Why knowing exactly who your most valuable customers are — and how you can actually reach them — is the key to success for any digital acquisition strategy

In part one of our Digital Economist blog series, we laid out a four-step game plan for building and executing on digital customer acquisition strategies that, as a first priority, drive revenue and profitability. Now, it’s time to take a deeper dive into each of those steps, starting with the basics of customer segmentation.

Simply put, the purpose of customer segmentation is to understand who your most profitable customers are and identify a means for targeting and reaching them. Without a clear definition of your customer segments, you could inadvertently go down the wrong path as you begin to shape your value proposition, optimize your conversion journeys, and measure the success of your digital customer acquisition efforts.

Unlike in digital marketing, where reaching anyone who generally fits the “persona” of your target customer can be considered a win, as a Digital Economist the primary focus of customer segmentation is to create a distinct strategy for weeding out the “good” customers from the “bad.” In other words, you must build a strategy that allows you to differentiate, isolate, and then hone in on only those customers who have the greatest likelihood of becoming your most profitable customers over time. And it’s this focus on profitability that tends to get overlooked via more traditional approaches to customer segmentation.

But this exercise shouldn’t be done within the confines of your marketing team. Why? Because it’s a process by which you not only identify the specific traits associated with your most profitable customers but also determine the specific channels through which you can target, reach, engage, and convert those customers with precision (and success). To do this, you need to look beyond marketing alone and collaborate with both your finance and sales teams. You want to look at the revenue and transaction data directly related to past marketing campaigns. Looking at the data in this way (i.e. from multiple angles and data sources) provides you with quantifiable proof as to exactly which customer segments will have the highest potential for generating lifetime value (LTV) for your business in the future.

Based on our experience, we’ve developed what we like to call the three primary building blocks of a successful customer segmentation strategy:

1. Determining the profitability signals associated with customers that you would ultimately deem a “best fit” for your business.
2. Building customer segments that bring those profitability signals to life in personalized, business-relevant, and real-world ways.
3. Identifying specific audiences on digital media that mirror your customer segments, providing you with a platform for continually testing and targeting those segments with relevant marketing messages, all in an effort to drive conversion and generate greater lifetime value (LTV).

This all sounds simple, right? Let’s take a closer look at how these work hand-in-hand.

Profitability Signals

Before launching any customer acquisition program — digital or otherwise — you need to be obsessively clear about what makes certain customers attractive to your business (vs. those that aren’t). These are what we call profitability signals, which typically fall into two primary categories: business attributes and customer attributes.

Think of business attributes as “prerequisites.” They help you define specific parameters around the traits associated with your most profitable customers and allow you to weed out the customers who simply don’t fit the bill, immediately. Traits like “has a desktop computer,” “values privacy,” or “has sensitive information to protect” are good examples of this. Customer attributes, on the other hand, are demographic traits like age, location, and annual income.

Combining behavioral-driven business attributes with demographic-driven customer attributes allows you to paint a clearer picture around who your most profitable customers really are.

This may seem like an obvious or straightforward first step, but it’s not simply an exercise in identifying a series of desirable attributes. You’ve got to drill down deeper than that. The goal here is to create a precise customer profile that, from a purely economic point of view, will tell you which customers will buy more and buy more consistently over time. The clearer and more defined your profitability signals are, the more relevant your customer segments will be to your business. This is the key to optimizing your LTV/CAC (customer acquisition cost) ratio over time.

Customer Segments

Now it’s time to synthesize all those profitability signals into something that you can really latch onto. This is where developing customer segments come into play.

Customer segments are basically a distillation of profitability signals into “personas” that can be sliced and diced in multiple ways — or, more simply, groups of customers having common profitability signals. For example, further developing the example above, you might come up with following customer segment: “self-made small business owners in ‘Main Street’ America.” Also, depending on the nature of your business, you’ll end up with three or four core customer segments that can give your profitability signals a more actionable dimension.

The purpose of building customer segments is to give the traits associated with your most profitable customers real-life “identities” that can be targeted with precision. This also helps transform profitability signals into something marketers can actually wrap their heads around.

