We recently explained the importance of crafting rich buyer personas based on data rather than anecdotal evidence. Very few organizations serve only one type of customer. Your buyer personas, therefore, represent a number of customer types you interact with regularly.
The creation of detailed buyer personas can feel like an academic exercise. It’s about sorting through data and working internally to craft personas. Some firms do the hard work and then let the personas gather dust in a binder somewhere.
Don’t let that happen to you. The critical second step after creating those buyer personas is putting them to work in the real world. Now that you have those personas in hand, it’s time to find your highest-value segments.
So much time, effort, and money can be saved by zeroing in on your highest-value customer segment (or segments). Simply by reallocating your budget and attention to your high-value segments, you create the potential to grow revenue without increasing your acquisition costs.
High-value segments aren’t necessarily your largest segments. Nor are they always the ones that account for the majority of your current revenue. Who are they, then? And how do you identify them? Read on.
What is a High-Value Segment?
The customer segmentation process is like an onion—it’s got layers.
In your initial dive into data-driven segmentation, you started by selecting a segment of the market. From there, you found your customers within that sliver of the market as a whole. Then, you created a handful of buyer personas to represent the different types of customers you engage with.
These profiles provide you with rich insights into not just customer demographics, but also the emotional and psychological drivers behind why they buy from you (which we discussed in our article on the importance of creating data-driven personas).
Now it’s time to peel back another layer. Within this handful of buyer personas, there are some customers with the potential to drive substantial growth for your organization. These are your high-value segments.
People in your highest-value segments are a perfect fit for your product or service. They understand innately what you do and why they need your help, and so the sales process is relatively quick (especially in comparison to their customer lifetime value) with few objections. They find deep value in your offerings and become loyal customers, returning frequently and buying an array of your products or services. They even become evangelists for your brand, regularly referring friends or colleagues.
How Do You Find Them?
All of your buyer personas represent regular customers, so how do you find the most valuable segment or segments among them? No surprise here: Let’s go back to the data.
This time, though, it’s not data about who your customers are, but rather, how they interact with your company. Take a look at KPIs that are tied to revenue. Customer lifetime value (CLV) is the best place to start.
Your ideal customer has a high CLV. They not only spend a lot with you initially, but they’re also in it for the long haul. Customers with a high CLV are worth investing in because their value to your brand only grows as the years go by.
When it comes to calculating CLV, it’s not just about the revenue you earn from that persona, but also how much it costs to serve them. A customer that brings in big dollars but needs lots of hand-holding is going to be less valuable in the long term than someone who spends a little less but is entirely self-sufficient. We’ve even seen instances where high-revenue customers are so expensive to serve they actually have a negative CLV!
The other key number to review is customer acquisition cost (CAC). From a prospect’s first visit to your website or first email newsletter they open, how much do you spend on sales and marketing before they sign on as a customer?
Once you know CLV and CAC for each customer segment, you want to review the CLV-to-CAC ratio for each. Your ideal customers are those with high lifetime value and relatively low acquisition costs. Your highest-value customers typically have a CLV:CAC ratio of 3:1 or higher.
You’ll need to apply some managerial judgment here, but in a dream scenario, your ideal customers will have both a large absolute CLV and a high CLV-to-CAC ratio.
And yes, this does mean you can have multiple high-value segments! If you have several groups of customers that are low-cost to acquire and high-value over their lifetime, they all deserve your time and attention.
Willingness To Pay
Here’s where things can get a little tricky. CAC and CLV calculations are inherently backward-looking. But you’re trying to earn more revenue in the future. You need to ensure those segments that have historically represented a low CAC and high CLV will continue to do so.
That’s why at this stage in the game we return to customer research. With the buyer persona framework in hand, reach out to customers in your segments and conduct an analysis of each one’s willingness to pay for your product or service. This is an important step with legacy offerings or when developing a new product.
As you begin to evaluate responses, you’ll see clear patterns emerge. Some segments will clamor for your offerings while others may yield a more tepid response. It will become clear through this exercise where you should focus your future energy and budget.
Creating your buyer personas is not a theoretical exercise. While it happens using data and research, the critical next step is to apply your learnings in the real world. As you begin to use your buyer personas to find your highest-value segments, you unlock information that becomes actionable.
From marketing messaging to sales strategy to product development, understanding who your high-value segments are and why they buy is the key to making smarter business decisions that drive long-term organic growth.
About the Sterling Woods Group, LLC
The Sterling Woods Group’s mission is to help clients make sense of their data to predictably grow sales. We apply data science to help you optimize your sales funnel, improve your marketing ROI, launch new products successfully, and enter new markets profitably.
We use a hypothesis-driven, data-supported methodology to discover insights that no one else is paying attention to. Then, we help you assemble the right sales strategies, marketing plans, technologies, and resources to seize this opportunity.
About the Author
Rob Ristagno, founder and CEO of the Sterling Woods Group, previously served as a senior executive at several digital media and e-commerce businesses, including as COO of America’s Test Kitchen. Starting his career at McKinsey, his focus has always been on embracing digital technology and data science to spur strategic growth.
Rob is the author of A Member is Worth a Thousand Visitors and is a regular keynote speaker at conferences around the world. He has been featured on ABC, NBC, CBS, Fox, and Digiday.
He holds degrees from the Harvard Business School and Dartmouth College and has taught at both Harvard and Boston College.
Rob lives outside Boston, MA with his wife, two daughters, and black lab.