A growing number of companies have come to accept that their fate hinges on
applying a more customer-centric approach to serving customers. This approach
represents an evolutionary shift from focusing merely on product sales and delivery
to focusing more explicitly on satisfying the needs and wants of today’s customers.
The quest for customer-centricity is driven primarily by three key factors:
1) the wearisome struggle to reach customers engulfed each day in a flood of
competing messages; 2) ever-rising expectations of how we interact with customers;
and 3) mounting financial pressures to optimize the return on investments in
Ignoring these factors otherwise leads to a painfully familiar series of problems:
poor customer acquisition and cross-sell rates, customer dissatisfaction and
disloyalty, and dwindling profit margins. Customer segment management is one
model of customer-centricity that offers companies new hope for surmounting
these problems to ultimately achieve a more blissful state of customer interaction.
Customer Segment Management Defined
Customer segment management is the process of segmenting groups of customers
based on like attributes and managing those segments in a way that maximizes
both the benefits to customers and the long-term profit potential of the organization.
For example, this includes segmenting customers according to product and service
needs, buying behaviors, and actual and potential profitability.
In essence, customer segment management can be viewed as a “stage on the way
to achieving true nirvana – managing relationships with each customer on an
individual basis.” Traditionally, companies have exploited a mass, or one-to-many,
approach to targeting customers but with diminishing results in satisfying the
needs and wants of customers. On the other hand, targeting and managing customers
on a one-to-one basis is currently not practical for most companies. For the
time being, customer segment management offers a more realistic customer-centric
approach to managing customer relationships.
While many companies intuitively feel that becoming more customer-centric will
provide the answer to their problems, the concept is often poorly defined and
not well understood. In this article, we offer a pragmatic approach to becoming
a customer-centric organization through the application of a model for customer
segment management. The model is based on actual observation and real-life experience
in successfully implementing customer-centric initiatives across different industries.
While we examine how the model may be applied across different industries, we
have chosen to highlight the retail financial services industry to provide more
in-depth examples of how the model can be effectively applied.
Before describing our model for segment management, it’s worth re-examining
the three key driving factors behind the need for customer-centricity a little
Figure 1 – Commercial and Internet messages per day per person in the U.S.
A Flood of Competing Messages
The first factor is the intensifying competition for consumers’ attention.
The average number of messages targeted at a consumer each day has risen from
650 in 1985 to more than 3,000 in 2000.
To successfully reach customers in today’s digital age, messages must be timely,
relevant, compelling, and more personalized. Rather than simply opening the
floodgates and pushing products at consumers, the key is to focus more on anticipating
and understanding what customers need and when they need it. This focus requires
collecting a greater depth of information about customers and identifying the
means – systems, processes and marketing channels – to most effectively exploit
For example, our analysis of consumer behavior for the banking division of
a UK-based financial services company revealed that while price was the primary
driver behind the take-up of consumer-lending products, consumers on average
only compared the offerings of one other provider before making purchase decisions.
Typically, consumers compared their current provider against a provider they
happened to be aware of at the moment of need. Subsequently, the company learned
that by segmenting its customer base and understanding the behavior within each
of its customer segments, it could reduce the number of competitors with which
it had to be price competitive while increasing conversion rates.
The second most prevalent factor driving customer-centricity is the continuing
rise in consumer expectations. Today’s consumers are quite sophisticated and,
at the same time, not very tolerant of mistakes.
When customers provide, for example, address or other basic information about
themselves to an organization, it’s expected that the information will be shared
among various parts of the organization and used appropriately. Frustratingly,
customers’ experience often falls far short of their expectations, even in quite
simple cases such as this. Not surprisingly, even fewer organizations succeed
when it comes to consistently providing consumers with relevant and personalized
information about products or services.
Mounting Financial Pressures
Last but not the least are mounting financial pressures to optimize the return
on investments in customer relationships. Our work at a client in Ireland offers
a classic example of the need to address profitability. Our initial analysis
revealed two major issues affecting the profitability of the company’s customer
relationships. The first being that the perceived value they deliver to customers
is not aligned with the value they gain from those relationships. Second, their
operational strategy does not recognize that certain customer segments are actually
happier with more remote, less costly distribution channels. By segmenting their
operations based on the needs of customers, however, they will begin to optimize
their marketing investments and more effectively allocate their resources in
delivering against customer needs.
