How Sophisticated Is Your Behavioral Segmentation?

In 1850, Paul Reuter, who later founded Reuters press agency, used a fleet of over 45 pigeons to deliver news and stock prices between Brussels, Belgium, and Aachen, Germany. This was the extent to which they segmented their audience.

Segmentation by geography is still important and, in fact, has grown increasingly sophisticated — segmentation is now down to the county or district level, especially, for example, by political campaigns in the last two elections. In today’s landscape, marketers have to do much more in terms of understanding their audience than simple geographic segmentation, however.

Right Message, Right People

Moving beyond yesterday’s mantra of “right message, right people, right time,” practitioners now need to be sure they’re delivering the right message to the people most inclined to take favorable action at the exact time they are predicted to take it.

Let’s begin with the most straightforward type of segmentation: demographic. For the past 20 years, demographic segmentation has been chapter and verse of direct marketing, evolving from art to science.

Demographic information is the most common type of information gathered from your customers, and today ranges from basic information such as name and address to age, education, profession, hobbies, pets, and virtually any type of factual attribute. The more you know about your customers’ profiles, the more sophisticated the demographic parameters that can be employed in your campaigns.

Each interaction with the customer brings an additional opportunity to learn more about them. An infinite number of segments can be parsed, but the type of information gathered should be relevant to your particular business and selling model. Whenever a customer makes a purchase, more information about him or her is added to the database, and you learn a bit more about the individual, what they buy and when they buy.

With ever more sophisticated segmentation, your direct marketing messages can become more relevant — and individual campaigns more segmented — to smaller groups of customers with common profiles. This is a key component of good demographic segmentation: the ongoing capture and analysis of information.

Access to Information

Thanks to the Internet and the wide availability of consumer segmentation data, most of today’s marketers have captured some basic data on their customers and have created some segments based on this information. Information is continually added to the database, and hopefully this information is used in the next campaign or promotion to further revise the segmentation.

Maybe you have created a few different versions of your e-mail campaigns based on some basic audience segments, and this is good. Most marketers do this today.

The best don’t stop there, however. They employ not just a database of customer information, but analytics to slice and dice the data in any number of ways for even deeper insight. Demographic database segmentation is only scratching the surface of what can be done with today’s direct marketing tools.

The goal of all direct marketers is to develop customer trust over time, and the best way to do this is to not only provide customers with the information they’re looking for, but hopefully to start predicting when they would be most open to receiving it.

Behavioral Segmentation

This is the new science of segmentation — behavioral segmentation. Behavioral segmentation involves analyzing and predicting the likelihood of a customer to take a particular action within a particular time frame.

Demographic profiling is incomplete because it doesn’t capture people’s tastes, habits or lifestyles — which often change over time. You can’t simply assume that what you knew of your customers when they first came to you is going to be true forever.

To truly serve your customers and address their individual needs, you need to capture and analyze their behavior. Behavioral marketing, not surprisingly, is based on each of your customer’s very specific behaviors, in your store or on your Web site, trended over time.

The following are possible customer segments that can encapsulate buyer behaviors:

• Bargain Hunters: they only buy during a sale, closeout or promotion;
• Holiday Shoppers: they only buy seasonally;
• Luxury Lovers: they respond to quality and high priced items;
• Browsers: they visit the store often but seldom buy; and
• Loyal Communicators: they not only buy, but are vocal about their preferences

Knowing more about your customer’s behavior means that you can market very specifically based on propensity. Maybe the Bargain Hunter would buy more often if a special discount was offered? Maybe the Browser would like free shipping? Maybe the Loyal Communicator is the perfect target for your “refer a friend” subscription drive?

Whatever you offer, knowing that this segment exists because you’ve captured and analyzed this behavioral information has presented an additional revenue opportunity.

Predicting and Tracking

Behavioral segmentation relies on historical data to predict what the customer will possibly do in the future. Successful predictive analysis isn’t reliant on expensive database mining and intelligence tools. Many insights can be gained from old fashioned market research techniques and today’s relatively affordable Web site tracking software. Even an analyst well versed in Excel can glean complex insight from the right dataset.

Capturing customer behavior and using segmentation fully, you can do so many things with your marketing. Split-testing, for example, is another very effective marketing practice based on segmentation. Take a segment and send to that list certain content based on what you know about that segment’s preferences. Send another segment different content and then see which gets better results.

If you segment your customers and then provide them with the dynamic content that is most meaningful to them, you are better fulfilling their needs and, at the same time, further developing your e-mail marketing.

The true aim of behavioral marketing is to isolate the most profitable customer segments — those most worthy of your marketing dollars, and not to waste time on those with no future propensity to buy.

For example, if you own a gym, and your customer data reveals that members who stop coming after only three months have a tendency not to renew their membership, but those that last nine out of 12 months do, then you know where to aim your renewal drives.

Lifetime Value Customers

The holy grail of behavioral analysis is to identify those customers returning the greatest Lifetime Value: the ones who are the most profitable over the life of the relationship.

When we talk about behavioral segmentation, what we’re really talking about is relationship-building based on providing the right message to those most inclined to take favorable action at the exact time they are most inclined to respond. In today’s complex and busy world, this is the true value of knowing your customers: being able to meet their needs individually and predictively.

The better you understand your customers, the more targeted and compelling your marketing messages will be, the better this message will be received and the more successful you will be at getting them to take the desired action. Isn’t that really your goal?

This process should be self-propelling: customer information continually captured and analyzed drives further segmentation and analysis, leading to an ever-more refined marketing program. For the most effective marketers, this is a way of life — but only if you gather the right data on your customers.