Segmentation is the key to making meaningful improvements in obtaining actionable insights. This means collecting and analyzing data in ways that allow you to create and implement improvement plans that make or save money. The solution is to divide the data into logical sub-groups with similar characteristics.
There are four common types of segmentation:
- Value-based, which facilitates implementing different levels of service for other valuable customers.
- Behavior-based enables the company to customize based on what it knows about the customer.
- Insight-based, which is developed from customer information and transactional data. Again, it allows customization of approach and communication.
- Needs-based, which is predicated on knowing that different customers have different needs. This links product features and brand attributes to customer actions.
For example, we have many options for setting up our Sales organization. Nevertheless, one factor is generally implemented – Sales territories (behavior-based segmentation). This is not only to control travel expenses but also to align the people with customers because different territories typically have different cultures, needs, and business practices. Thus, few global businesses do not have regional Sales-VP for the Americas, EMEA (Europe, Middle East, Africa), and APAC (Asia/Pacific). And matrixed on top of geography are product specialists who know a lot about a few products but know them well.
Another use of segmentation is cost analysis. For this discussion, I will focus on warranty costs for Medical devices. I chose this specific example because I have been a reader of Warranty Week for about ten years, and they recently published an interesting analysis of this topic. And the story was compelling.
The people at Warranty Week have been tracking actual warranty costs, warranty accruals (budgeted warranty costs replaced by actuals each month), and product sales. As they began to dig into the numbers, they found that by segmenting the data, they had a very compelling story. Here is what they said:
“To illustrate a specific trend within the medical and scientific equipment sector, we’ve further divided the 177 companies into two sub-groups. First, we’re isolating 24 companies whose medical or scientific equipment makes heavy use of lasers, X-rays, or other types of radiation. Second, we’re presenting separate data for the remaining 153 companies, whose products do not make use of lasers, X-rays, or other types of radiation.”
They are two separate segments.
Of all the charts in the article, I think this one best tells the whole story:
Here is what Warranty Week says about their analysis:
“There’s another big difference. The non-laser/non-X-ray group, containing 153 companies and accounting for roughly 85% of the total claims and accruals, has done little over the past 10 years to reduce its expense rates. They started the decade towards the high end of the 0.5% to 1.0% range, and ended it towards the middle or low end of that range.
However, the laser/X-ray group has made spectacular progress, dropping their average expense rates from 2.5% to 3.0% of revenue in 2003-2006 to 1.5% to 2.0% in 2010-2012. And rather decisively, the group ended 2012 with its lowest-ever claims rate (1.6%) and second-lowest-ever accrual rate (1.7%). It’s also beginning to lose the seasonal pattern, keeping rates steady-but-declining year-round.
So while the laser/X-ray group suffers from higher warranty expense rates, they’re also demonstrating that they’re better at both reducing and stabilizing those.”
A 10-year declining trend is no accident. Many people in different companies (including suppliers) have been working very hard to save money. How much money? In 2012 the Laser and X-ray equipment warranty claims paid were $126 million – not small potatoes!
Key Takeaway
Segmentation is not just for looking at your customers but also for looking at all aspects of your business. It should be a way of looking at all your numbers; otherwise, you lump everything together and get some meaningless answers.
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