Audiences

Creating customer segments is merely a way to personify your most profitable customers. Unfortunately, you can’t just plug in “self-made small business owners” into Google Adwords — as convenient as that would be — and then wait for your customers to pour in. You need to go one step further. In the world of digital customer acquisition, you have a plethora of digital media channels to choose from for targeting and reaching your most profitable customers. As you evaluate those channels, you need to stay laser-focused on only those channels where audiences (i.e. real, living, and breathing humans) exist that mirror your customer segments. Using the example above, the best way to reach “self-made small business owners” might be to hone in on the following audiences that live within these channels:

• Email: Reaching small business owners through bank and lender databases
• Programmatic: Bidding on display media targeted to local business news content
• Broadcast: Buying spots to play during business-related talk radio and podcasts

Once you’ve pinpointed your audiences across various digital media channels, the next step is to build marketing campaigns that encourage potential customers to take some sort of action.

This notion of “context is king” couldn’t be any truer in the game of customer segmentation. Your marketing message must be relevant within the digital media context it lives in order to get potential customers to follow through with a conversion-based action. Fortunately, with digital marketing, you have limitless opportunities to refine and optimize campaigns — from the creative itself to the calls-to-action — to generate the highest conversion rates possible. That’s why you must be clear about who your most profitable customers are, as this will ultimately determine how you end up marketing to them.

5 Foolproof Steps for Customer Segmentation

Now that you know the primary building blocks of any customer segmentation strategy, it’s your turn to apply these concepts to your own business. There are a few ways to approach this. For example, if you intimately know who your ideal customers are inside and out, build from there. However, for businesses that have never created a true customer segmentation strategy of their own, the best place to start is by looking at your customer data. Since this tends to be the case for the majority of businesses we work with, for the purposes of this blog post, let’s start our five-step customer segmentation journey there:

1. Get the data. Identify what data sources you have within easy reach first. Whether it’s Google Analytics or a combination of sources — for example, those tied to your marketing campaigns — be sure to get a lay of the land. Second, don’t forget to bring your CRM (sales) data into the mix, so you can more clearly connect the dots between marketing KPIs and sales.
2. Identify what performance means to you. For most businesses, the conversion step of a customer making a purchase will be your key success metric. However, from the minute a customer engages with your brand through any digital media channel, you must be able to track exactly where customers drop off or when they decide to take a specific (conversion-based) action. Understanding conversion (or the lack thereof) from all of these angles will give you a more solid understanding of what performance looks like at every touch point along the customer journey.
3. Slice and dice the data. Start by segmenting the data across age and gender, as those are typically the most readily available variables on any analytics platform, and then layer on the relative conversion rates for each of the subsets you’ve isolated. The goal here is to create a simple and clear picture of performance at more granular level.
4. Segment with data-driven insights. Start by asking yourself two questions: 1) What customers do you have the most of and 2) Who are your best customers (i.e. who are your customers with the highest conversion rates)? This is essentially an assessment of overall audience size vs. relative conversion rate (for each age/gender data subset). As a starting point, you’ll want to focus on the largest audience with the highest conversion rate — and then fill in gaps from there. The goal here is to evaluate how well your website and marketing campaigns are working as well as why they are encouraging specific actions. It’s important to note that context also matters as you evaluate this data. Why might certain age groups index higher for your business than others? Are there other offline ways that customers can engage with your business — and how might that skew the data around certain conversion actions? Why might one gender drive more volume but fewer conversions? You need to answer these questions (and more) through the lens of your business to weed out only the customers who will likely generate the greatest long-term profitability for your business.
5. Begin targeting. Once you’ve determined the segments with the greatest potential to grow your business, it’s now time to identify the digital media channels through which you can reach them with targeted and relevant marketing messages. Then, it’s just a matter of optimizing those campaigns in real-time to ensure you achieve an optimal customer acquisition cost that maximizes your margins and total profit.

