Getting Started With List Segmentation

I want to discuss the basics of list segmentation and why it's an important part of maximizing profitability. Segmenting your customers (i.e., house file) will help you know who to mail and, just as important, who not to mail. The days of mailing your entire house file every mailing is over. It's time to begin capturing your mailing results by house file segment and mailing more selectively.

What's segmentation? Definition per The Economic Times: Segmentation means to divide the marketplace into parts, or segments, which are definable, accessible, actionable, and profitable and have a growth potential.

Why should you go to the time and trouble to segment your customers into various groups? The simple answer is to protect against overmailing certain customers and wasting precious marketing dollars. Tracking and analyzing customer purchases over time will provide a significant payback which will be reflected on your bottom line.

Segmenting a house file by recency, frequency and monetary Value (RFM) has stood the test of time. This segmentation methodology was drilled into my head back in the early 1970s, and I’ve been practicing it ever since. Most catalogers use some form of RFM. An RFM classification “flags” each customer with a three-place identifier that’s based on the recency, frequency, and total monetary value of his or her previous purchases.

The data is based on customer information within your house file. Recency is always the No. 1 criteria for determining a repeat purchase, followed by dollars spent. While purchase frequency is important, it's not as important as the other two criteria. Every customer is located within a RFM “cell” relative to other customers. A customer’s RFM changes even if they don’t make a purchase.

The three-dimensional cube is divided into levels along the recency, frequency, and monetary axes. Thus, each customer’s name resides within a given cell according to similar purchasing characteristics. This information enables you to identify which cells contribute the most to your profit and overhead expenses, and it helps you determine an appropriate catalog mailing schedule. To maximize revenue per catalog (RPC) mailed, send catalogs only to customers within designated cells.

Not all customers are created equal (which is why segmenting your house file is important). There's a difference in the purchase behavior of print catalog vs. web buyers. For example, there are “item” buyers who tend to purchase one time and never return. They search the web for a specific item and when they find what they're looking for, they buy it with no intention of making repeat purchases. Mailing this group every time you drop a catalog or mail piece may not stimulate them to buy again.

There are also “shoppers” who make multiple purchases over time. This group should be mailed more frequently. Using RFM will help you know how frequently and when these customers should be mailed. The point is, segment and analyze catalog buyers and web buyers as two separate groups.

I want to share with you the definition of a “customer” vs. a “buyer” that I've used for years. This is part of our segmentation theory. This mindset will help you think clearly about the mailing strategy to both groups. A “buyer” is someone who purchased one-time only. A “customer” makes two or more purchases over time (one year to two years). Obviously, we need buyers before we can have customers. However, our goal is to retain more customers on the house file. What’s more, we need to be careful not to overmail the buyer group. This is where RFM comes in.

A word about lifetime value (LTV) is an important consideration. LTV is the value of all the purchases a given customer has made to-date plus the value of the purchases this same customer is likely to make (discounted for present value) over time. LTV helps determine how much you can afford to invest for a new buyer looking beyond their initial purchase. For example, you can afford to invest for a new buyer if it's less than the average lifetime profit per customer (including your buyer acquisition cost). This assumes, of course, that your cash flow is sufficient to handle a given level of spending. You're making a financial investment to acquire a new catalog buyer in hopes the payback will come. How long you can afford to wait for the investment to pay back depends on your financial situation and the payback opportunity itself; generally, one year or less is what I recommend.

In all my years in this industry, I've never known a more cost-effective mailing criteria other than RFM. RFM analysis can help your company minimize the waste of direct-selling dollars by identifying unprofitable mailings to less-frequent and inactive customers. This enables you to maximize profits and invest the money saved into growth-oriented programs such as new buyer acquisition. If you don’t already, it might be time to get started segmenting your house file for mailing purposes.

Stephen R. Lett is the founder and chairman of Lett Direct, Inc., a catalog consulting firm specializing in circulation planning, forecasting, digital marketing, and analysis since 1995.