Welcome to the latest installment of our series on segmenting best practices and use cases. We’ve covered a lot of ground, including using segmentation to influence some of the leakiest leaks in the retail revenue bucket. Today we're changing things up — we're not talking about how to roll out the red carpet for high-value customers; instead we're going to the other end of your customer ecosystem to cater to your discount seekers in a way that serves you both.
We talk a lot about finding that segment of your most valuable customers, the VIPs, the high-CLV champions, that top 10% who are the source of 50% of your revenue. They’re great, right? Well, let’s not forget that all of your customers serve a purpose in your business, and today we’re going to talk about discount shoppers.
Welcome to the latest installment of our series on segmenting best practices and use cases. We’ve covered a lot of ground in the last few weeks regarding segmentation strategies in retail. For the other articles covering segmentation use cases, check these out:
- How to Segment to Increase First & Second Repeat Purchases
- Using Behavioral Segmentation to Detect Churn Before It’s Too Late
- Segmentation Strategies for Winning Back Churned Customers
On to the main event!
Retailers have a lot of inventory to worry about. There might be a lot of math and science that goes into figuring out how much of a thing to order, but it’s unlikely that any retailer has ever ordered the exact right number of, say, pink flannel shirts, leaving no one wanting and no excess inventory.
Which is why sales and clearances happen. You have inventory to move to make room for the next season. This might seem like a low-stakes time to blast everyone in your database, but hold on for a second.
Let’s say you have a bunch of pink flannel shirts sitting in your warehouse. You need to get rid of them because purple flannel shirts are en route and you need the shelf space.
So who do you send your clearance sale emails to?
Well, pink flannel was huge with your age 25-35 urban professionals (whom, internally, you refer to as Persona #3: “Hank the Hipster”), so you can send it to him.
But what if Hank the Hipster really lives up to his name and isn’t interested in last season’s fashions? Are you wasting an email on a high-value customer who’d rather buy newer items at full price?
Another way would be “has ever” segmentation and anyone who's ever bought any flannel shirts, boom, let's send them that pink flannel email. That makes perfect sense, right?
But you can also add in other layers of segmentation, and things get pretty interesting.
Let's say you have a group of customers who are very loyal and they're very valuable, but they only buy clearance items or when there's a big sale. You can still have a positive margin on these customers because they’re active and you don’t have to spend much to advertise to them. Even though they’re not those holy grail full-price shoppers, they’re still valuable shoppers. Some of them could even be in your top 10% because they buy at such a high volume. You just happen to know that they're waiting for these types of events only.
On the other hand, you might have other customers who don't ever buy clearance. Your line of pink flannel got to the clearance rack because it’s not in vogue anymore, and your cohort of full-price shoppers shop at full price exactly because they only want the trendiest, most current items. It’s likely they stocked up on pink flannel months ago, but even if they didn’t they’re just not interested.
This is where behavioral segmentation by purchase history is valuable. You have your coupon-clipping discount rack shoppers in a bucket, and this is who gets your clearance email. The email you send to your trendy full-priced shoppers could mention the sale, but these customers would much prefer — and would respond much more positively to — an early-access email featuring products that haven’t been generally released yet.
The motivation behind segmentation is to lead with things that are a better match with what your customers are looking for, and the financial rewards follow suit. A byproduct of that is your high-margin shoppers are buying your high-margin items and your low-margin shoppers are buying your low-margin items, and the whole ecosystem is happy.
There are some potential financial benefits from doing things like this, not just because a conversion rate might be better, but because you're matching people to the things they're looking for and that can have a big impact on the bottom line as well.
Another point to make is that you can test subsegments because there’s always more to learn about your customers.
Let’s say you start with your coupon clippers. You could segment them into “Has ever bought pink flannel” and “Hasn't bought pink flannel.” Why would you do this? Maybe you’ve got a hunch that the coupon clippers who haven’t bought pink flannel are worried about an au courant wardrobe, but they still like the pink flannel. So you test that out — will the “has evers” buy more than the “hasn’t evers?”
Meanwhile, you’ve got your ever-important control groups running — “has evers” and “hasn’t evers” who don’t get a promotional email — letting you know if your more nuanced strategies are providing incremental lift or not.
One thing to notice is that the above example started with a hypothesis in the form of a story. This is an important point to close on. Start with a simple, behavioral story that you think makes the most sense. Run an experiment that could confirm or disconfirm that story. Keep a control group to get a baseline of how this segment reacted outside of the experiment. Then dig into the results to see if different pockets of people responded differently. Let that guide how you might further break down your segments as opposed to just leading off with what's easy in terms of demographic segmentation.And if you want to learn more about the most powerful form of segmentation — segmenting by Customer Lifetime Value (CLV) — then click the link to read our latest book, The Chance of a Lifetime.