CLIENT SEGMENTATION: HOW, WHEN AND WHY? (A new vision)

Historically, organisations have used segmentation in various different departments, such as marketing departments, where it is used to try and define or locate new target clients. In the sales department, segmentation is usually applied to differentiate large volume clients, who are treated differently and receive different sales conditions to the others, and to identify clients that consume certain products or services in order to “cross-sell” and/or “up-sell”, to increase sales. In financial department, based on my years of experience dealing with the managers of these departments, segmentation is used based on the level of risk, the volume of risk, payment schedules, etc. for each client, in order to monitor, control and to accept (or not) commercial risks.

Within the commercial “pipeline” along which a company's client will travel, from its identification by the marketing or sales department, its inclusion in the company's asset base as a client, and its ongoing relations with the company (loyalty), it is generally in these early stages that potential client databases (simply called "databases") are required. These can be internal or purchased from independent companies that specialise in supplying this kind of service.

Companies need to grow year on year, in terms of sales or client volume and they therefore usually resort to obtaining a database to identify new business opportunities.

In general, apart from the normal segmentations by activity, sales, geographic location, employees, etc., the two main requirements for a database are, in no particular order:

1. Up to date - in other words, that the company that provides the database has the appropriate mechanisms to permanently maintain all the fields of each record as up to date as possible, which is associated with the following:

2. That the information provided is accurate, which depends on the information sources from which the data is obtained, in order to prevent high average rates of returns, non-productive calls and visits and to gain maximum advantage from its use.

Once the database has been requested, the first variable usually used to measure its efficiency is the returns rate. After this, the company may measure the numbers of "hits", contracted clients, response method indices, etc. However, what should really be asked beforehand is "do they contain information on potential clients that I really want to approach" and "Are they clients that I want to have as an asset on my balance sheet."

You have to remember that no client transaction is signed today with immediate payment. In reality, many months may go by between the order being placed and the payment being collected, depending on the sector, product or service. Solvency can be established from the perspective of a company's payments (ratios) through financial and book analyses of its data as at today, using investigated reports; however, this data is usually 12 to 18 months old.The goal has to be to establish their future situation, months in advance, in order to determine whether or not they are suitable for your portfolio and the level of commercial risk you wish to assume, avoiding unpleasant surprises due to default.



You must also take into account that many companies that appear in the Companies Registry are not active; they are companies that in the current economic situation have been forced to close and, for various reasons, have not been cancelled by the registrars. In most cases, these inactive companies continue to appear in these databases, with the consequent wasted resources from contacting them.

If a client with a high risk of payment default is not of interest to the company, how much marketing and sales efforts, both in terms of finance and resources, could be saved if you could make a prior segmentation based on levels of default risk probability.Clearly, you could make significant savings in every department, as the investment would be oriented towards capturing only those potential clients that are of financial interest as assets to the company.

At the moment, given the current economic and financial climate, companies are operating in an environment that is as variable as it is hazardous, given the high levels of delinquency and its domino effect, as this problem is one of the main reasons for the disappearance of companies and, above all, self-employed individuals in Spain.It is therefore vital to take two types of action:

o Ensure that all marketing and commercial actions are directed towards clients that do not have present or future default risks, at least during the next 12 months (you can leave the rest for the competition!). This will prevent adding potentially dangerous clients to your portfolio.

o Carry out periodic and preventive analyses of your client databases in order to take preventive measures, months in advance, against possible future payment defaults.

Do these tools exist? Can this be done? Reality or fiction? The answers is, yes, they do exist. There are databases drawn up based on personal interviews with the managers directly responsible for companies in Spain, in which the data provided is compared, updated and verified. These include tools such as Predictive Delinquency Ratings, which indicates the company's probability of default, 12 months in advance and with an extremely high, empirical and truly demonstrable level of reliability and accuracy. Moreover, they are affordable instruments within reach of all types of companies, due to their ease of access and handling and their low cost.

If in addition to using databases segmented using the aforementioned criteria, you use the suitable channels and means to approach current or potential clients, offering each of them, in a personalised manner, the product that suits their needs, this will undoubtedly give you some very powerful tools with which to ensure you achieve your goals, regardless of the department in which the activity is carried out.

I could mention numerous success stories, from large utilities multinationals and financial institutions to SMEs and self-employed individuals, in all types of business sectors in which these types of services are requested:

1. For carrying out marketing and sales actions aimed solely at truly profitable targets.

2. To establish periodic monitoring of the credit quality of existing clients, providing clear warning signs of default months before the problem occurs, thereby enabling action to prevent it

The results have been genuinely successful and quantifiable:

1. Reductions and savings:

- From investment in databases, given the exceptionally low returns rate (no hits are lost due to out-of-date data).
- By only approaching profitable clients you remove between 30% and 40% of records with high levels of default probability.
- By eliminating inactive companies.
- By reducing the number of delinquent clients and the associated costs.
- By reducing the percentage of the portfolio at risk.
- By reducing the usual tension between the risks and sales areas caused by the acceptance or rejection of transactions.

2. Increases and benefits:

- From the efficiency of hits resulting from sales and marketing actions.
- In the client portfolio.
- In sales.
- From motivation of the sales network.
- From transactions accepted by the risk department

Why not put it into practice?

Gustavo Sousa
Regional Manager
Iberinform Internacional, SAU