Profiting From Proliferation

The McKinseyQuarterly

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Managing your business as if customer segments matter

Article at a glance

As markets polarize and customer needs fragment, customer segment management is becoming increasingly important. Effective segment management often requires collaboration across functions, which is difficult to facilitate and reward in product-, service-, andgeographically oriented organizations. A few marketers have responded by adopting common, actionable segmentations, integrating segment-level goal setting into the planning and performancemanagement processes, and establishing clear organizational accountability for results. This approach can yield dramatic changes in customer experience and significant financial gains. But it's easier to talk aboutthan execute-which is precisely why effective segment management is a powerful basis for sustainable competitive differentiation.

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Managing your business as if customer segments matter

Selll1 R. COllil1ll, Pete!' W. DIlhlllt!'ilim, Ill1d MIln::

Today's proliferating environment is dramatically increasing the impor-

tance of effective customer segment management. Marketpolarization is widening the gaps between the lifetime values of various segments. Fragmenting customer needs are creating opportunities for specialist competitors to go after just one segmento 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 betterat 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 ofmost 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 oractively managing it through differenti-

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Profiting from Proliferation

ated customer propositions and experiences. 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 exploitedstate-of-the-art customer-relationship-management (CRM) technologies to develop and deliver truly differentiated value propositions, create customer-Ievel scorecards, or make them central to running the business. A key reason is that understanding and acting on segment- or customer-Ievel information often requires collaboration among a number of functions that interact with customers across theorganization. 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-Ievel change. More specifically, marketers must complete three tasks:
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Choose an actionable segmentation,...