Customer segmentation, simplified

Looking for an actionable growth plan for your business, but struggling to find a way to combine the complexity necessary to be effective with the simplicity required to execute once the plan is created? Here’s an option you can implement in less than a day: The nine-box approach to customer management.

In the 1970s, McKinsey & Co. helped General Electric develop the GE-McKinsey nine-box matrix, a mechanism a decentralized corporation can use to determine where the best investment opportunities exist. In the decades following its creation, it was co-opted by human resource departments as an approach to personnel management. In this application, employees are categorized as low, medium or high performance, and low, medium or high potential. That resulted in nine possible employee ranking combinations. Each of these rankings then led to a specific management plan to maximize that person’s potential for the organization.

The same logic can apply to evaluating your customer base using frequency of purchase plotted against the number of different products purchased.

Review your data

What companies often learn, just at first glance, is that all too often they spend significantly to acquire a customer once, but rarely maximize that customer’s value. Companies should work to create campaigns to help customers increase their purchase frequency, if not of the same product then additional or complementary products and services.

Evaluate your acquisition channels, methods

Identify the customers that are only purchasing one time and one product. These customers will be in the lower, left portion of your matrix. Determine what they have in common. Are they all being acquired with the same aggressive promotion, or coming from the salesman that is discounting the most? In this step, the most valuable lesson will likely come from determining what not to do in the future.

Grow your current customers

Once you’ve looked at the lower left, focus on growing the customer segments in the middle by adding some upsell and cross-sell campaigns. Many times companies can simply add a new product segment to their email newsletter. Other times a specific incentive to re-engage customers that have lapsed for more than one year since last purchase is effective.

Focus on improving one customer segment at a time with specific campaigns and measurements. Many times the simplest strategies are the ones that make the biggest impact. Give yourself permission to focus on one element of maximizing customer value each month and learn which makes the greatest impact to your bottom line.

Sam Falletta has developed successful customer acquisition and retention strategies for some of the largest brands in the world, including Microsoft, Ford, Honda and the American Red Cross.