How Simple Market Segmentation Produces Extraordinary Results
By Dan McDade
Let's say you are running lead generation programs using inbound and outbound lists. If you knew in advance that there was a way to generate a higher response rate at a lower cost, would you do it?
Most marketing executives wouldn't hesitate to say, "Yes!"
The secret is relational techniques that balance principles of statistics with realities of today's marketing budgets to predict the likely success of B2B marketing programs. The process helps you identify your most valuable segments and achieve a higher number of more profitable sales for less money.
How marbles are like prospects
I am going to date myself. I can remember playing marbles as a kid. If you ever played marbles, you know that there’s a difference between Swirls and Agates. A Swirl costs 25¢. Agates are more like $5. If you pay $5 for a marble, you are going to want to make sure you bought an Agate and not a Swirl.
Pretend for a moment that each marble represents a unique prospect. Some are valuable ($5 Agates) and some are not as valuable (25¢ Swirls). Unfortunately, many marketing programs are run as though there is no difference between Agate prospects and Swirl prospects.
It is as though prospect names come in at random, get shaken up in a jar and then campaigns are run without regard to the value of each prospect. It would be the same thing as selling a jar of marbles without regard to the mix between Swirls and Agates.
Segmentation lessons learned from B2C
I once ran a sophisticated business-to-consumer catalog company that mailed more than 100 million pieces of direct mail per year. You can bet we knew the difference between our Agates and Swirls. We had three Ph.D. statisticians pouring over results and running analysis against huge files based on what was then called RFM (recency, frequency and monetary) data resulting in precise targeting based on previous results, investment hurdles and availability of goods. Our prospects with the most potential—meaning those who had recently made a purchase, were frequent buyers, and who had spent a lot in the past—were treated differently from a marketing standpoint than those how didn’t share those characteristics.
Segmentation works in B2B marketing too
For the most part, B2B marketers do not have the same rich data sources as did (and do) B2C marketers; but they have more data than they think. What I tell my clients now that I am focused on the B2B space, is that any data file can be segmented based on history, overlay of information and intuitive judgment.
With a little effort it is possible to substantially increase results over what is commonly accepted today. The sidebar tables are simple illustrations of what can be an immensely complex topic. Option 1 is a one-size-fits-all approach with relatively little value. Option 2 however provides a framework for simple segmentation that can produce powerful results:
Option 1—where all 100 contacts in the database are contacted the same way—is how many if not most marketing programs are executed today. You buy a list of names, send them all something (whether it is email, direct mail, calls– or all three) and send the leads to the field. Frequently, in this approach, longer-term prospects (what we call nurtures, or those who are promising but not quite ready to buy) are lost in the process. With this approach, marketing has no mechanism to nurture longer-term opportunities and sales is driven simply by revenue and does not perceive that it’s their job to nurture.
Option 2 —segments a database of 1,000 prospects into five groups of 200 based on any known or attainable information. You’ll see in the second table that this approach results in response rates of the highest-ranking group nine times that of the response rate on the lowest ranking group.
The ranking of the 1,000 prospects is based on SIC or NAICS, revenue and/or number of employees; business type (headquarters, branch, or other); and can include geography and other relevant "firmographics" (technical environment, propensity to outsource, geography, population).
Get more results with less spend by focusing on high value prospects
In the example shown, you achieve 84% of the results with just 40% of the investment. By focusing on the targets that show the most propensity to buy, you spend less on marketing. Those numbers speak for themselves.
Honestly, it does not take a rocket scientist (or Ph.D. statistician) to enjoy these kinds of positive results from segmentation. You just must segment, measure, re-segment … and remember, the work is never done.
Why I’m not talking about Artificial Intelligence in this blog
You can hardly read an article or look at television these days without seeing and hearing about Artificial Intelligence (AI). It’s hot. It is what a lot of marketers want to talk about. However, it’s not the Holy Grail. SAS, the great grandfather of data analytics and AI has a valuable whitepaper written for executives that you can find here. In it, they deliver an insightful observation:
“It can be difficult to sift through market hype and grandiose promises to understand exactly how AI can be applied in practical and reliable solutions …. A computer’s strength comes from its ability to reliably, efficiently and accurately analyze large volumes of data without fatigue. But, the computer does not understand strategy. It is limited to a specific task, which it executes in a very intelligent manner. Its ability to learn and provide insights is limited in scope. It still requires humans to take those insights and determine what role they will play in a larger strategy that accomplishes [our] identified objectives …. Despite the hype, artificial intelligence is not the correct solution to every problem.”
