Customer Service Segmentation
The Strategy, Benefits and Payback
- Customer service segmentation strategies drive personalized and differentiated services based on one or more customer attributes.
- Value-based segmentation strategies seek to retain the small group of the highest value customers, grow the economic value of the largest group of mid-value customers and make unprofitable customers profitable.
- Rather than a one size fits all customer support policy, a value-based customer segment strategy finds a balance in the cost of service delivery and customer economic impact or potential.
Research findings published in the Customer Service Excellence Report demonstrated a stark difference among the Best-in-Class leaders and their lower performing peers in their use of customer segmentation.
85 percent of the Best-in-Class applied customer segments as part of their customer service delivery model. That figure fell to 49 percent for medians and 24 percent for laggards. The majority of medians and laggards instead applied a one-size-fits-all approach.
There was also a significant correlation among those with a Customer Experience (CX) strategy and customer segment-based service delivery model. That makes sense as one of the primary goals of a CX strategy is to deliver differentiated customer experiences and grouping customers by shared attributes is one method to achieve that goal.
Customer Segmentation for Customer Service
Customer segmentation groups customers based on shared attributes, characteristics or other similarities.
In a customer service or contact center context, this most often means grouping accounts based on firmographics, demographics, technographics, purchase transaction history and/or profit potential.
More advanced techniques may group customers by behaviors, psychographics, customer sentiment or customer journey. For example, when it comes to journeys, it can make sense to filter and route customers based on where the customer is in their journey. This needs-based approach could mean separating early adopter customers who seek onboarding and installation help versus late stage customers who seek upgrade or more advanced help.
The most advanced customer segmentation evolves from static to data driven or dynamic segments based on an integrated mix of measures. With the accumulation of more data the groupings mature and refine into micro segments.
Value-based customer segmentation groups customers based on the economic value to the company as measured by actual or potential profitability. The most common value-based measures are customer lifetime value (CLV) and customer profitability. However, including other factors such as the cost per customer acquisition, cost to retain the customer and customer referrals make the measure more accurate.
Once customers are categorized, they may be aligned with some form of differentiated service. For example, the highest value accounts may be routed to the most experienced agents. Or customers may be routed to agents based on the products they purchased or their preferred communication channels. Or customers at risk of churn may be routed to agents trained in retention methods.
More often, an array of services and benefits are allocated to customers based on their economic value or potential. The below illustration shows how companies may use an allocation approach to align services and business processes.
In the above example, customers are segmented from most to least profitable. The alignment table allocates service investment and resourcing with business processes and terms based on customer contribution or other business drivers.
In the example, the company uses a tiered support model to deliver high touch support (with entitlements, Service Level Agreements, concierge services, loyalty program benefits, etc.) for high contribution customers and self-service support for low or negative contribution customers.
The reality for most companies is that about 20 percent of customers will contribute 60-80 percent of company profits and 5-10 percent will deliver negative profits. In a competitive market, failing to deliver higher levels of service to higher value customers puts those customer relationships at risk. Continuing to deliver services to non-profitable customers puts the company at risk.
No company's financial performance can withstand sustained unprofitable customers. Allocation offers an alternative to resolving non-profitable customer relationships. Rather than discontinue relationships with unprofitable customers, those accounts can be directed to lower cost customer service channels such as virtual agents, community forums or self-service knowledgebases.
It's essential that these alternative channels are effective (as measured by customer satisfaction) as the intent is not to deliver an ineffective service but a lower cost service alternative. These digital support channels can also harvest digital footprints to create customer insights.
Customer Service Segmentation Benefits
A tiered support model allows for a more precise allocation of support resources and the delivery of personalized and differentiated customer experiences.
When combined with upselling or cross-selling it can identify bundled, personalized or specialized offers and improve offer conversions and average sale amount.
When properly implemented it also grows customer lifetime value, increases customer retention, lowers cost to serve, and aligns services (i.e., service levels, resources, investments, etc.) with customer value so that both the services and the customer relationships are sustainable. Identifying clients that contribute negative profits to the company creates an opportunity to plug those profit leaks. No company can sustain delivering unprofitable services.
Other benefits of value-based customer segmentation, or finely tuned allocation based on an integrated mix of measures, include the following.
- Improved engagement and relationships with the highest value customers
- Improved retention with moderate and high value customers
- The ability to apply techniques such as individually priced services, different levels of service or lower cost support channels to convert unprofitable customers to become profitable
- The use of techniques such as look-alike modeling to systemically convert moderately profitable accounts into the high profitability tier
- Combine segments with predictive analytics to recommend next best actions or highly relevant promotions or offers
- Apply customer aggregation insights to update or adjust the company's target market or ideal Customer Profile (ICP) and thereby lower the cost per customer acquisition and bolster future customer retention
The Fairness Quandary
Aligning groups of customers to benefits and services can seem unfair to some. However, the reality is we all experience it in our personal lives, and it generally goes unnoticed or is recognized without issue.
Where I live the same person owns several car dealerships. When my Mercedes needs maintenance, the dealer drives a loaner Mercedes to my house (40-minute drive), picks up my car, performs the maintenance, washes the car, drives it back to my house and picks up the loaner. When my daughter's 10-year-old Mazda needs maintenance, she drives it to the dealer, and my wife or I follow to bring her back home. Then we do it again when it's time to pick up the car. No pickup service, no loaner car, no wash when the service is complete.
My daughter doesn't feel a sense of inequity. The economics of the cars, and the customers who buy them, drive differentiated levels of service. More so, if my daughter were to get the same level of service, it would most certainly increase the cost of the maintenance or service, which is not something she would find attractive.
The same principals apply when frequent flyers with status board the plane first and get the best seats, or frequent shoppers receive the high discount coupons or high spend credit card holders get special perks.
In a contact center perspective, those customers who purchase or earn (based on their revenue contribution to the company) higher status with the company may receive higher levels of support.
High value customers know their worth and expect a premium service. Customers with lesser spend generally do not have the same expectations. They may also define value more so on price than perks.
A key point of value-based customer distribution is target services for target segments. It is less about reduced services for select groups and more about the appropriate service for each group.
Whether the contact or call center should select an allocation model or a one-size-fits-all approach is a decision that will be influenced by each company's business growth strategy, customer strategy and corporate culture.