Why Customer Segmentation Matters

Knowing exactly who your most profitable customers are is the first and most important step in building a digital acquisition game plan that drives real results. Failing to do so leaves you susceptible to wasting valuable marketing dollars to reach customers that either aren’t a good fit for your business or won’t drive long-term profitability. Why risk that?

Set aside the time to build a focused customer segmentation strategy — and don’t be afraid to be critical every step along the way. The more you hone in on the right customers now, the more effective your digital acquisition efforts will be down the road. Focusing your customer segmentation strategy on only the customers with real potential to drive long-term value for your business is what differentiates how a Digital Economist (vs. a digital marketer) approaches and executes on digital customer acquisition campaigns.

Now, if you hit a roadblock as you begin tackling these five steps on your own, don’t forget that we’re here to help. Just give us a call.

Check out how LQ puts customer segmentation into practice by downloading the Sun Basket case study today — and see how we’ve helped them turn more of their most profitable customers into actual subscribers!

The foolproof way to drive measurable business growth (that really matters)

Late last year, we introduced the concept of the “Digital Economist” with the launch of our whitepaper, The Rise of the Digital Economist. The idea really stuck.

In an era when digital is king and data is now a marketer’s best ally, everyone from the CMO down has no choice but to become a performance marketer at heart. This is underscored by the fact that digital marketing spend in the U.S. alone is set to hit $120 billion by 2021, accounting for a whopping 46 percent of total marketing investment. The key takeaway here is quite simple: the future of marketing is unquestionably digital. Today, there’s less of a focus on coming up with show-stopping Mad Men-esque “big ideas” and more of a desire to reach the right customers, on the right channels, with the right message, all at the right time. This isn’t to say that creative thinking has gone out the door. It’s just that today’s version of creativity has a slightly new vernacular: hyper-targeting, deep segmentation, real-time optimization, and personalization.

This is why the term “Digital Economist” has resonated with everyone we’ve spoken to, from our customers to our partners – and beyond. To be successful in this growing digital-first marketing environment, we’ve learned that embracing the basic principles of economics and applying it to the execution and measurement of digital marketing is the new recipe for success.

Today, we’re excited to announce the launch of our Digital Economist blog series, dedicated to helping you understand the importance of embracing a Digital Economist mindset as you plan, execute, and measure your digital customer acquisition strategies.

Being a Digital Economist is about more than just acquiring leads and conversions. It’s really all about seeing digital customer acquisition as a catalyst for business growth and profitability. And this is more important today than ever before as businesses now face a number of complex marketing challenges. For those in highly competitive industries, for example, it’s hard to manage rising costs associated with breaking through the noise. And for those entering into new markets, how to reach the right customers can feel like uncharted territory – which means it’s up to you to learn who your best customers are as well as how to target them effectively. Whatever your situation is, building a holistic strategy for driving only the most high-value potential customers along a journey with your brand – all without wasting valuable marketing dollars – should be your number one priority.

Thinking like a Digital Economist allows you to do just that (and a whole lot more!). To get your digital customer acquisition program started, ask yourself the following questions:

• Who are our most profitable customers?
• Why would someone want our business offering?
• What is the process for selling to these customers?
• How will we measure profitable growth?

These are the essential building blocks for crafting a digital customer acquisition game plan that drives measurable business growth. In this inaugural post, you’ll see how these questions translate into a series of steps that, when done right every time, can be a real game changer for your business. (And no, this is not an overstatement!)

As we continue through the Digital Economist blog series, we’ll take a closer look at each step as well as other important concepts, providing you with useful tips, advice, and case studies to help you see digital customer acquisition in a whole new – and dare we say, better – light. For now, though, let’s start with the basics. Here are the four steps you should always take to ensure your digital customer acquisition strategy drives long-term business growth.

1. Identify the Target Customer

This may seem like a no-brainer – because you can’t grow your business without customers – but being crystal clear about not only what kinds of customers you want to target but also which will likely become the most profitable for your business is really important. Unfortunately, the latter often gets left by the wayside. This is not for a lacking of wanting but the result of not knowing how to measure this (we’ll get to this in a bit).

