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January 04, 2006

Paul Wang - a God of Customer Segmentation

Several years ago I went to a lecture at the excellent Northwestern School of Integrated Marketing Communications. It was by this young guy, Paul Wang, and the down to earth, insightful and practical things he had to say about customer segmentation have never left me.

What was great about what he said was that it really guided you to stay focused. Not just on the easy wins but on the ones that will pay. Great sales people cut folks out of their pipeline that are going to waste time and energy to sell. Professor Wang directs strategic (and database marketers) to do the same thing, not just in the short but in the long term.

Specifically, he has broken down the type of business buyer into three groups - program buyers, transaction buyers and relationship buyers:

• "A program buyer is one who follows some sort of internal procedure to make their business purchases. This is typical of governments or mature industries which have developed manuals which govern their buying process. Typically, such buyers try to spread their purchases of any one category among several suppliers according to a fixed schedule. Such program buyers are almost immune to external marketing stimulus. They are highly unlikely to be early adopters. One of the first steps in finding early adopters, therefore, is to identify the program buyers, and eliminate them from consideration. Your sales force and your common sense can help in this task."
• "The transaction buyer... are primarily motivated by price. They are willing to shop around for every purchase... and actively compare prices. Loyalty is almost unknown to these buyers. You can keep your warehouse open on a Saturday afternoon to meet an urgent need for such a buyer. The following Tuesday when they have a big additional purchase, they will bid it out, rather than giving it to you in return for your exceptional service only three days before. These buyers are also unlikely to be early adopters... If you are on sale, they will flock to buy from you. When your competitor is on sale, they will desert you. By keeping track of the ebb and flow of buyers as your prices change, you can often identify these transaction buyers, and eliminate them from your product launch portfolio."
• "The relationship buyer... are customers who like your products and services. They have built a relationship with your employees. They think of your company as their primary supplier of your category. They do not want to be bothered to have to shop around every time they make a new purchase. They look for quality, good service, helpfulness, friendship and information. If you can supply these things, they will stick with you when your competition is on sale. If you have a new product, they will be the first to want to hear about it. It is to these good people that we look for our product launch."

I love this segmentation. It had a strong influence on our own "regular, seeker, doubter, sleeper" segementation. It's great because it give you direction. Focus on the folks who can be loyal, who will generate the highest life-time value. Do the minimum for those who won't be influenced by your marketing anyway and avoid the temptation of dragracing for customers who will desert you on price later anyway. Clearly not just for business-to-business customers either. For more on this segmentation read here.

Posted by johnza at January 4, 2006 10:12 AM

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