Customer or market segmentation is the process of breaking down sales information into different categories based on certain characteristics. These characteristics include domestic versus foreign sales, sales by product type, and sales and profitability by customer and product type. Having this kind of detailed information available allows you to thoroughly analyze customer information.
Here are three types of customer segmentation that will provide your organization with insight and help you make more informed decisions:
Top Customers
Understanding your business’s top customers along with their profitability is key to knowing where to focus your efforts. Businesses typically know which customers have the highest revenue totals; however, there are many instances in which customer margin information is either missing altogether or is incomplete or inaccurate.
One of the keys here is to understand profitability. Through a detailed analysis, a business should be able to obtain customer profitability by products and services, which in turn can lead to better decision-making regarding pricing. Companies may be surprised to learn that their top revenue clients may not be their most profitable, but by completing an analysis, changes can be made to improve pricing and sales efforts or to improve efficiency and margins.
Demographics
Understanding where revenue is generated from geographically – whether domestic or abroad – should be relatively straightforward. It is important for that information to be available on a granular basis in order to have revenue by state in the case of domestic sales, or by country and/or region for foreign sales.
This is critical from a compliance and reporting standpoint to ensure your company is reporting revenue correctly and complying with the necessary tax filings. It is also equally important to understand the cost of delivering that revenue domestically and abroad, as these costs can differ significantly depending on the geographic location of the customer, types of taxes involved, duty, etc.
Product or Service Types
In today’s business environment, companies have made significant improvements in their technology systems, yet there is still a lack of products and services data as well as a lack of understanding of margins by product type. This is a critical area if you want to fully understand your business and what products and services drive your company’s profitability.
Successful businesses are driven by many aspects. The items above are some of the revenue driven aspects that are critically important to better understanding your business and which customers make you money, as well as to making informed decisions about the markets you are doing business in, the products or services that are making you money, and whether to discontinue underperforming or unprofitable products and services. Without a baseline understanding of these important areas, it is difficult to maximize growth potential and earnings.
Richard Snyder is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email or 215.441.4600.
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