Today's proliferating environment is dramatically increasing the importance of effective customer segment management. Market polarization is widening the gaps between the lifetime values of various segments. Frag-menting customer needs are creating opportunities for specialist competitors to go after just one segment. And proliferating distribution channels and media vehicles are helping all companies target the most valuable customers with focused service and advertising. The result is a powerful need for companies to get better at identifying and delivering distinctive value to their most attractive customer segments.

But few organizations can get their segment strategies to work. Many companies articulate detailed segmentation plans, but they rarely define and manage their segments in a way that helps the organization differentiate the value it offers specific groups of customers. What's more, the planning systems of most companies lack the roles, processes, and integrated customer metrics needed to create unique customer experiences for select segments or to respond quickly to shifts in a segment's value. Indeed, many organizations have difficulty measuring the extent of customer migration (more spending by satisfied customers or less spending by dissatisfied ones)—much less quantifying its financial impact or actively managing it through differentiated customer propositions and experiences.¹ For evidence of this challenge, consider data-rich industries such as financial services, airlines, and retailing, which were among the first to identify meaningfully different segments by parsing large volumes of data. Few companies in these industries have exploited state-of-the-art customer-relationship-management (CRM) technologies to develop and deliver truly differentiated value propositions, create customer-level scorecards, or make them central to running the business. A key reason is that understanding and acting on segment- or customer-level information often requires collaboration among a number of functions that interact with customers across the organization. Facilitating and rewarding such coordination is difficult in product-, service-, and geographically oriented organizations.

In short, developing powerful segmentations—and acting on them by providing distinctive experiences to valuable customers—is much more a management and organizational challenge than one of data, technology, or analytic sophistication. Companies must measure, understand, and focus management attention on what is happening within and across segments, how what is happening there relates to aggregate business or marketing plans, what the implications are for performance management, and which organizational changes are needed to effect segment-level change. More specifically, marketers must complete three tasks:

1. Choose an actionable segmentation, meaning that segment objectives (including customer experience targets) are explicitly linked to overall business goals.
2. Build formal mechanisms within planning, measurement, and performance-management processes to manage customer segments effectively.
3. Create organizational accountability for segment results and empower segment "owners" with the authority to make or influence key decisions.

As we shall see, a few companies—in industries that include retail, telecom, and casino gaming—are leading the way.

Portrait of the problem

For most companies, periodic (usually monthly or quarterly) reviews of actual performance against the annual plan are critical for determining how best to capitalize on successes and make adjustments for underperformance. Yet in these periodic reviews, most executives don't know what is happening in a number of meaningful segments.

A large retail bank experienced just this problem. The bank planned and tracked performance by product group (such as checking, credit cards, and mortgages) and by channel (including branches, phones, online, and mail). Further, it compared sales, costs, profits, attrition rates, cross-sell penetration, and customer satisfaction across products and channels. But it didn't link performance in individual customer segments—such as investors, retirees, home owners, renters, and students—with aggregate financial objectives and results. Management therefore couldn't pinpoint how strategies to improve customer acquisition, increase penetration, and lower attrition across the bank's key segments were related to the bank's sales and profit goals. Nor was there a process to ensure that the bank modified its tactics as customers moved within and across segments. Finally, given the traditional importance of decentralized product groups and the branch network for developing and sustaining customer relationships, the bank had trouble organizing and managing accountability by customer group instead of along product, channel, and geographic lines.

This situation isn't new. But in a world of proliferation, with rapidly changing segment dynamics, such poor linkages are extremely costly. During a period of rising short-term interest rates, for example, the bank did not understand that a substantial portion of its investor segment was shifting large amounts of short-term liquidity balances to competitors such as ING Direct. Even though these customers reported no changes in satisfaction levels and had no intention of closing their accounts, their annual contribution to the bank's profits fell by 60 to 70 percent. If this institution had understood these dynamics, it might have decided to redesign its products and restructure pricing. But lacking a plan or the ability to measure results along segment lines, the bank did nothing.

Closing the loop

To address this situation, the bank had two needs: first, it had to ensure that its planning and performance-management systems could track and generate prompt reactions to marketplace changes influencing customer acquisition, product or service usage, or attrition rates within and across segments. Second, it needed a plan that could yield a set of customer proposition and experience initiatives aimed at goals such as increasing usage in the renter segment. With the right level of detail in the metrics, this bank would know exactly how many customers in that segment had increased their usage, how many had decreased it, how many had defected altogether, and what each of these changes was worth.

How could the bank get there? The solution lies in making the approach to segmentation more actionable, linking that approach with the processes for strategy setting and ongoing performance management, and aligning the organization so it can more easily hold individuals and groups accountable for segment-specific sales, profit, retention, and experience targets.