Figure 2 – Illustrstive Segment Management Model
At the Root of the Problem
Many companies fail to address these factors because they are organized around
product silos with incentives based on standalone targets rather than on targets
that encourage customer profitability across product areas. Fundamentally, they
lack a single, integrated view of the customer.
Disparate sources of customer data collected and managed by different parts
of an organization frequently yield independent views about customers segmented
along individual product units and distribution channels. The situation is further
exacerbated by inconsistent performance metrics across the organization. The
undesired result is perceived, and even, actual competition among organizational
units rather than cooperation.
Adding to the problem, management attention may be diverted to other pressing
concerns such as mergers and acquisitions, or new product introductions. More
often, companies simply fall into the rut of doing things the way they have
always been done. Not only does the situation fail to maximize benefits to both
customers and the organization, but it generally leads to unnecessary costs
due to duplicate customer contacts, overlapping systems, and pure confusion.
At the root of it all is the failure to recognize that addressing the needs
and wants of customers is integral to the organization of a company – from the
overall business strategy and measurement criteria to the structural alignment
of supporting systems, processes and people. Customer segment management provides
a framework for addressing these factors in building a more customer-centric
The Model in Concept
In concept, the typical model for customer segment management depicts the supply,
demand and distribution functions of a company as being separate from each other.
These core functions are then supported by a shared group of services, such
as information technology, accounting and finance, and marketing services, which
may also include a customer analysis or insight function.
Based on this concept, customer segment managers within the demand function
are viewed as entrepreneurs charged with the goal of maximizing market penetration
and profitability within their segment. They depend largely on customer insight
analysis to identify customer buying behaviors and needs. They also work collaboratively
with product groups in the organization to spot new customer product and service
propositions, which are then developed by the product groups. These propositions
will most likely differ by customer segment.
The customer segment managers are responsible for determining which product
offers their customers or prospects will receive and through which channels
they will be delivered. Where possible, the segment managers also define the
rules for interacting with customers across the different contact points which,
for example, may range from in-store checkout to a Web-based or phone-based
interaction. These rules are consistently applied across channels.
Segment managers receive frequent reports on their performance and are expected
to continually refine and improve on their management tactics.
A More Pragmatic View of the Model
Based on our experience with many organizations, the following picture depicts
a more realistic view of the several degrees of customer segmentation management.
Stage 0: Product-Centric Analysis
At the far left of the continuum, in the product-centric analysis stage, analysis
of customers is focused on product lines. The dominant element is the product
or product line, and customer analysis tends to be based on purchase behavior.
Information collected is used primarily for tactical promotions and targeting.
Product profit and loss is used as the primary measure for gauging an organization’s
Stage 1: Marketing Segmentation
In the marketing segmentation stage, the organization begins consolidating
information across product lines and using the insight gained for high-level
market analysis, strategy development and customer communication planning. The
nature of the segmentation tends to be offline, periodic and not well integrated
into the operational environment, except where it influences more tactical direct
Stage 2: Customer Management
A qualitative change takes place when an organization enters the customer management
stage. Rather than being used primarily as a planning tool, customer segments
are treated as a management dimension. Typically, it is at this stage that a
customer management function is formed. The function assumes responsibility
for developing business strategies and measuring performance along customer
segments. The customer manager also assumes a coordination role to ensure the
customer element is considered in operations, which often includes responsibility
for setting customer contact rules within a product-led communication plan.
Stage 3: Customer Segment Advisors
In the customer segment advisors stage, the customer management function is
further solidified by the introduction of segment managers, who may each assume
responsibility for one or more segments. The role of the segment managers becomes
clearly focused on specific segments and serving as key advisors to product
and channel management. However, their challenge at this stage is operating
with minimal budget and exerting influence over a strong channel manager or
product development function.
Stage 4: Customer Segment Owners
Authority is no longer such an issue in the customer segment owners stage,
as segment managers assume an overtly operational role with responsibility for
setting the rules that govern nearly all forms of customer contact in their
segment – regardless of the product, channel or nature of the interaction. In
this advanced role, segment managers are more powerful: they own the proactive
marketing budget, controlling which product offers are made available to their
customers and how they are delivered. They will be responsible for setting the
rules for customer interaction, whether in a marketing, sales or service context,
tailoring the rules to suit the customer’s segment.
