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Segmenting Customers for Profit

Segmenting Customers for Profit Process

Market segmentation is the process of dividing up the total market based on identifiable characteristics, which have common needs. You can also apply the concept of market segmentation to your customers. For example, you can segment your customers based on the cost to service, the size of the average sale or the number of transactions.

Though segmenting customers for profit or customer segmentation is a simple concept, it is not simple to implement in any meaningful way. The difficult part is identifying the various segments so that you can identify profitable customers versus those that can cost you time and money.

Customer Segmentation – Vertical or Horizontal

Customers may be segmented either horizontally or vertically.

Horizontal segmentation is where you divide customers by industry, geographic location or revenue size.

Vertical segmentation is where you might sell numerous services or products to just one particular type of customer.

For example, you might sell to customers in the construction industry numerous products, such as, steel, lumber and doors to that customer. Though segmenting customers based on market characteristics is useful, you might also segment your customers based on servicing characteristics (i.e.: size of order number of transactions or total sales volume).

Profitability Analysis By Customer

Once you have identified the various segments that apply to your customers you then perform a profitability analysis by customer. Take your annual sales by customer and break it out into various segments. Identify any patterns or relationships which might indicate opportunities for improvement. For example: a large number of small customers or concentration of large ones.

Customer Profitability Analysis

Next, perform a customer profitability analysis by subtracting your estimated relative cost to service from the revenue for the various segments. Estimating the cost to service may be done in general terms on a scale of one to five or in specific terms using activity-based costing. By relating your cost to service to your revenue streams, you can often identify “profit drains” that can be restructured. This restructuring might involve raising prices on select customers, implementing price discounts, sales incentives or firing customers.

If you want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.

segmenting customers for profit

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segmenting customers for profit

 

Recommended reading: The Strategy and Tactics of Pricing, Fourth Edition, by Thomas T. Nagle and John E. Hogan

See Also:
Segment Margin
Activity Based Costing vs Traditional Costing
Implementing Activity Based Costing
Profitability Index Method
Net Profit Margin Analysis
Gross Profit Margin Ratio Analysis

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Market Segmentation

See Also:
Market Positioning
Market Dynamics
Marketing Mix (4 P’s of Marketing)
Value Chain
Porter’s Five Forces of Competition

Market Segmentation Definition

Segmentation marketing is a smaller set within the market as a whole. You can divide this by age, gender, price, race, interests, etc. Often times marketers try and find these market segments to find the best way to offer a certain product or service.

Market Segmentation Explained

Market segment analysis is the process that involves finding a certain group with similar ideas or characteristics that will cause them to demand the same amount of products. For example, if a company makes toys, then they are not going to want to post ads on the History Channel or ESPN. Instead, they should position its ad campaign on the Disney Channel or Nickelodeon. The target which is kids will often be tuned into one of these channels making it a prime location for toy companies to advertise.

Marketing Segmentation Example

Joe Bob is looking to maximize the potential for an ad campaign that he would like to run for his company Haughty Purses. The purses that the company makes are all custom and made from real leather. The cost to make them is high and production is slow. After some marketing segmentation analysis Joe Bob finds that the target market for the company contains the following characteristics:

– Women
– Aged 20-30
– Fashion Idealistic
– Needs to be Exclusive

Joe Bob then finds that these women read the same fashion magazines and observe fashion shows when presented on television. Therefore, Joe Bob decides to target the market segment by providing ads with beautiful models of the age group with a snob like sensibility.

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Market Segmentation

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Market Segmentation

 

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