Perspectives of Segmentation

One of the three activities on customer analytics is segmentation. (psst: wanna know the other two... mail me on michaeldsilva@gmail.com). Most often when I discuss on performing segmentation analysis with the marketing folks.. I get the "we know our segment" arguement.

I have had marketing managers retort with "Yeah, we know what segments we target" or "we have the corporate, retail and government segment". They believe they have already segmented their segments and as such do not need analytics to further do any segmentation exercise. And they are correct. {now wait... am i contradicting?}.

It is at this point that I often take a tangential topic and take the white board for a chalk talk on the perspectives of segmentation. Let me take this opportunity to use this white space to do the same here.

There are basically three levels at which customers are segmented. The following diagram shows the three levels of segmentation.



The first level of segmentation is at a Strategic level. The segment defined at this level is primarily used for organization setup. As such, this segment should survive for atleast 5 years.

The second level of segmentation is at an Operational level. The segments defined at this level dictates the processes within the organization. Each of the segments require its specific approach to selling and servicing. This segment should survive for atleast 2 years.

The third level of segmentation is at a tactical level. The segments defined at this level often requires specific communication modes. This in marketing terms, refers to specific campaigns as well as offers. The segments at this level are more of an ad-hoc nature. These segments do not survive for more than a year at the max.

The role of statistics is primarily at the third level, that is the tactical level. And this is where the mismatch happens. While me as a statistical solution provider is taking of segmentation at level 3, the marketing personnel is often referring to level 1 or level 2 segmentation. However, often the two parties are not aware of their perspective at two different levels.

I often use this theory to address the conflicting scenario during my pitch to the marketing personnel. All the best with your understanding on marketing segmentation and the role of statistics.

Loyalty has a new dimension

The last year has seen increasing request for loyalty management solutions from prospects. The requirements typically hinge on accumulation, management and redemption of loyalty points. There are complexities built in via arrangements of shared loyalty programs.

A few prospects look beyond point management and define loyalty as management of customer lifecycle. Here the requirements are more analytically oriented as against the earlier transaction oriented.

I have noticed a peculiar behaviour among the young generation. This generation is completely different to the previous one. My earlier posts highlights why a company should refocus or create a separate focus stream on the new generation of customer (Loyal customers are dying).

Though I may not necessarily belong to the "young" generation, let me start this post via my personal experience. A few years back I was transferred to a office location which was towards north of Mumbai. There was a Axis Bank branch in the adjacent building to this office. Since this was convenient, I opened a savings account with this branch to cater to my daily cash need. The bank also announced a web portal to maintain my bank account. When I checked the portal, it was pretty basic (this was quite some years back). There was not much I could do. I could not even open a new fixed deposit. So I stayed with ICICI Bank (which was the primary bank for me then). The only reason for me not to stray from ICICI Bank was the activities I could perform on the web site.

I have noticed a similar behaviour around. People often are comfortable with one channel and tend to focus their transactions on this channel. The recent percolation of smart-phones provides a good example. Ever watched two smart-phone owners converse. They compare the activities that they can perform on their phones and are quick to identify the bottleneck which prevents these activities. Whether this is a mobile banking activity or social networking. The introduction of Blackberry by just two telecom is a case in point. A good number of people known to each would have shifted their telecom provider so they could do some "blackberry" transactions, even if it meant just checking and replying mails.

Where the addiction to the channel is high, this often will take priority on the loyalty and will kill any brand or company loyalty present. Consider the purchase of books. If one had to walk to the bookstore, then there will often be a top of mind bookstore outlet or brand that one would frequent. For me, I love frequenting Crossword. But recently, I have sort of become comfortable with online purchase of my books. So do I have the same preference for Crossword online store? Not anymore. A quick search on google for the book... click on the first link... check the price and order. Thats it... Done. No more store loyalty for me.

So how does a company leverage this loyalty to a channel? As a first step, one needs to understand the profile of customers basis the channel of interaction or transaction. Any new product or service or cross sell that needs to be made to this set of customers should be provided on the channel of preference. It will not be a success if an offer is made on the phone for a customer who prefers the internet for his purchases. Similarly, expecting a in-store customer to buy into a offer by subscribing on the web will also not be too successful. Unfortunately, there is a initiative among many marketing personnel to move the customer to the lowest cost channel. Ever noticed a bank trying to entice you to go the ATM when you want to withdraw money. Maybe they are losing the additional business a customer would have given them while he is in the branch. Pushing him to the ATM will only result him in frequenting some other bank who accommodates his presence in the branch.

Want to know how to identify channel loyalty and leverage this knowledge, mail me at michaeldsilva@gmail.com

Beware of gut feel !!!

Last week I was in discussion with the founders of a firm providing analytical solutions for retail industry. They have, in the recent past, added predictive analytics module to the offering stack.

One of the founder was enquiring from me on how one would do cross sell for a retail. I stated that a first step would be to do a segmentation analysis.