Stage 5: Customer-Centric Profit & Loss
At the far right of the continuum in the customer-centric profit & loss stage,
the role of segment managers is taken to the ultimate managerial level. Segment
managers become responsible for measuring profit and loss along customer segments,
which subsequently poses a more challenging reporting task. Products and distribution
channels assume a subordinate position relative to customers. The sum of the
profit and loss measures for the segments, in turn, becomes representative of
the organization’s overall profit and loss performance. However, measuring profit
and loss along customer segments will never completely replace the need for
measuring profit and loss by product units and channels. Product profit and
loss typically is still reported as a secondary measure of performance and may
in some cases be required for public accounting reports.
Is There a Right Place to Be on the Continuum?
There is no single right answer for where an organization should be on this
continuum. It depends on the organization. Depending on the industry, strategic
intent and current situation of the organization, any of the stages along the
continuum may be applicable.
For example, a credit card company focused on being a mono-line producer is
more likely to be at the far-left end of the continuum. On the other hand, a
company that strives to be a full financial services provider is more likely
to be at the far-right end of the continuum.
Whatever the case, the primary objective is to create an organization in which
there is a stronger focus on improving profitability by more effectively anticipating
and understanding customer needs and wants, which subsequently means developing
products and services that are manageable in execution, innovative and, to the
extent possible, profitable in their own right. The key is to decide what the
right balance is for your organization and then determine how to achieve that
Figure 3 – Customer Centric Continuum
Achieving the Right Balance
Intense debate naturally arises over the issue of whether all product lines
should be profitable in their own right or whether individual product profitability
can be sacrificed in carefully selected cases as a means to encourage overall
customer loyalty. The answer, however, clearly depends on the overall management
strategy of the organization, the nature of the product and, often, the individual
personalities of the managing executives involved.
The nature of an organization’s industry also factors into determining the
right position along the continuum. For example, select industries such as retail,
where the customer is often not known on an individual level and the product
is standardized, tend to be better positioned along the far left end of the
continuum. This positioning particularly applies to industries driven by product
innovation, such as electronics or mobile phone companies.
At the far right end of the continuum are industries where there is a very
strong need to interact with customers on an individual level, and tailored
products tend be primarily organized around customers or customer segments.
For example, many service-based organizations, including marketing and other
types of business-to-business professional services firms like merchant banks,
are generally organized around customer segment groups, often referred to as
industry segments or portfolios.
On the other hand, there are some organizations, such as those in retail financial
services that can effectively assume a position virtually anywhere along the
continuum. This is a clear case of where other factors, such as a company’s
overall business strategy, culture and individual management personalities come
into play. As a general rule, retail financial services companies are moving
steadily toward the right end of the continuum. However, those we are aware
of that have attempted to move all the way to Stage 5 have encountered difficulties.
Let’s take a look at a couple of more specific examples:
o In one case, a South African bank attempted to jump all the way from near
Stage 1 to Stage 5 in one push and met with failure, primarily because fundamental
issues of ownership and profitability had not been resolved. Unable to reach
agreement on key decisions such as product pricing, they reverted back to a
position between Stages 1 and 2 on the continuum.
o In another example, a UK-based bank also attempted to jump to Stage 5 and
encountered operational difficulties in the pricing and delivery of services.
It has since settled on a position between Stages 4 and 5, where the segment
managers are responsible for planning and delivering most of the customer contact
but are not responsible for profit and loss.
These two examples suggest that where, in industries like retail financial
services, overall profitability is primarily driven by fundamental product characteristics,
Stage 5 is difficult to sustain.
Frequently, lack of a suitable infrastructure will inhibit a move toward achieving
a more customer-centric organization. For instance, one financial services company
realized that because its systems and processes could not support rapid product
development, there was a limit as to how close toward Stage 5 it could get.
With only a limited product set, very little product customization possible
and no ability to bundle products, the segment managers could really only influence
communications to customers. Segment management will likely drive the need for
a more sophisticated and elaborate infrastructure.
Aligning People and Processes
Most organizations respond to these challenges by adopting fixed and very rigid
segment structures. However, this ignores the fact that customer segments should
be dynamic, reflecting that consumer behaviors change and evolve over time.
Building an infrastructure to sustain customer segmentation requires flexibility
in aligning an organization’s processes and people to continually anticipate
and respond to changing customer behaviors. This, in turn, poses an ongoing
challenge for organizations in building critical mass around key skills to operationalize
customer-driven segment management teams.
A larger multi-line organization, such as a retail banking services company,
will particularly find customer segmentation challenging as different lines
within their organization may be respectively positioned along several different
points of the continuum. Rather than adopting fixed segment structures, organizations
managing positions at the right end of the continuum will need to consider building
virtual customer segment management teams to cost-effectively deploy the greater
number of required resources.
