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Unformatted text preview: Customer Analytics Segmentation Beyond Demographics August 2008 Ian Michiels Customer Analytics: Segmentation Beyond Demographics Page 2 Executive Summary This report isolates best practices in customer analytics and customer segmentation. The report articulates feedback from 220 organizations. The findings demonstrate how top performing organizations leverage more than demographics for segmentation and deliver demonstrably higher performance as a result. Best-in-Class Performance Aberdeen used four key performance criteria to distinguish Best-in-Class companies. The Best-in-Class demonstrated the following performance: • 43% year over year increase in annual revenue • 42% year over year increase in customer profitability • Aberdeen’s Research Benchmarks provide an indepth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations 35% year over year increase in average order value • Research Benchmark 25% year over year increase in market share growth Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics: • 57% have processes in place to identify high value customers and market to them uniquely • 71% share customer analytics analysis among multiple functions in the organization • 75% indicate they have accurate, centralized information in their customer database “Our existing customer analytics and segmentation efforts are in a constant state of refinement.” ~ Robert Guldi, Director of Sales and Marketing, Whitehill Manufacturing Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must: • Calculate customer lifetime value. Forty-seven percent (47%) of Best-in-Class companies currently measure customer lifetime and 32% indicated they are confident in this measurement (versus Laggards, 78% of which don't even calculate customer lifetime value). • Integrate multi-channel technologies and consolidate customer attributes to one centralized database. Eighty-one percent (81%) of Best-in-Class companies use past business history for segmentation. Sixty-five percent (65%) use behavioral variables collected from web analytics tools, forms, surveys, and other customer feedback tools for customer segmentation. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 3 Table of Contents Executive Summary....................................................................................................... 2 Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2 Chapter One: Benchmarking the Best-in-Class ..................................................... 4 Business Context ..................................................................................................... 4 The Maturity Class Framework............................................................................ 6 The Best-in-Class PACE Model ............................................................................ 7 Best-in-Class Pressures and Strategies ............................................................... 8 Chapter Two: Benchmarking Requirements for Success ..................................12 Competitive Assessment......................................................................................12 Capabilities and Enablers......................................................................................13 Chapter Three: Required Actions .........................................................................18 Laggard Steps to Success......................................................................................18 Industry Average Steps to Success ....................................................................19 Best-in-Class Steps to Success ............................................................................20 Appendix A: Research Methodology.....................................................................21 Appendix B: Related Aberdeen Research............................................................23 Featured Underwriters..............................................................................................23 Figures Figure 1: Top Three Pressures Causing Adoption of Customer Analytics..... 4 Figure 2: Challenges to Customer Segmentation.................................................. 6 Figure 3: Year-over-Year Performance Change in Key Metrics ........................ 7 Figure 4: Top Three Pressures Causing Companies to Adopt Customer Analytics and Segmentation ........................................................................................ 8 Figure 5: Top Three Strategies for Customer Analytics ..................................... 9 Figure 6: Currently Use Customer Segmentation...............................................10 Figure 7: Companies that Currently Track Attributes.......................................10 Figure 8: Currently Use Attributes in Segmentation..........................................11 Figure 9: Best-in-Class Use of Key Performance Metrics..................................15 Figure 10: Technology Used by the Best-in-Class to Collect Customer Data ..16 Figure 11: Technology Used by the Best-in-Class to Analyze Customer Data..17 Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 6 Table 2: The Best-in-Class PACE Framework ....................................................... 