SC QUALITY GUILDCustomer value and segmentation
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Compare customer segments on margin after cost to serve, lifetime value and the value of a retention gain, and get a service-alignment recommendation for each.
ON THE EXAM · CMQ/OE V.A.3, V.B.2, V.B.4 · FREE · NOTHING YOU TYPE LEAVES YOUR BROWSER
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Segmentation bases
A segment is a group of customers with similar needs and similar value, so that one service approach fits them all. Common bases are demographic or firmographic (industry, size, location), behavioral (order pattern, channel, volume, loyalty), needs-based (what they value: speed, price, customization, compliance) and value-based (profit and lifetime value). Good segments are measurable, large enough to matter and different enough to need different treatment.
Customer lifetime value
This tool uses a common simplified formula: CLV = m × r ÷ (1 + d − r), where m is the annual margin per customer after cost to serve, r the annual retention rate and d the discount rate. It assumes margin and retention stay constant and that margin arrives at the end of each year the customer stays. It leaves out acquisition cost and margin growth, so treat the result as a comparison between segments, not a forecast. Customer equity is CLV times the number of customers.
Two traps: revenue is not value (a large customer with a high cost to serve can lose money), and a segment average hides the spread inside it.
The value of retention
CLV rises faster than retention does, because the denominator (1 + d − r) shrinks as r grows. A few points of retention are therefore worth the most where margin and retention are already high. The often-quoted finding attributed to Frederick Reichheld and Bain & Company, that a 5 percent increase in retention can raise profits by 25 to 95 percent, came from a limited set of industries; use your own numbers, as this tool does, rather than the headline range.
Aligning service to segments
- High value, satisfied: protect and grow with account management and priority capacity.
- High value, dissatisfied: a retention risk to fix first.
- Cost to serve above margin: reprice, set minimums or move to a lower-cost service model.
- Low value, low growth: efficient standard service and self-service.
Diverse customers bring conflicting requirements and compete for the same capacity. Decide the rules in advance (contracted service levels first, then by value, with a price for exceptions) instead of letting each conflict be settled by whoever calls loudest.
On the CMQ/OE exam
Expect questions on choosing a segmentation basis, why retention is cheaper than acquisition, and how to serve customers whose requirements conflict.