You can get a lot of improvement with simple segmentation. Don’t over-complicate the process because it is expensive when you get it wrong using AI.
What else should be tracked?
In addition to leads, there are other valuable dispositions that should be tracked on an ongoing basis. It’s important to continue to measure how many of your contacts end up as leads. It’s also critical that your measure the outcomes of all contacts and put a plan in place to continue to work them to completion.
· Lead. About 3% to 5% of your database should end up being viable leads, with the authority to buy and with a clear need for your solution. Define the attributes of each target that becomes a lead to help you (and your sales cohort) continue to fine tune your agreed-upon lead definition (AULD). For more about AULD and how it can help you solve the blame game between marketing and sales, click here.
· Pipeline. Another 3% to 5% of your targets should be Pipelines. Pipelines are companies that meet the definition of a lead that is mutually agreed upon by both marketing and sales (AULD) but are not yet ready for sales. One or two more touches by a qualifier are required to move them to the point in the pipeline where is appropriate for sales to take over. When that happens, expect between 20% to 30% of these dispositions to become leads.
· Nurture. The right companies in the right verticals with the right environment but not the right time. Nurtures differ from Pipelines because timing of their interest is too far out to predict, unlike Pipelines where timing of the follow-up as well as the specific actions to take are very specific. Roughly 25% of dispositions will result in a Nurture, which will convert to leads in a future touch cycle at about 150% of the lead rate the first time through a list.
· No Response. Close to half the dispositions will be No Response. Knowing which contacts in your database have this status is valuable. While we haven’t heard from them, we’ve gathered enough information to know that they are not disqualified. They should be resegmented based on what has been learned so far and put through three or more touch cycles—also called a cadence—in an effort to get their attention. A cadence defines the number of, type of and timing of calls, voicemails and emails that offers the optimal touchpoints for success. Tracking and testing cadence is yet another data set that can be continually improved, but that’s a topic for another blog J.
· Not Qualified. If it turns out the contact is not qualified, that is, the company does not meet the agreed-upon lead definition, it needs to be taken out of the mix. This allows marketing dollars to be more effectively spent on more promising opportunities.
· Bad. If the company’s out of business, too small (or large), wrong geography (such as overseas HQD), merged, divested or otherwise out of market focus, the contact needs to be purged from the list.
Two metrics to measure once a lead has been generated and is ready for sales
The first is lead rate and the second is close rate.
1. Lead rate. It amuses me that executives think the lead rate for a $100,000 software solution should be the same as a $1,000 technical appliance. The more expensive the solution, the fewer prospects there will be, which means the lead rate for these solutions will be lower than for low-cost solutions that have a much larger prospect universe. When I talk to prospective clients seeking lead generation services, the first thing I do is to qualify them by calculating the likely cost per lead, close rate, deal size and margin. More than half the time my “back of the napkin” estimates point to a solution other than proactive outbound lead generation, qualification and nurturing program because the gross margin just doesn’t support the cost.
2. Close rate. I worked with one client for years and while it was easy for us to generate leads in one vertical, their sales force could not close any of those leads. It was not the fault of the sales force. It was the nature of the vertical. So, even though our lead rate was relatively high in that vertical, and as such the lead cost is relatively low, we discontinued contacting this vertical because the leads didn’t close.
Cost per lead (based on the lead rate) and cost per close (based on the value of the lead) are both important to track and work on improving.
So, back to marbles
If you pay $5 for a marble, you expect to own an Agate. Think of databases and lists the same way. Find the Agates, that is, the most valuable prospects in your market, touch more of them than you do Swirls, and you will enjoy a higher marketing ROI every time.
If you are struggling with how to identify, segment and then close the loop on your database marketing, I can help. Let me know what challenges you are having in these areas and we can work together to come up with solutions.