8 Table 3: The Competitive Framework...................................................................13 Table 4: The PACE Framework Key ......................................................................22 Table 5: The Competitive Framework Key ..........................................................22 Table 6: The Relationship Between PACE and the Competitive Framework.22 © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 4 Chapter One: Benchmarking the Best-in-Class In order to maximize top and bottom line revenue, organizations must be capable of understanding, reacting, and anticipating customer behavior. As a result, top performing organizations are turning to segmentation to identify key trends and commonalities among customers across marketing and sales channels. According to findings from the September 2007 Benchmark Report, Demand Generation: Kick-Start Your Business, 65% of organizations segment customers based on demographic characteristics. How do organizations move beyond demographic segmentation to incorporate behavioral, geographic, and psychographic variables for segmentation? Fast Facts √ 48% of respondents were B2B organizations, 47% were B2C, and 5% were B2B2C √ 46% of all respondents used control groups to test and improve response rates on segmentation efforts Aberdeen research, from the May 2008 Benchmark Report, Lead Prioritization and Scoring: The Path to Higher Conversion, reveals that 34% of companies are using dedicated customer analytics tools for segmentation and targeting, and 44% are planning to adopt these tools in the next two to three years. Today, the increasing competition for high value customers is causing many companies to turn to segmentation and targeting techniques that incorporate demographic, geographic, psychographic, and behavioral variables for segmentation. Business Context Research reveals that customer data is a core challenge for every organization, whether the organization collects the data themselves, purchases it from third party providers, or some combination of the two. Figure 1: Top Three Pressures Causing Adoption of Customer Analytics All Respondents Need to increase customer loyalty / retention 48% Need to increase profitability 34% Need to anticipate customer desires for new product and service development 32% 0% 10% 20% 30% 40% 50% 60% Source: Aberdeen Group, August 2008 The top pressure causing companies to segment and target customers is a desire to increase customer loyalty and customer retention (48% of all © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 5 respondents). A secondary concern for all organizations is a need to increase profitability either through improved response rates on marketing campaigns or by minimizing customer churn and maximizing customer retention, particularly among the most profitable customers (Figure 1). Types of Segmentation By definition, customer segmentation is a process for categorizing customers into smaller groups called segments. Customers within the same segment exhibit the same set of unique attributes. Segmentation helps organizations deliver targeted, relevant, marketing messages to customers and prospects and results in higher conversion rates than one-to-many marketing techniques. The most common forms of segmentation include demographic, psychographic, and geographic segmentation using customer characteristics like age, gender, race, lifestyle, attitude, and geographic regions. Behavioral attributes can also be leveraged for segmentation: product usage, buying cycle, purchase history, online activity, responsiveness to marketing materials, etc. By incorporating behavioral components into traditional segmentation techniques, organizations can target and market customers far more effectively. The following categories represent the most common ways to segment customers: • Demographic variable: age, gender, race, etc., • Geographic variables: country, state, region, etc. • Psychographic variables: lifestyle, personality, values, attitudes, etc. • Behavioral variables: buying stage, benefit sought, product use, reaction to marketing messages (click, ignore, visit site), etc. • Past business history: purchase history, frequency, amount, etc. • Contextual segmentation: the use of customer behavior and business history to segment according to the customers' motivation or need to purchase or use a product / service Collecting and aggregating attributes for segmentation is no easy task. Sixtyone percent (61%) of all respondents indicate data quality is a core challenge to effective segmentation (Figure 2). © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 6 Figure 2: Challenges to Customer Segmentation Data quality 61% Data required does not exist 30% Lack of tools to analyze data 26% Lack of centralized database 26% 0% 10% 20% 30% All Respondents 40% 50% 60% 70% Source: Aberdeen Group, August 2008 The Maturity Class Framework Aberdeen used four key performance criteria to distinguish the Best-inClass from Industry Average and Laggard organizations. The top pressures causing companies to adopt customer analytics include a desire to increase customer satisfaction and loyalty (ultimately, to increase revenue) and a desire to increase profitability. As a result, Best-in-Class represent the top 20% of performers in: • year over year change in annual revenue • year over