Actionable segmentation

The central challenge of a segmentation strategy isn't how to develop one—a variety of approaches work—but how to make it useful and integrate it into a company's ongoing planning and performance-management efforts. The segmentation must explicitly link corporate financial objectives to the behavior of people in a segment and to customer experience goals. This linkage allows general managers and marketers to understand how the experiences of valued customers influence behavior and how behavioral shifts drive core product or service objectives. It also provides predictive (as opposed to static) measures of customer profitability.

While this is not a particularly technical challenge, the chosen segmentation should meet some important criteria:

• the ability to assign all customers to a segment for an overall line of business, usually defined by a distinct set of common customers, shared channels, and multiple products or services (typically, five to eight primary segments for a business thus defined)
• distinct differences between segments, at least by their current and potential value to the company and by customer behavior and needs
• a clear relationship between these segments and alternative segmentation approaches (such as demographic or attitudinal ones) that are used for various marketing and other purposes (including risk management)

Although nearly all companies have undertaken some version of this process, even those with highly analytical segmentations often have a number of versions for different product groups, geographies, and operating units. Executives hoping to implement company-wide segment-based strategies need to establish a common language for talking about customers across the business. The CEO, for example, should expect product group managers to describe their plans and actual results in common terms across segments, regardless of channel or geography. Only then can the segmentation broadly influence a company's product mix, go-to-market model, brand, and service model or serve as the basis for allocating and prioritizing resources.

Planning processes, metrics, and performance management

Given the complexity of today's marketing environment, the last thing most organizations need is new, independent strategy and planning processes for customer segments. Instead, companies should revamp existing planning exercises so that they become a vehicle for sharing information and for deciding how to go after segment-level opportunities that require collaboration across the organization.

To keep this process manageable, companies should augment traditional mechanisms for defining strategic objectives by adding segment-based P&Ls and operating metrics consistent with aggregate goals. A top-down goal to establish 20 percent market share and a 10 percent earnings before interest, taxes, depreciation, and amortization (EBITDA) margin for a new product, for example, could tie into a segment scorecard with targets for customer acquisition, churn, pricing, and service costs. When corporate financial objectives are explicitly linked to segment-level scorecards, companies can ensure transparency and accountability for segment performance.

Aligning the organization and the segment strategy

With a strategic segmentation defined and clear segment objectives established, companies must clarify the primary locus of customer segment ownership. Segment owners should augment rather than replace the organization's product, service, and functional units and be held accountable for segment-level results.

Companies can either create a new role within a product group or a channel organization or constitute a new segment group that complements existing organizations. Whichever model a company chooses, it must give the segment owners meaningful control over resources and decisions affecting the factors that drive customer experience, corresponding behavior, and segment migration. Examples might include funds specifically for new customer acquisition programs, call-center queues with specialized reps to prevent churn, and personalized online campaigns.

From theory to practice

The experiences of four companies in different industries—casino gaming, luxury retail, and telecommunications (integrated and mobile)—highlight different approaches to capturing value from segment management, as well as some common characteristics. In all cases, the companies succeeded in targeting and actively managing just a few metrics tied to core financial and customer experience objectives. Clear primary ownership and accountability for the results of segment-based changes were the keys to effectiveness.

Case study 1: Casino gaming

A major gaming company faced tough competition and fickle customers. It had a weak loyalty program that based its rewards to customers on their average spending levels but did not factor in how frequently and recently they visited or how much they spent at the casino as a share of their total entertainment expenditures.

The gaming company gradually recognized that tracking average spending gave an inaccurate picture of a segment's potential, because many high-value customers visited competing gaming sites and had outlays that varied significantly over time. Instead, the company decided to track spending flows and to build predictive models based on gaming behavior. As part of the overall segmentation approach, the company established 90 different behavioral segments, each with its own per-visit profit-and-loss forecast.

This segmentation highlighted the need to provide different experiences for customers of different value (Exhibit 1). The casino operator also created a three-tier loyalty program providing differentiated incentives for customers to spend more. To make the change stick, the company created vice presidencies of marketing for each operating division and made the VPs accountable for carrying out the new segment strategy. The executives, in turn, held individual casinos accountable by tightly managing a set of local metrics that allowed properties and specific groups within those properties to measure operational results and to understand their impact upon financial performance.

Each property, for example, had a detailed segment-level scorecard including the number of customers, average revenue per visit, and comparative revenue versus prior visits—metrics that were tied to the property's overall revenue objective. Furthermore, using predictive modeling the company actively tracked the migration of customers, particularly those on the cusp of upward or downward migration. In the end, the company's integrated set of initiatives generated a 25 percent increase in the annual revenue contribution of high-value customers, a 40 percent rise in the number of their visits, and an increase of six percentage points in the casino's share of their entertainment wallets.

Case study 2: Luxury retailer

A high-end retailer with aggressive growth goals decided to delve deeply into the needs and migration patterns of customers who resembled its highest-value customers but spent less. This effort allowed the company to identify several segments that were relatively underpenetrated but had high spending potential and appeared to be interested in the merchandise authority and store experience that were central to the retailer's value proposition. A particularly important segment turned out to be busy professionals seeking fashion and quality.