He wanted to know how one would do segmentation and what variables would form an input to the segmentation exercise. I mentioned that a host of variables can be considered. One could consider demographics, transactions, interactions, and if available even psychographics. When we went into detailing, I stated that variables such as RFM could form inputs. So one should consider variables such as weekend visits, weekday visits, time of visit, day of visit, etc.

At this stage, we had a disagreement. This person stated that RFM cannot be an input into segmentation exercise but rather it should be used to describe a segment. I explained to him that at an initial stage we should provide all possible variables and derivations of the variables as input to the statistical model and let the model identify and select the significant variables. He was still insisting, and infact continously injecting, that RFM cannot be an input.

I explained to him again that if he takes a stance that RFM cannot be an input to modelling then it implies he is letting gut-feel or instinct override the modelling exercise. This is not a right way to do modelling. The best way is to let the model do the variable selection. At the end of this exercise, it may still happen that the RFM variables will not be a significant variable. But considering the possibility that a few of the RFM related variables are significant in identifying clusters or segments, then letting instinct take over and not providing RFM variables to the segmentation model will result in incorrect segements. And any subsequent modelling exercise will further magnify this error. Often this is what happens in reality. Trying to force instinct as an input into a statistical modelling exercse often leads to a incorrect inference or scoring. And always the blame of failure is put squarely on the modelling process.

As Malcolm Gladwell states instinct is often good but it should be validated... And validation as defined by him is instinct generated after 10,000 hours of going through the same grind. And even after this instinct, he states that it still helps doing statistical modelling as an independent activity since it can be used to validate the instinct.

The person I was discussing with obviously did not come with a 10,000 hours of retail exposure. We walked apart as not best of friends. I still hold on to my stand that it is best to provide as many variable as inputs to the modelling exericse and find the significant one rather than filtering any variable upfront.

Need to know how you can segment your customers OR more important why should you segment your customer base, contact me at michaeldsilva@gmail.com. I will be glad to discuss and assist you on the same.

Shopping Basket based business planning...

My last post was on the creation of a "Customer Relationship Manager" position as a first step towards customer centricity. I had intended to continue on this topic. But last week the local Spencer Retail outlet shutdown in our residential locality. I was thinking over why it did not work out for the retail chain to continue with the store. So I have pushed the CRM position story to the next post.

We had moved into this locality about 7 years back. At that time, in the place where the current Spencer Retail was located, a local entrepreneur had started a supermarket format called Sunrise Supermarket. Since this was the only super market around and also it was closer to our residence, we started frequenting it for all our household purchase. In fact soon it was a Sunday ritual to drop into Sunrise on our way back from church and gorge on some puff cakes.

All our shopping trips started and ended with one trip to Sunrise. Slowly we adjusted our weekend activities to be able to visit Sunrise when the crowd was at its lowest .. which was saturday afternoons.

A couple of years back, Sunrise wound up and gave its space to Spencer Retail. A D*Mart outlet opened up about a mile further down. While Spencer tooks its own time to start operations, D*Mart was quick to setup and beat Spencer to its opening. My wife and myself started frequenting D*Mart. However, we always tended to stop at Spencers on our way back from D*Mart. D*Mart did not stock non-veg items and we always needed to pick up chicken and bacon from Spencer.

Soon wife decided to drop D*Mart and visit only Spencer. There were two primary reasons for this -- (1) She did not like the quality at D*Mart, and (2) We were spending too much time at the check out counter at D*Mart. I probably know the reason for the second one... D*Mart was cheaper than Spencer and so attracted maximum crowds in a two store locality.

But everytime we came back from Spencer we were getting more and more frustrated. The number of items on our shopping list that were not available in Spencer was increasing every week. So after our trip to Spencer, my wife still insisted on visiting the local market for stuff that we could not get at the Spencer outlet.

In fact, I remember about an year back, my wife was so frustrated that she actually called for the store manager and complained about items that were no longer available. She told this person that at this rate they will soon have to shut down. That was it.. my wife predicted the downturn of Spencer Retail outlet. Unfortunately, the store manager did not take her seriously. Today, Spencer Retail has shut down the store. My wife did not use any analytics, any forecasting, nor any predictive tool... just her experience on a weekly basis to predict the store is going downhill.

Too often I have found inventory managers trying to order stocks basis individual movement of SKUs. So items that are moving slowly get eventually moved out of the merchandise portfolio for a store. No consideration is given to the fact that this item may actually complete the shopping basket of the customer. In the endeavour to focus on the fast moving SKUs, the slow moving ones are edged off the area of attention. This often leads to an incomplete shopping basket for the customer and forces her to visit other outlets to procure the missing items. When the number of missing items increases, the customer finds it convenient to avoid the store altogether and move to her regular kirana store or to another store outlet.

The need for inventory managers is to study the shopping basket to see if the slow moving item is part of a typical set of baskets. If so, then it would make sense to forecast the number of shopping baskets and then derive the number of SKUs to order basis the items in each shopping baskets.

