In the corporate universe, we see the consolidation of some maxims that, simple as they may seem, imply profound transformations in organizations and in the consumer market. Aphorisms such as “customers are increasingly demanding” and “there are no infinite resources” say a lot about how companies should behave in this increasingly competitive and globalized world.
Immediately after the Second Industrial Revolution, the focus of organizations was on increasing the scale of production and mass consumption, given that there was a huge demand repressed by supply restrictions and the high cost of products before the emergence of machines. During this period, companies were the ones who called the shots, adapting consumer demands to their supply capacity, a fact that is well illustrated by Henry Ford's famous quote about the Ford T model.
“I announced one morning, without any previous warning, that in the future we were going to build only one model, that the model was going to be “Model T,” and that the chassis would be exactly the same for all cars, and I observed: Any customer can have a car painted any color that he wants so long as it is black"
Henry Ford
Considering the demand restrictions and fierce competition for the market seen in today's world, we have evolved to a somewhat different scenario: now companies must adapt their offers to meet the new demands of customers and consumers. If once the logic of one size fits all could be considered true, in the current context it has lost its meaning. Customers have their own aspirations for products and services and want to be treated in an increasingly personalized way.
Results of a Customer Segmentation
In a quantitative exercise, considering that each customer has a certain level of service requirement, it would be possible to define a single service policy that contemplates all these requirements, that is, a standard service level corresponding to the maximum level of requirement, which satisfies up to the most demanding customer, as shown below. Consider on the abscissa (x axis) the customers ordered from the most demanding to the least demanding, and on the ordinate (y axis) the service requirement correlated to each one (graph of lines in orange):
Figure 1 - Superior standard service level
Source: ILOS
Observing the image, it is noted, however, that this practice of 100% effort causes great waste, given that customers with more modest service requirements are served under a much superior service (in the case of the figure above, 21% of all effort is wasted). This would be a less than austere way of meeting demand and, as is known, shareholders are unwilling to assign so many unnecessary resources to executives. An alternative to a greater resource restriction would be to deliver an average level of service to all customers, as shown in the image below:
Figure 2 - Standard median service level
Source: ILOS
Observing the figure above, it will be noted that a portion of customers will be dissatisfied, as they will receive a service lower than required (Client A), a portion will be served efficiently, with service close to the required (Client B), and a portion third and final installment will continue to be met with a service superior to that required (Customer C). In this example, restricting the service level not only led to a reduction in effort to 83%, but also a drop in waste to 12%. The consequence, however, was the creation of a gap between demand and supply, generating dissatisfaction of 8%.
Figure 3 – Consequences of “One size fits all”
Source: ILOS
The reality is that setting up an average service remains very cumbersome, as important customers may receive service that is considerably less than desired.
The alternative that arises, therefore, is Customer Segmentation, that is, the separation of customers into groups with similar characteristics and expectations to ensure better service and allocation of resources. Such groups must have an adequate number of customers, being excessively small, perhaps the company's investments are not worth it, being excessively "bloated", perhaps there will be a lack of uniformity in the characteristics of the components.
In the figure below, for the same customer configuration and using the same effort shown in the previous example, it is possible to extract a superior result by segmenting customers into 3 groups.
Figure 4 - Level of service with 3 segments
Source: ILOS
In the new scenario, with the same effort it was possible to eliminate waste by half (from 12% to 6%) and reduce dissatisfaction to a quarter of the previous scenario (from 8% to 2%). The only difference between the two cases, which we can credit all the difference in the result, was the segmentation into 3 clusters mentioned.
An important highlight that must be given is the following: the form and criteria used in the segmentation are decisive for its success. A common mistake in this process is to ignore the customers' desire and consider only their characteristics to segment them, such as geographic location and sales channel. Customers with similar characteristics may have very different requirements, so offering the same value package to both will lead to both waste and dissatisfaction.
It is also wrong, and very common, to group clients considering only their requirements. Based on this criterion, priority will be given to customers who most demand attention and not to the most important and representative customers, generating an increase in the cost of serving and loss of profitability. Therefore, both what the customer would like to receive as a value package and its characteristics must be taken into account in the segmentation process.
It is also possible to note that the greater the number of groups, the better the results from the point of view of effort, waste and dissatisfaction. You can even reach the limit of recognizing that each client is unique in their needs, deserving of a particular service: the single customer view (each customer is not closest one, each customer is um), unfortunately still unfeasible due to the intrinsic complexity of managing a large variety of services. Even so, in the present segmentation exercise, using only 3 groups, results far superior to the average service level example were achieved, showing the potential of this management mechanism.
Conclusion
The previous examples, like any model, show a simplified scenario of reality, in which the “service requirement” was condensed into a one-dimensional variable. Real life, however, shows that this variable is multidimensional, and may be related to various commercial, logistical and financial attributes such as: service frequency, delivery time, payment time, etc... The truth is that each customer has a particular vision in relation to each of these different service dimensions, and creating value packages by grouping these expectations is a huge challenge.
Finally, Customer Segmentation can generate significant advantages for the supply chain of organizations. In addition to stopping unnecessary waste, this practice can contribute to increasing the profitability of companies through a more sensible redistribution of resources, generating new perspectives and helping to obtain the maximum value to be captured.
References
Christensen, Clayton M., Scott D. Anthony, Gerald Berstell, and Denise Nitterhouse. “Finding the Right Job for Your Product.” MIT Sloan Management Review, Spring 2007, pp. 38-47.
Cohen, Steve, and Paul Markowitz. “Renewing Market Segmentation: Some New Tools to Correct Old Problems.” ESOMAR 2002 Congress Proceedings. ESOMAR, pp. 595-612.
Gale, Bradley T. Managing Customer Value: Creating Quality and Service that Customers Can See. FreePress, 1994.
McDonald, Malcolm, and Ian Dunbar. Market Segmentation: How to do it, how to profit from it. Butterworth-Heinemann, 2004.
Myers, James H. Segmentation and Positioning for Strategic Marketing Decisions. American Marketing Association, 1996.
Yankelovich, Daniel, and David Meer. “Rediscovering Market Segmentation.” Harvard Business Review, February 2006, pp. 122-131.
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