual, the model seems to apply. Minimal modification is needed.   

Surprisingly, the model is a revelation for many business people. Many business people have become buried in their own immediate problems of orders, engineering and shipment. As a result, they have never looked at this business perspective. When they do so, they will see the light.

SOURCE: The Importance of Customer Segmentation

  • Bill InmonBill Inmon

    Bill is universally recognized as the father of the data warehouse. He has more than 36 years of database technology management experience and data warehouse design expertise. He has published more than 40 books and 1,000 articles on data warehousing and data management, and his books have been translated into nine languages. He is known globally for his data warehouse development seminars and has been a keynote speaker for many major computing associations.

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