As part of my Demand Management (DM) research, I've spent a fair amount of time investigating company practices in customer segmentation and differentiated customer services. With DM defined as “the matching of supply and demand over time—including both during and between planning cycles,” these practices are strategic in nature since the alignment of services (that is, supply) to customer segments (that is, demand) is not frequently done. Optimal alignment involves a purposeful focus on sustained profitability growth and requires balancing the incremental costs of providing differentiated services with the long-term growth of revenues and margins generated.

However, all too often companies segment informally in less than optimal ways—meeting customers' demands for additional services without analyzing whether they will be more profitable. Haven't you heard someone say, “If Wal-Mart wants something they get it?” Of course, for free. This is “squeaky-wheel-gets-the-grease” segmentation, in which complimentary services are provided to those customers (or sales reps on their behalf) that scream the loudest or threaten the most. This type of segmentation leads to hampered profitability in the long run. (Click here to see my column on “Free Service,” which originally ran in the November 2007 issue of Supply Chain Management Review).

Conceptually, customer service segmentation involves identifying groups of customers for which a company will provide sets of services. It works on the premise that all customers are not created equal and should not necessarily all get the same services. Exhibit 1 depicts an alignment of differentiated services to customer segments with the left-hand triangle showing a build-up of services aligned to each customer segment depicted in the triangle on the right-hand side. It shows lowest-tier customers only getting basic services, mid-tier customers additionally getting some special services, and top-tier customers getting these plus some high-level value-added services.

One of the most difficult aspects of segmentation, however, is identifying which customers should be in each tier. A survey I conducted with Larstan Publishing, prior to the launch of the Demand Management Solutions Group, queried managers on what customer criteria were being used by their company to segment its customer base so as to provide specialized and customized services. Here is a summary of the survey results:

• 43 percent used importance (such as strategic, long-term contract customers)
• 38 percent used sales dollars
• 34 percent used channel
• 27 percent used profitability
• 24 percent used delivery time requirements
• 24 percent did not segment

Thus, while segmentation appears to be prevalent, with about three-quarters of respondents saying their companies segment, the results support the fact that big, important customers largely drive segmentation, with service requirements playing a lesser role.

The basic concept around optimal segmentation is the understanding that services should be matched to customers to achieve long-term strategic goals, such as sustained profitability growth. Optimality will depend on the criteria used to segment the customer base as well as the services offered to each segment, so that customers (demand) are most profitably matched with services (supply). In Exhibit 1, service-segment alignments are depicted as double-sided arrows to represent that customer needs and service offerings are aligned in accordance with strategic “push-pull” objectives.

For example, if segmentation criteria are based only on customer size, the alignment will be focused on maximizing revenues, not profitability. This would be represented in Exhibit 1 as “pull” alignment, with arrows going from right to left to depict customers dictating the segmentation and services, with little regard to their impact on a company's costs or inventories. Hence the biggest customers get anything they want and services take a back seat—often given away—to driving product sales.

On the other hand, if customer segments are developed using just customer service requirements, the matching will be focused more on efficiencies, less on sales. Hence companies will tend to “push” the services they are most efficient at rather than the ones customers really need. In Exhibit 1 this would be depicted with alignment arrows going from left to right.

A process manufacturer I know of is a good example of a company that is trying to achieve optimal segmentation. This company segments its customers into three tiers with the top tier being big global accounts, mid tier being big regional and rapidly growing accounts, and the lowest tier being the rest. In contrast to most companies, it provides more services to the mid rather than the top tier accounts. The reason is that big customers only buy on price, which tends to erode profitability. Strategically the company decided to wean themselves off these customers and move to generating more business from mid tier accounts that don't nickel-and-dime them over pricing and are growing faster. These represent more opportunity for long-term profitability growth.

Summarizing, optimal customer service segmentation should be done formally and purposefully to meet strategic goals. To do this requires segmenting customers on criteria that are both demand- and supply-oriented. This segmentation approach makes more business sense than giving everything away to the biggest and baddest customers.