This Article focuses on the profitability cycle of customers and the value of the data warehouse’s segmentation capabilities to enhance the corporation’s competitiveness. The data warehouse should be the center for corporate competitiveness. Previous articles have discussed how the data warehouse supports the segmentation of customers. Once customers have been segmented, the corporation has the opportunity to improve their profitability in many ways. Segmentation of customers can direct:

• How marketing should be done;
• How advertising should be done; and
• Selection of the promotions which are most likely to succeed. Etc.

Segmenting customers into different categories is a worthwhile exercise. But after the segmentation of customers into categories, one discovers that these categories are dynamic and that they can be used to predict cyclical behavior of the customer. A customer starts in one category. This may be the entry level. Then it may become a regular customer, moving to the sustaining category. This customer may remain a sustaining customer for a number of years. At the next step in its cycle, the customer may enter the very profitable cycle. Depending upon the economy, the customer’s profitability may experience a downturn and be segmented into the sustaining cycle again. Worst case, the customer may be segmented as unprofitable, and while in that category, may fail and exit the system.

This simplified pattern of activity shows that the same customer may be segmented into different categories during the various cycles of its existence.

Figure 4 shows the segmentation of a customer moving from one category to another based on the economic cycles it experiences:

While previous activities of customer segmentation have some competitive value, it is this movement of customers from one category to another, based on economic cycles, which has the most competitive value. Once the organization understands the pattern of movement, some really important questions need to be asked. These questions include:

• How fast are customers moving from one segment to the other? And
• What segments are changing the fastest?

The tracking of the customer through segmentation of the data warehouse provides a true competitive advantage. Simply stated, if an organization can determine that segmentation is changing and the reasons for the change, it will be able to predict its customers’ economic cycles and control its own destiny.

Each customer move from one segment to another provides vital information. Why do customers move:

• From an entry position to a sustaining position?
• From a sustaining position to a position of profitability?
• From a position of profitability to a sustaining position?
• From a sustaining position to an unprofitable position?
• From an unprofitable position to a sustaining position?

The answer to each of these questions is important and very different. Answering these questions is at the heart—the very heart—of corporate strategy.

So how can the data warehouse help? The data warehouse can help in many ways. The simplest way the data warehouse helps the corporation is in providing the analytic environment to measure the movement. Before the question—“why are customers moving?” can be answered, the question of “how many customers are moving?” must be answered. In an ideal case, not many customers will be moving to the unprofitable category, but many more customers will be moving to the sustaining or the profitable category. A company knows it is in trouble when more customers are moving to the sustaining and unprofitable categories than to the sustaining and profitable categories. However, a company can avoid trouble by having proper segmentation to allow it to predict its customers’ cycles within its data warehouse.

The data warehouse can measure these movements by analyzing its data and performing segmentation over time. Time periods are compared to one another and present the measurement of what is happening in any given position.

Used in this manner, the data warehouse can be critically effective for the enhancement of the corporation’s competitive advantage.

Next week, in Part IV, I will address the reasons for customer movements in the segmented categories. 

To read the first two articles in the series, click here—The Data Warehouse and Customer Profitability, andThe Data Warehouse and Unprofitable Customers.

SOURCE: The Data Warehouse and Customer Profitability Cycles

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