The company recognized that to increase its wallet share in the target segments, it would have to adapt both its merchandise and the service in its stores to these consumers' distinct need for fashion, quality, and convenience—especially the need to get in and out of stores quickly. But several obstacles stood in the way of taking such steps. For starters, few store managers embraced the complications of identifying and providing differentiated service to specific shoppers. Moreover, the retailer's traditional planning processes took place in silos within marketing, merchandising, and stores, leaving little room for cross-functional segment goals.

To address these issues, the retailer appointed senior executives from merchandising and operations to build new programs and drive execution within existing stores. These executives began by focusing on initiatives designed to increase convenience. In many cases, they charged individual store personnel with targeting customers in the busy, fashion-conscious professional segment.

In addition, the company created a new set of financial and segment-level metrics to track success. After establishing top-down financial targets, the retailer defined segment-specific objectives, such as frequency of visits, incremental sales versus the prior quarter, the number of customers by segment, and cross-sell rates. The retailer also reviewed these new metrics during its regular performance-management meetings with store managers. This integrated, segment-based approach (Exhibit 2)—combining programs aimed at specific customers, segment-oriented planning and performance management, and support for organizational changes—contributed to increases in average spending by target segments: 10 percent growth for all purchases and 30 percent for targeted merchandise categories.

Case study 3: Integrated telecommunications carrier

A North American telecommunications carrier with wireline, video, voice, and data offerings decided to take an integrated view of its products. One reason was that customers increasingly were purchasing services in bundles from telecom players and cable television operators. Also, the more products customers had, the less likely they were to defect.

The company somewhat differentiated its treatment for customers who were major consumers of a specific service—for example, by giving them their own call-center waiting queues for that service. But it had difficulty identifying the most valuable segments across product groups, much less the best opportunities to deepen penetration, pull off "up-selling," and avoid churn within those segments. The telecom provider knew that improving its effectiveness required a better understanding of the factors shaping customer behavior. It therefore segmented its customers by lifetime value (margins across all products per household) and risk to defect (measured by wireline spending, whether cable was in the area, the number of products held, and a predictive churn model with dozens of service variables, such as whether a customer had multiple recent service calls).

It turned out that two key metrics—the number of households with multiple products and the number of high-value, high-risk households targeted—provided enough insight to integrate segment performance with overall financial goals (Exhibit 3). The marketing organization used separate scorecards to track the subdrivers of these two key metrics. Key scorecard measures included the percentage of marketing spending allocated to targeted households, the percentage of customers at risk for attrition who were "saved," and the penetration of the company's services within each account.

The telecom player's CEO created an integrated marketing function intended to generate household-level programs that cut across individual product lines. Tasked with improving acquisition rates, stimulating upward migration, and reducing churn, the group developed new product bundles, coordinated decisions around marketing offers and pricing, and launched initiatives to improve service issues correlated with churn. The company, for example, targeted for retention those customers who had recently disconnected their high-speed data service, because analysis showed that these people were ten times more likely than the average customer to disconnect their fixed-line service within 60 days. As a result of segment-level actions, the company realized improvements in churn, product penetration, and average revenue per user that together helped boost profitability by more than $100 million.

Case study 4: Mobile-telecommunications provider

A European mobile provider sought to attract new customers by enhancing its brand and service propositions. The company assessed all of its customers' value, service needs, and willingness to pay. Historically, the company, like most of its competitors, had focused on brand-loyal, full-service customers. But it quickly identified a relatively large (25 to 30 percent of all customers) and underserved segment of no-frills customers who were very happy to trade the ability to shop in retail stores, call into customer service centers, receive handset upgrades, and see their service provider in TV commercials for a price discount of 20 to 25 percent.

Since the entire front-end service proposition had to be completely different from the core business, the operator decided to set up a separate no-frills business unit whose management team had an equity stake. The company even went so far as to launch a distinct brand for the new unit. Although initially there was strong resistance to organizational separation, it proved critical in achieving the cost structure, operating speed, entrepreneurial culture, and incentives needed to build this type of business from scratch. Over roughly two years, the no-frills unit gained a 10 percent market share.

These examples show how a diverse set of initiatives—offering high rollers free flights to Las Vegas, aiming high-touch service at certain shoppers upon their arrival in stores, launching an entirely new wireless service—can dramatically alter the experiences of targeted segments and produce significant financial gains. As these examples also emphasize, effective customer segment management is easy to talk about but challenging to execute. In fact, that's precisely why it is a powerful basis for sustainable competitive differentiation.

The early leaders have adopted common, actionable segmentation across the entire business, integrated the setting of goals for segment-level customer experiences and financial performance into their planning and performance-management efforts, and established clear organizational accountability for segment-level results. To succeed, they must artfully integrate this approach into the organization's existing product, channel, and geographic orientation in a way that makes a real difference. Taking the plunge is worthwhile because it enables a company to create more valuable relationships with customers.