year change in customer profitability • year over year change in average order value • year over year change in market share growth Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers © 2008 Aberdeen Group. www.aberdeen.com Mean Class Performance 43% year 42% year 35% year 25% year over year increase in annual revenue over year increase in customer profitability over year increase in average order value over year increase in market share growth 7% year over year increase in annual revenue 3% year over year increase in customer profitability 3% year over year increase in average order value 1% year over year increase in market share growth Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 7 Definition of Maturity Class Mean Class Performance Laggard: Bottom 30% of aggregate performance scorers 6% year over year increase in annual revenue 7% year over year decrease in customer profitability 12% year over year decrease in average order value 2% year over year decrease in market share growth Source: Aberdeen Group, August 2008 Measurable Improvements in Other Key Metrics Best-in-Class organizations also demonstrate superior performance in other key metrics (not used to define the maturity classes) including annual profit margins, customer lifetime value, customer acquisition, and customer retention - reinforcing the benefits of adopting Best-in-Class techniques (Figure 3). Figure 3: Year-over-Year Performance Change in Key Metrics Increased 40% 33% 32% 31% 29% 30% 26% 20% 10% 1% 0% n ui si tio ti o n ac m er to C us C us to m er Sa t Ac q e Li fe tim m er to C us lp ro ua Best-in-Class -18% is f Va lu e Va lu e to fit m ar C us -30% m er (E B IT D A ) -20% An n -3% -5% -10% gi n Decreased 0% All Others Source: Aberdeen Group, August 2008 The Best-in-Class PACE Model Using customer analytics to achieve corporate goals requires a combination of strategic actions, organizational capabilities, and enabling technologies. Table 2 summarizes the strategies, capabilities, and enablers the Best-inClass use to mitigate the pressure to increase revenue and customer loyalty. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 8 Table 2: The Best-in-Class PACE Framework Pressures Actions Increase customer loyalty and retention Capabilities Centralize customer data for "one view of the customer" Adopt new technology to collect data on segmentation variables Ability to calculate lifetime value by individual customer or segment Dedicated analysts for marketing and customer analytics Segments are uniquely recognizable by the sales and marketing departments Multiple functions (IT, analysts, line of business managers, executives) participate in customer analysis and segmentation Enablers Web analytics CRM Email marketing Customer feedback Customer database Segmentation and targeting tools Database consultants / services Data hygiene tools / services Marketing dashboards Campaign management Business intelligence Source: Aberdeen Group, August 2008 Best-in-Class Pressures and Strategies Best-in-Class pressures do not align with the top three pressures for all respondents. The Best-in-Class are 1.7-times more likely than their peers to turn to customer analytics and segmentation for measurable increases in annual revenue instead of profitability (Figure 4). Best-in-Class companies show an affinity to use (or plan to use) segmentation to impact top line revenue, not bottom line profitability. Top performing organizations are using segmentation and customer analytics to increase message relevancy and lead to sales conversion rates. The Best-in-Class are equally as likely to focus on customer loyalty and retention improvements using customer analytics. The specific focus on using segmentation to improve top line revenue is a differentiator between Best-in-Class and all other organizations. Figure 4: Top Three Pressures Causing Companies to Adopt Customer Analytics and Segmentation % of Companies 60% 53% 44% 44% 42% 40% 33% 33% 30% 29% 21% 20% 0% Need to increase top line revenue Need to increase customer loyalty / retention Best-in-Class Need to anticipate customer desires for new product and service development Industry Average Laggard *Respondents asked to select multiple answers Source: Aberdeen Group, August 2008 © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 9 Best-in-Class Strategies Data consolidation and centralization trends also differentiate the Best-inClass from all other organizations. The number one strategy the Best-inClass use or plan to use to increase revenue and customer loyalty is a centralized database (Figure 5). Top performing organizations are on average 1.5-times more likely than Industry Average and Laggard companies to use one or more sales and marketing technologies (web analytics, email marketing, CRM, lead management, customer feedback tools). So why does the second most prevalent strategy for the Best-in-Class include adopting new technologies to collect customer data? Interviews with Best-in-Class companies reveal that the technology will be new to segmentation efforts, but often already exists within the organization. This multi-channel integration theme is a consistent point for all organizations. Figure 5: Top Three Strategies for Customer Analytics % of Companies 80% 60% 58% 57% 53% 46% 40% 47% 34% 33% 33% 25% 20% 0% Integrate multiCentralize customer Adopt new technology data for 'One view of to collect data on channel technologies the customer' segmentation variables Best-in-Class Industry Average Laggard * Respondents asked to select multiple answers Source: Aberdeen Group, August 2008 Use of Customer Segmentation Research suggests data segmentation is not a core differentiator among the maturity classes, over three quarters of all respondents' segment customers (Figure 6). However, Best-in-Class practices reveal stark differences in organizational capabilities and technology use. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 10 Figure 6: Currently Use Customer Segmentation Best-in-Class 81% Industry Average 77% Laggard 67% 0% 20% 40% 60% 80% 100% Source: Aberdeen Group, August 2008 Aberdeen Insights — Strategy The proliferation of marketing and sales channels convolutes the ability for organizations to correlate customer behavior across segmentation variables (demographics, psychographics, geographic, behavioral). What attributes do organizations actually collect and track? More importantly, what attributes do they use for customer segmentation and customer analytics? Ninety-four percent (94%) of Best-in-Class organizations track geographic variables on customers (Figure 7). Interestingly, the Best-in-Class are 1.3times more likely to collect purchase behavior than demographic behavior. Seventy-five percent (75%) of top performing organizations indicate they collect behavioral attributes using internal technologies like email, web analytics, surveys and forms, and call center databases. Figure 7: Companies that Currently Track Attributes % of Companies Tracking Variable Geographic Variables 94% 82% Past Business History 74% 59% 56% Behavioral Variables 40% Demographic Variables 53% 49% 42% Contextual Variables 29% Best-in-Class Psychographic Variables 42% All Others 18% 0% 20% 40% 60% 80% 100% Source: Aberdeen Group, August 2008 continued © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 11 Aberdeen Insights — Strategy Figure 8 shows the percentage of organizations that currently use each specific attribute for segmentation. Note the disparity in data collected (Figure 7) and data used (Figure 8) for segmentation. Note that the Bestin-Class are highly likely to use purchase history to segment customers. Best-in-Class companies heavily incorporate behavioral variables and contextual variables in segmentation models to isolate unique attributes among customers (for example, people who bought x product and came back 6 years later for x product). % of Companies Using Variable for Segmentaiton Figure 8: Currently Use Attributes in Segmentation Geographic Variables 88% 79% Past Business History 81% 55% 65% Behavioral Variables 41% Contextual Variables. 58% 34% Demographic Variables 47% 53% Best-in-Class Psychographic Variables “In our business, the challenge is correctly predicting the impact specific variables will have on segmentation. When we are incorrect, we test our assumptions by triangulating the results of multiple tests which usually helps us identify the optimal set of variables to optimize our models. ~ Robert Guldi, Director of Sales and Marketing, Whitehill Manufacturing 43% All Others 26% 0% 20% 40% 60% 80% 100% Source: Aberdeen Group, August 2008 Unlike the Best-in-Class, all other organizations struggle to actually leverage the data they collect. For example, 59% of all other organizations collect purchase history attributes but only 55% of those organizations actually leverage these attributes for segmentation. The use of multiple types of attributes for segmentation helps the Best-in-Class achieve superior performance. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 12 Chapter Two: Benchmarking Requirements for Success The research demonstrates that the Best-in-Class are far more likely to collect and use a combination of behavioral, contextual, purchase history, psychographic, geographic, and demographic attributes to segment and target customers. Case Study — Gaming Industry One of the nations largest casino gaming organizations struggled to maximize customer loyalty and needed a better way to encourage the best customers to return over and over again. “We have always had a very robust system in place to help us identify high value customers,” said the Director of Customer Relationship Management. “We have a very sophisticated system to collect information about how our customers interact with us.” Fast Facts √ A lack of tools to analyze data was the second most prevalent challenge for Industry Average organizations (the first is lack of data quality) √ 30% of Best-in-Class organizations measure the negative impact of marketing campaigns (versus 18% of Laggards) The company was one an early adopter of Recency, Frequency, Monetary Value (RFM) segmentation and used historical information to isolate trends in recency of visits, frequency of visits, and the average amount of money customers spent in the casino. By combining this information with psychographic and demographic attributes, the casino was able to segment customers at an extremely detailed level. Armed with this information, the casino implemented a rewards program and a new set of marketing campaigns which targeted specific regions and segments. The result was an astonishing 130% lift in top line revenue. The casino anticipates over 65% of the current revenue run rate is attributable to the segmented marketing campaigns. The casino used advanced segmentation and modeling technology to help predict the impact of different marketing messages. Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute their daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of appropriate tools and effective deployment of those tools); and (5) performance management (the ability of the organization to measure their results to improve their business). These characteristics (identified in Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 13 Table 3: The Competitive Framework Best-in-Class Average Laggards Processes to identify high value customers and market to them uniquely Process 57% 53% 46% Segments are uniquely recognizable by the sales and marketing function 62% 47% 46% Multiple functions (IT, analysts, line of business managers, executives) participate in customer analysis and segmentation 71% Organization 49% 41% Dedicated analysts for marketing / customer analysis 40% Knowledge 32% 25% Accurate, centralized information within customer database 75% 53% 36% Technology that support customer segmentation: Technology 64% customer database 65% customer feedback tools 60% segmentation and targeting tools 41% database consultant / services 40% data hygiene tools / services 62% customer database 51% customer feedback tools 42% segmentation and targeting tools 31% database consultant / services 31% data hygiene tools / services 50% customer database 33% customer feedback tools 32% segmentation and targeting tools 24% database consultant / services 26% data hygiene tools / services Calculate Customer Lifetime Value (CLV) by individual customer or segment 47% Performance 24% 15% Forecast customer trends using analytical data 44% 34% 19% Source: Aberdeen Group, August 2008 Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with end users, Aberdeen’s analysis of the Best-in-Class reveals that these companies predominantly rely on best practices in process, organization, and technology to achieve superior performance. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 14 Process Sales and marketing functions in top performing organizations are 1.3-times more likely than all other companies to recognize unique differences between segments. Segments should be homogeneous groups of individuals. While this may seem arbitrary, the Best-in-Class are poised to maximize investments in sales and marketing because these functions can adapt messaging accordingly to maximize relevancy and increase overall conversion rates. Having processes in place to ensure segments are uniquely recognizable by sales and marketing is a differentiating practice for Best-inClass organizations. Organization Organizational practices are core components of leveraging customer analytics to grow revenue and customer loyalty. Best-in-Class companies demonstrate an affinity for disseminating customer analysis across multiple functions (IT, finance, management, dedicated analysts, marketing, etc.). This enables the Best-in-Class to extract demonstrably more value from customer data since each group brings a unique perspective and skill set to analyze the data. Best-in-Class organizations are also 1.6-times more likely than Laggards to dedicate specific marketing analysts for customer data analysis. Additionally, the Best-in-Class are 1.6-times more likely to hire dedicated marketing analysts for customer data analysis. Today, Best-in-Class performers are adopting tools to offload or automate basic analytical tasks to allow experienced analysts' to focus on more advanced analysis. As a result, top performing organizations are looking for easy to use and maintain tools for operational resources to conduct basic analysis. “We've got to 'walk before we run' and our company is in its infancy regarding database marketing. We are committed to using guest information / preferences to build a database for analyzing and segmenting the lifetime value of guests, and incorporating a contact strategy to reach them with the right brand essence and activation messages.” ~EVP of Marketing, Travel and Hospitality Company Knowledge Management The single most important component to effectively segmenting customers is a centralized database. The top challenge around customer analytics for all organizations is a lack of data quality. The Best-in-Class are 1.5-times more likely than Laggards to leverage data hygiene services and database consultant services to maximize the integrity of their databases. Use of a customer database is not a differentiating factor for top performing organizations. In fact, on average, 70% of all respondents used a customer database and segment customers. While knowledge management practices are essential to achieving superior performance, the convergence of technology, process, and organizational practices actually enable dramatically higher annual revenue growth, market share growth, and profitability growth for the Best-in-Class. Technology Best-in-Class organizations leverage a number of core technologies that are integral to superior performance and customer analytics capabilities. These tools help the Best-in-Class simplify and automate analysis and collect data © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 15 on customers and prospects. The Best-in-Class are 1.9-times more likely to use customer feedback tools. Customer feedback technologies are used to collect psychographic attributes for Best-in-Class segmentation efforts. Automated segmentation tools have two major benefits for the Best-inClass. First, they can reduce overhead on analysis and speed the optimization of future marketing efforts. Second, these tools allow operational resources to do basic analysis, leaving more advanced analysis to dedicated marketing analysis as discussed in the “organization” section earlier. Performance Management Best-in-Class companies are three-times more likely than Laggards to calculate and track customer lifetime value. The Best-in-Class also track and monitor other key metrics to drive customer analytics performance. Figure 9 demonstrates the relative value that the Best-in-Class place on key metrics. Metrics that are measured but cannot be trusted are of little value. For example, 80% of the Best-in-Class track customer churn, and 56% are confident in this metric, which means customer churn is a well known, important metric for the Best-in-Class. Figure 9: Best-in-Class Use of Key Performance Metrics 15% 9% 80% 56% Customer Churn 35% 47% Customer Profitability 85% 3% Credit Risk and Fraud Mitigation Customer Lifetime Value 32% RFM Indicators (Recency/Frequency/Monetary Value) 27% 18% 87% 27% 42% 15% 47% 36% 69% 6% 0% 20% 40% 60% 80% 100% Track- Confident in Measurement Track- Somewhat Confident in Measurement Track- Not Confident in Measurement Source: Aberdeen Group, August 2008 © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 16 Aberdeen Insights — Technology Technology Used to Collect Customer Data Seventy-five percent (75%) of Best-in-Class organizations collect behavioral information using internally owned technology. Figure 10 shows current and planned adoption of key technologies used to collect customer data in top performing organizations. Note how a customer database, web analytics, CRM, and customer feedback tools will become core components of all Best-in-Class organizations in the future. Figure 10: Technology Used by the Best-in-Class to Collect Customer Data Web Analytics 73% CRM 24% 69% Email Marketing Technology 30% 67% 15% Customer Feedback Tools 65% 34% Customer Database 64% 35% 0% 20% 40% Currently Use 60% 80% 100% Plan to Use Source: Aberdeen Group, August 2008 Technology Used to Analyze Customer Data Industry Average and Laggard organizations are far less likely to actually use the data they collect for segmenting and analyzing customers than the Best-in-Class. Figure 11 shows the tools Best-in-Class companies currently leverage, and plan to leverage, to support customer data analysis. Best-in-Class performers democratize access to centralized data and encourage multiple stakeholders to participate in customer analysis. The Best-in-Class are two-times more likely than Laggards to adopt technology designed to help segment and target customers - a core enabling technology for the Best-in-Class. This provides confidence in performance measurements and overall higher return on marketing investments. continued © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 17 Aberdeen Insights — Technology Cont'd Figure 11: Technology Used by the Best-in-Class to Analyze Customer Data Segmentation and Targeting Tools 60% Campaign Management 56% Business Intelligence 18% 53% Marketing Dashboards 22% 51% Database Consultant/Services 20% ~ EVP Sales, Life Sciences Technology Provider 19% 41% 0% “We are revamping our entire global marketing efforts with an emphasis on CRM and web analytics to collect behavioral data and blend it with demographic and geographic information.” 24% 34% 40% Currently Use 60% 80% 100% Plan to Use Source: Aberdeen Group, August 2008 © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 18 Chapter Three: Required Actions Whether a company is trying to move its performance in annual revenue, market share, and customer profitability from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements: Fast Facts Laggard Steps to Success √ 60% of Best-in-Class companies plan to increase the budget for customer analytics technologies in 2009 • Centralize customer data for one view of the customer. Best-in-Class companies are two-times more likely to collect what they deem to be "accurate, centralized data in a customer database." Forty percent (40%) of Laggard organizations do not use a customer database, and 67% of Laggards indicated they currently segment customers. That means a significant portion of Laggard segmentation is not rooted in customer data. The research proves that segmentation efforts that are not justified with meaningful data do not produce results that lead to Best-in-Class performance. • √ 44% of Best-in-Class companies plan to invest in customer analytics technologies in 2009 Adopt new technology to collect customer data. The research indicates the top strategy for Laggard organizations is adopting new technologies to collect customer data for segmentation. Best-in-Class organizations demonstrate 98% current adoption and planned adoption for the following technologies which enable top performing organizations to collect variables and attributes for