Let’s take a look at how an organization’s people and processes might be aligned
effectively at a more tactical level to support segment management:
o Operationally, an organization would be comprised of cross-functional teams
with skills and processes centrally coordinated
o Segment management teams would be supported by specialists deployed from
o The primary role of the specialists is to ensure their areas of competency
support the development and implementation of their assigned segment’s strategy
o The cross-functional segment teams assume responsibility for the development
of their customer base through a segment strategy, embracing communication activities,
product development and channel management to meet goals set by the strategy
o Central coordination of processes promotes optimization of timing, ensuring
activities are structured in the best interests of the whole organization and,
at the same time, avoiding inter-group rivalry and duplication
o The primary structure is bound together by core processes
Supporting IT Systems
So far, we have described the stages along the continuum in terms of process
and organizational characteristics. But as the organization moves toward a more
customer-centric approach, there is an increasing need for information technology
systems support across four main areas:
o Richer customer data supplemented with external sources
o Integration of customer data across products and channels
o Integration of primary market research with internal data
o Availability of customer information at all points of need, including customer
contact points organized into a data warehouse, data marts for marketing and
analysis and an operational customer database that links to core information
o Sophisticated data-mining tools for segmentation and profiling
o Advanced tools for predictive modeling
o Advanced self-learning and pattern detection software in industries with
significant transaction volumes
o Systems that can apply the insight gained about the customers to support
sophisticated marketing and sales, and differentiated service – but in a transparent
and easy-to-use manner – consistently across channels
o In some industries, automated detection systems that identify sales opportunities
and generate leads automatically
Monitoring and Reporting
o Systems that can track activity and report key metrics so that the effectiveness
of segment strategies is understood and can be modified when necessary
There is nothing to stop an organization from developing very sophisticated
systems support for CRM activities while still operating with a relatively product-focused
approach. In fact, there may be quite sophisticated predictive modeling techniques
being used to help target offers on a per-product basis. However, in practice,
the development of more powerful, integrated systems tends to go hand-in-hand
with the development of the customer-centric organization model with each driving
For example, an organization that wants to more effectively manage the lifetime
value of its customers, across all products, may create the supporting data
warehouse, analytics and marketing tools. However, the sponsors will quickly
find that it is difficult to maximize the value of this infrastructure without
clarifying ownership and responsibility for achieving the goal by customer segment
Figure 4 – Typical roles, responsibilities, and key performance indicators
(See larger image)
In other cases, new tools are enabling a more centralized approach across organizations.
For example, the new generation of real-time, cross-channel marketing systems
enable a central group to define the rules for sales prompts consistently, across
all of an organization’s channels, and then move those rules into the production
environment with just a few clicks of a mouse. This is a powerful tool for ensuring
that segment-specific strategies are translated into appropriate action at the
point of customer interaction, enabling a much more centralized and consistent
Similarly, as more data becomes available, there is a need for very high capacity,
including high-speed data processing platforms and databases to support data
analysis. For example, a major US retailer is building a database that will
capture all transactions from its stores, by customer, so that these can be
used to generate real-time, personalized offers by customer at the checkout.
Only a few specialized technologies can currently meet the huge demand for data
capacity and retrieval in these situations. Where these systems are implemented,
they provide another tool for the segment manager to put his or her strategies
Based on our observation of customer segment management initiatives in several
industries during the past three years, we have established a set of factors
that we believe are essential to ensuring success:
Get the segmentation right from the start.
The criteria used to define the segmentation needs to be carefully considered.
Developing effective customer segmentation is a voluminous subject in itself,
but it is worth bearing in mind the following points:
o For an operational segmentation, the membership criteria should be explicit
and mutually exclusive; that is, it should be clear to which segment an individual
customer belongs. For this reason, for operational segmentations, behavioral
and geodemographic segmentations are more effective than attitude segmentations
based on market research alone.
o While our model builds in flexibility to respond to changing segmentation
definitions, time and effort – not to mention morale – will be saved if the
segmentation is thoroughly tested and relatively stable before the organization
structure around it is implemented.
o The number of segments should not exceed an organization’s ability to service
them in terms of providing both resources and differentiated offerings.
o It is a good principle to include customer value models and algorithms as
a dimension in all segmentations, regardless of other criteria used, to focus
the organization on retaining its most valuable customers and driving up the
value of the other customers.
