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What is Customer Behavioral Segmentation?

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Pavlov proved that you could condition animals to act a certain way, preferably a way you wanted them to, through behavioral reinforcement. And ever since, marketers have been trying to copy the trick. That’s because, while opinions and attitudes matter, behavior matters more. Sure you want your customers and potential customers to think well of your brand and have positive intentions, but in the end you want them to actually do something that generates revenue for your business.

Decision making process

Maybe this is why the emerging field of behavioral economics has garnered so much attention in recent years, and particularly since Daniel Kahneman and Amos Tversky (posthumously) were awarded the Nobel Prize in Economics. Since then, books like Freakonomics and Predictably Irrational, written by other authors interested in personal behavior and decision making, have shot up the best seller lists and become interesting topics of conversation (at least in certain circles).

This trend in empirical research, which has revealed peculiarities in people’s decision making process, has also found a friendly companion in behavioral segmentation, the analytic approach to segmentation that is driven by the cold, hard facts of consumer actions. To see why behavioral segmentation is an important tool for marketers consider this.

Demographic segmentation

For many years, marketers have segmented their customer files by examining demographic and psychographic characteristics or, on occasion, survey-derived attitudinal customer data. And, of course, simple behavioral approaches using purchase recency, frequency, and monetary value have also been used extensively. But, ultimately, these techniques fail to reveal sufficiently what kind of a relationship the customer has with the brand, whether he has a high level of engagement with the brand, whether the brand ranks high in his hierarchy of choices, and thus fall short of understanding the customer’s true potential with the brand.

Why to use behavioral segmentation?

What has made behavioral segmentation so appealing and useful now is that there has been an explosion in the data that is available to assess these important measures. First of all, more sales transaction data is now captured than ever before because customers are buying in more channels (and particularly on the web) that have the ability to record those transactions. And although store sales are still tops, businesses are doing a better job capturing those elusive cash sales by arming customers with loyalty and discount cards that, when swiped, record the customer’s every purchase.

Online customer segmentation

The web has also generated vast amounts of customer interaction data that enable marketers to expand their view of how engaged each customer is with the brand. This may not be true for all industry types, but it certainly is in financial services, automotive, retail, travel, entertainment, and other big categories. If you are a marketer, this data can tell a lot about a customer. Is he a regular visitor to the web site? How often does he browse my products? Does he respond to online surveys and other engagement devices? How willing is he to share information? Does he get involved in online chats? All of these actions are additional important indicators of customer potential and loyalty. The behavioral economists may show that customers don’t always act rationally, but, as has been said, actions (however irrational) speak louder than words.

Behavioral segmentation schemes

Over the last four or five years, we’ve seen how bringing transaction and interaction data together in a behavioral segmentation scheme can pay big dividends for marketers. The benefits have ranged from more sales per customer to higher retention to greater profitability. Marketers have also seen more return per dollar spent, which has helped keep the finance department smiling too. Behavioral segmentation may not be the solution for every case, but when it fits the task we think the results can be pretty powerful.

Using customer information

To know if behavioral segmentation is right for you, ask yourself if you are leveraging all of your customer information assets as effectively as you can.

  • Do you have good historical data for two or more years on customer purchases?
  • Do you have at least one year of interaction data that can be linked to individual customers?
  • Do you have a way to assess the value of your customers?
  • Do you know which behaviors you would like individual customers to change to make them more profitable?
  • Do you have a process or are you willing to institute a process that will produce customer-specific development plans?
  • Are you willing to differentiate your marketing efforts, including differentiating your product and service offerings, to address customer-specific goals?

 

Regardless of how you segment your customers now, you should look seriously at behavioral segmentation as a way to drive greater value from your customers and secure better long term profits. We are happy to discuss this topic with you if you’d like to learn more and I encourage you to return to our website periodically for updates on the use of behavioral segmentation.