segmentation: o o Web analytics: website and email marketing behavior and recency and frequency information provide behavioral variables for segmentation. o Email marketing: is used to track conversion rates and click-through rates. What impact does the marketing message have on a particular segment? Does adjusting the message increase or decrease key performance indicators? This is used for contextual segmentation or behavioral attributes. o • Customer feedback tools: email, surveys, and web forms provide an excellent source of explicit segmentation variables. Best-in-Class companies use these to determine purchasing needs for products and services. Customer database: 40% of Laggards do not use a customer database. Laggards need to focus on integrating and centralizing customer data. Investments in customer databases will be essential to achieving Industry Average or Best-in-Class performance. Track psychographic attributes and use them in segmentation. Only 16% of Laggards collect psychographic © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 19 attributes on customers (versus 42% of Best-in-Class). Eighty-two percent (82%) of the Best-in-Class collect these attributes across internal channels: email, forms, surveys, call center, etc. Thirty-three percent (33%) of the Best-in-Class append their databases with third-party purchased psychographic attributes. Industry Average Steps to Success • Use behavioral data in customer segmentation. Forty-six percent (46%) of Industry Average companies currently track behavioral data, while only 45% of these companies actually use the data they collect in customer segmentation. Behavioral data can be used to provide context around purchase intent and purchase behavior. This is a core component of Best-in-Class performance. In fact, the Best-in-Class are 1.4-times more likely than the Industry Average to currently leverage behavioral data in customer segmentation. • Collect explicit data from customers using survey’s and feedback forms. Best-in-Class are 1.5 times more likely than Industry Average companies to collect psychographic and behavioral variables using feedback and response forms. • Consider using Recently, Frequency, and Monetary Value (RFM) indicators to proactively identify high value customers. RFM is a means of isolating customers who have a higher propensity to purchase again. Past consumer behavior is the best predictor of future consumer behavior. These individuals are loyal customers and therefore will require less sales and marketing spending, ultimately delivering higher profitability and return on marketing investments. Organizations can drive down return on investments and overall marketing spend by isolating these customers. Measure customer activity based on the following: o Recency: Track customer activity on the website, how often do they visit, did they recently purchase a product, if so, what products or services do they commonly purchase. Customers who purchase recently tend to buy again. Measure repeat rates by category, product, demographics, marketing channel, and psychographic characteristics. o Frequency: Track how often consumers interact or purchase over time. This could include the length of time a customer spends on a website (Is there any correlation to purchases and the length of time customers spend?). This can also include website visits over time (in x years, how many times does the average repeat customer visit a site, or talk to a salesperson, or respond to an email). o “We purchased psychographic information from a third-party provider and we are having a very difficult time proving how any of the attributes influence or correlate to purchase decisions. We are currently looking into bringing in a marketing service agency to help us.” ~ Director of Marketing, Finance and Banking Monetary value: Customers who purchase large order values tend to purchase again. Dust off the old customer © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 20 purchase data and look for correlations between order value and repeat customers. Best-in-Class Steps to Success • Integrate multi-channel technologies. This is actually the third most important strategy for Best-in-Class organizations to mitigate the pressure to increase top line revenue and customer loyalty. However, the research proves that organizations that centralize and collect customer data from multiple channels (web, email, call center, brick and mortar stores) and use this data to target and position to customers and prospects more effectively achieve higher performance. One-third of the Best-in-Class still do not aggregate core data like email or web analytics with the customer database. Continue investments in consolidating and integrating customer data across various channels and functions. • Improve database quality with data hygiene tools and database consultants. The number one challenge to customer segmentation for all respondents was data quality. Thirty percent (30%) of the Best-in-Class leveraged database services to optimize their marketing database. Deeper analysis revealed that these Bestin-Class organizations also achieved the upper 10% of performance increases in annual revenue and market share growth. The research suggests organizations stand to gain demonstrably more in overall performance than