This is not a very complex analysis. The purchase baskets are available from the POS units. Every purchase receipt is one basket. The first step is to group the purchase transactions into clusters of similarity. This can be done using either an cluster algorithm or an association algorithm. These two algorithm are significantly different and have their own objective. Once we know the number and contents of typical baskets, the next step is to forecast the number of baskets that will need to be filled. Basically, we are predicting the number of visitors to the store for each purchase baskets. When this is done, we can sum up the individual SKUs to come at the number of SKUs to stock so that all the purchase baskets are filled.

If only Spencers had done this analysis, my wife (and many others) would have continued to shop at the store and it would still be running today.

If you are in retail and want to know how this analysis can be done... get in touch with me at michaeldsilva@gmail.com

And before I windup, a reminder on the survey on the right side of the screen.

If you have come this far, do vote your view at the end of this post.

CRM needs a Customer Relationship Manager

The Jet Airways pilots "strike" is in its third day. I am currently at the airport for my flight back home. And I am happy I did not opt for Jet Airways flight this trip. I am in all support with Mr. Goyal. The airlines exists for taking people from one place to another, always closer to their destination. By calling for a mass sick leave, the pilots have violated the basic reason for an airlines existence. I hope the government stays out this time and let Mr. Goyal run his business. It it means shutting down the airlines, so be it. This action of the pilots have hurt Jet badly and its going to take a looong time for it to get back on the market share. (And the Jet Airways counters is diplaying a panel that reads "Jet takes you places after you have flown with us".. pooh atleast they should have covered the panel till people could actually fly with them). By the way, all flights are on time ... now what are the chances of that happening on an ordinary day.

For those who have not noticed, I have a poll running on your right side of the screen. For those who have notices, I have received queries on what the query mean.

A lot of companies talk of customer relationship management and customer centricity. However, the organization structure and business process remains untouched. At most a lovely (costly) CRM application is purchased and implemented. The implementation team is asked to map the CRM application to the business process. The implementation is done, some customizations are deployed, t-shirts get distributed, go live parties are celebrated and users are forced to use the new application.

Lets break down CRM... The first word says there has to be a customer. Well, if the company still runs then obviously it has customers. So that is addressed. It was a easy one.

The next word is Relationship. Here is where a clear cut definition of what is the relationship with a customer does not exist. There are often a lot of marketing statements and marketing vision/mission statements. Somethings on lines of providing comfort to users, providing transport to users, elimination worries of customers and so on. But what exactly is the relationship. Is the customer just an acquaintance, a person known, a friend, a good friend, a best friend, a fiance, a spouse (or an ex). Most companies don't know what relationship they want to build with their customers. They have excellent order and billing systems. Customer records get created, a customer id is allocated, sales order generated and payment booked against it. Beyond this there is no definition of how a relationship with the customer should be envisioned.

Discussion on the third and last word - Management - does not make sense. Most, infact all companies, I have interacted at has failed at the second step. They do not know what relationship they enjoy with their customer. For most a customer is a consumer of their products and a consumer of their CRM processes. So they focus mainly on improving the consumption of products and the consumption of their CRM processes.

Banks have started defining GOLD or PLATINUM segments. The high net value individuals. They have clear cut definiton of the relationship with this segment. There was lovely advertisement depicting a financial advisor on her morning jog and constantly thinking of what her clients need would be. One advisor with a american bank in India once stated to me that he is expected to be part of the customer's life in any way possible... even if it means turning up at his customer's place at 6 in the morning to walk his dog. But beyond this high value segment, there has been no attempt to define relationship with the other customers.

The reason is very simple. This is because there is no "Customer Relationship" manager. A profile whose job will be to define the relationship with each segment of customer. In the case mentioned above, the bank allocates the high value customer to a dedicated group and bars all the other departments to contact this set of customer. This dedicated group is responsible for the ownership of the customer relationship. However, in these cases also, the relationship is crudely defined as "turning up ... to walk the dog" attitude to customer service. The other customers are not owned by anyone in particular. Whenever a customer buys a product, the respective product group thinks they own the customer. Thus over time there are multiple group who each think they individually own the customer and devise their own strategy to deal with the customer. A classic case, I saw at a telco, where the landline department debarred the outgoing of a customer whereas the sales person from the mobile department was in the waiting area of the same customer with a "preferred" deal for the mobile service.

Companies on the route to CRM should first appoint a Customer Relationship Manager. This profile will be responsible for defining how a customer enters the companies records, what processes touch the customer, how the relationship should be built and also how and when should a customer be eased out. All other groups - service or product - will align themselves to the definition established by the Customer Relationship Manager. A lot of culture change is needed for this attitude to set in. Especially in cases where a product sale dominates the revenue of a company as in such cases this product group tends to muscle its way to access the customer and keep others away.

So.. go ahead and set up a "Customer Relationship Manager" profile.

Now the poll question should be clear, so what is your answer?