Keep the end in mind.
It is important to understand the implications of advancing through the stages
along the right side of the continuum. Experience has shown, for instance, that
retail banks find it difficult, and virtually impractical, to operate in Stage
5. Again, the ultimate stage on the continuum for your organization depends
on the nature of your business and industry, and must be realistic in terms
of investment with buy-in from key management personnel in your organization.
Plan the journey.
The more stages you attempt to move your organization through at a given time,
the bigger the implementation challenge. Moving from product-centric to customer-centric
requires a change of culture and outlook, and it seems to work more predictably
if done gradually in stages. A clear roadmap that lays out the steps toward
achieving the end goal will also help to gain buy-in from the business and technology
Define responsibilities and performance metrics.
Possibly the most common issue encountered with these programs is disagreements
over responsibilities. Classic issues, such as “who owns the customer?” will
be raised and – unless dealt with proactively – waste valuable time and effort.
It is essential to get the responsibilities and metrics socialized and agreed
to upfront so that “turf wars” are avoided. This means aligning resources with
the value gained from customer relationships.
Select segment managers with the right skills and attitude.
The segment management role is a challenging one. In many ways, the segment
manager is an entrepreneur, always looking for ways to better understand and
improve the profitability of their segment. Yet, in organizations, negotiation
skills are also critical. Segment managers will need to negotiate with both
their product supplier and distributor counterparts, who have historically played
more significant roles.
They also need to be good team players with the ability to recognize when applying
collaborative approaches, rather than developing unique solutions, would be
more appropriate. They must be able to think strategically and operationally.
For instance, it might be more profitable to develop a new product that would
have moderate appeal across several different customer segments rather than
appealing exclusively to one segment.
Finally, the segment manager needs to be analytical and have an appreciation
of data and technology. Consequently, effective segment managers are hard to
find, and care should be taken in their selection.
Continually evolve skill sets to meet changing needs.
As you organize your segments around specific skill sets, realize that you
will need to continually evolve those skill sets based on the changing needs
of the organization. For example, if you decide to transition your organization
from segmenting along product lines to segmenting by customer groups, the product
managers with whom your customers exhibit the greatest propensity to buy in
the future will likely evolve into segment manager roles.
Build the right supporting infrastructure.
The key requirement here is to have in place tools that enable the segment
manager to understand their segment, develop strategies, establish and implement
contact rules, and monitor performance. Without the right tools and data, segment
managers will be unable to maximize the potential of their segment. For instance,
it is critical to develop a single, integrated view of the customer that gives
the segment managers a rich and complete view of their customers.
Create a customer-centric culture.
Moving along the customer-centric continuum is not the single answer to fix
all problems in the culture and working practices of an organization. Organizations
must be able to manage cross-functional teams, establish accountability, and
be passionately interested in understanding and meeting customer needs and wants.
Is It All Worth It? You Can Bet It Will Be.
The changes required to implement segment management are fundamental and can
– depending on where you are aiming for and how you plan to get there – require
significant effort and expenditure. So, is it worth all the effort?
The answer is a resounding yes, for two reasons. First, segment management
enables organizations to realize the benefits from other CRM capabilities. Recent
Accenture research revealed that a typical $1 billion business unit could boost
pre-tax profits by $120 – $150 million by moving from average to high performance
in the top 21 capabilities identified in the study. Not surprisingly, segmentation
is one of the top capabilities, and its impact on the performance of other capabilities
is clear. For example, one UK-based financial services provider that implemented
segment management similar to Stage 4 in our model achieved a 6 percent increase
in their bottom-line profits.
Just as importantly in the long term, the move to higher degrees of customer-centricity
is a strategic response to a clear change in the business environment: consumer
attitudes have changed, permanently. Customers know what is possible, and they
expect nothing less. At the same time, the competition for their attention is
growing ever more fierce. A customer-centric organization is best aligned –
with the caveat of achieving the right balance – to meet these challenges now
and in the future.
As Good as It Gets – for Now
When carefully applied, customer segment management can help to effectively
position organizations to both grow and protect their share of customers in
the 21st century. But again, customer segment management is just one step along
the journey toward managing customers on a one-to-one level with individually
tailored products and messages. As we get closer to achieving that nirvana,
customer segment management will naturally fade away.
For the foreseeable future, however, we believe customer segment management
offers the most practical approach for achieving customer-centricity, supported
by ever-increasing levels of individual targeting and personalization.