the cost of services and data hygiene initiatives. Top performing organizations supplement segmentation efforts with demographic, geographic, behavioral, and psychographic data. The combination of process and technology maximize performance for these organizations. Aberdeen Insights — Summary One of the top pressures for all organizations is the need to measure and maximize return on marketing investments. Customer analytics play an essential role delivering superior performance from marketing spend. Best-in-Class companies demonstrate that the use of multiple attributes in customer segmentation (demographic, psychographic, behavioral, and purchase history) leads to superior annual revenue growth, market share growth, average order value growth, and improved customer profitability. The Best-in-Class showed a higher propensity to enable sales, marketing, finance, and dedicated analysis with processes and technologies that centralize, clean, and democratize customer data. Investments in customer databases and tools to help automate and streamline segmentation efforts are on the rise among all organizations. Half of all respondents plan to increase the budget for customer analytics initiatives in 2009. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 21 Appendix A: Research Methodology Between June and July 2008, Aberdeen examined the use, the experiences, and the intentions of more than 221 enterprises that currently leverage customer analytics for marketing and sales. Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on customer segmentation strategies, experiences, and results. Responding enterprises included the following: • • Job title / function: The research sample included respondents with the following job titles: marketing (41%), sales (32%), operations (2%), business process management (7%), other (18%); senior executive (20%), vice president (28%), director (18%), manager (17%), other title (17%). Industry: The research sample included companies from the following industries: software and hardware (19%), IT consulting (9%), telecommunications (4%), retail (4%), consumer package goods (7%), travel (5%), finance and banking (4%), and other (48%). Study Focus Responding executives completed an online survey that included questions designed to determine the following: √ The use of various attributes (demographic, psychographic, behavioral, etc) in customer segmentation √ The current and planned use of technology to support customer analytics √ Best practices in customer segmentation • Geography: The majority of respondents (67%) were from North America. Remaining respondents were from the Asia-Pacific region (18%) and Europe (15%). √ The measurable value of leveraging more advanced customer segmentation techniques • Company size: Twenty-six percent (26%) of respondents were from large enterprises (annual revenues above US $1 billion); 20% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 54% of respondents were from small businesses (annual revenues of $50 million or less). The study aimed to identify emerging best practices for channel management, and to provide a framework by which readers could assess their own management capabilities. • Headcount: Twenty-two percent (22%) of respondents were from large enterprises (headcount greater than 1,000 employees); 25% were from midsize enterprises (headcount between 100 and 999 employees); and 53% of respondents were from small businesses (headcount between 1 and 99 employees). Solution providers recognized as sponsors were solicited after the fact and had no substantive influence on the direction of this report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 22 Table 4: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Source: Aberdeen Group, August 2008 Table 5: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance. In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance? Source: Aberdeen Group, August 2008 Table 6: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. Source: Aberdeen Group, August 2008 © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 Customer Analytics: Segmentation Beyond Demographics Page 23 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report include: • Social Media Marketing: The Latest Buzz on Word of Mouth; July 2008 • Sales Analytics: Hitting the Forecast Bulls-Eye; July 2008 • Customer Feedback Management; June 2008 • Customer 2.0: The Business Implications of Social Media; June 2008 • Lead Scoring and Prioritization: The Path to Higher Conversion; May 2008 • B2B Teleservices: The 2008 Buyer's Guide; April 2008 • The CMO Strategic Agenda: Automating Closed Loop Marketing; March 2008 • CMO Strategic Agenda: Demystifying ROI in Marketing; February 2008 • Green Marketing: Leveraging Customer Data to Reduce Direct Mail Waste; February 2008 • Social Media Monitoring and Analysis: Generating Consumer Insights from Online Conversation; January 2008 Information on these and any other Aberdeen publications can be found at www.Aberdeen.com. Author: Ian Michiels, Sr. Research Analyst, Customer Management Technology Group (CMTG), ian.michiels@aberdeen.com Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. © 2008 Aberdeen Group. www.aberdeen.com Telephone: 617 854 5200 Fax: 617 723 7897 ...
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