The truth is, not all customers are going to want or need what your business offers. This begs the question: why waste precious marketing dollars on reaching prospects that never convert – or convert and then churn out quickly – when you could precisely target customers who will buy more products and services from your business and stick around for the long haul? You wouldn’t. You must truly understand who your ideal customer is, inside and out.

Start by identifying the profitability signals for your ideal customers. Think of these like prerequisites. Potential prospects who don’t meet these baseline requirements can automatically be weeded out of your “ideal customer” consideration set. Once you’ve identified this first set of criteria, the next step is to build out customer segments based on a combination of these profitability signals and other attributes – like age, gender, marital status, household income – to paint a clear picture of the exact customers you really want to engage with.

Although customer segments serve as a great foundation for targeting with digital marketing, you have to get a bit more granular than that to actually reach your most profitable customers. This is where building audiences comes into play. Adding an intent-, behavior-, or content-based targeting layer onto your customer segments can help you reach prospects that not only meet your requirements but also are more likely to be actively shopping for the solutions you offer. Building audiences is a smarter way to target – as it brings your customers segments to life in a more relevant and real-time way – and an even better way to maximize the impact of your marketing dollars.

2. Define a Clear Value Proposition

It’s nearly impossible to convince potential customers to choose your business over a competitor’s if you can’t articulate a clear value proposition for them to latch onto. This is your proverbial “hook.” Simply assuming that people already know the value your business provides – without doing any amount of hand-holding – won’t get you very far. Your target customers need you to show them why your products and services address their needs better than anyone else, how you stack up to the competition, and what unique differentiators make you truly stand out.

Defining a clear value proposition isn’t merely an exercise in outlining key features and functionality. Those only describe “what” your business does, not “how” your business delivers unique value or “why” customers should give your business a second thought. As you build out your value proposition, you must tap into what your ideal customers truly care about – their wants, needs, goals, expectations – and then demonstrate with quantifiable proof how only your products and services deliver on those core values.

Depending on the nature of your business and the needs of your customers, your value proposition can take many forms. What works well for your competitor might actually not work for you, even if you have similar business models or offer similar products and services. In fact, to ensure that your value proposition resonates, you’ll want to tailor message to each of your customer segments, aligning closely to the unique needs or intent of those segments. Doing so allows you to make a more compelling “pitch” to drive meaningful clicks and conversions.

Just remember, every business is unique. Your value proposition is no exception to this rule. No business can be all things to all people – or across all of your customer segments. Having a clear and personalized value proposition will help you avoid the tendency of falling into this trap.

3. Orchestrate the Conversion Journey

So, you’ve figured out who your ideal customers are and have identified the best way to reach them through digital marketing. The rest is smooth sailing from here, right? Not quite.

A click from an ad is where the journey towards becoming an actual customer really begins. You need to get this part right because it’s essentially the “make or break” moment that decides a prospect’s fate. Will they continue through to make a purchase? Will they lose interest along the way? Do they need more information? You should be prepared with a scenario for each.

That’s why it’s critical to build out the entire conversion journey before ever dedicating a single cent towards getting leads into the funnel. Why? Because conversion journey mapping is a science all onto its own. Every step along the journey can be measured and optimized to increase your chances of converting a prospect to a customer with every click. But you can’t do that if you don’t know what that journey looks like. Similarly, as you learn more about your customer segments over time, you might find that the right approach for one segment may not necessarily be the right approach for another. Oftentimes, each of your customer segments will require a unique conversion journey of its own, tailored specifically to the needs, intent, and value proposition associate with that customer segment.

However, before you build your conversion journey, you must define a couple important variables. Start by determining your acquisition model. When prospects click your ads, are you asking them to make a purchase, provide contact information for follow up, sign up for a limited trial, or any hybrid combination of the above? There’s really no-size-fits-all here, but there are a number of reasons why certain businesses might choose one acquisition model over another. For example, businesses with low brand awareness typically offer limited trials to get more customers “into the door” quickly.

Choosing your acquisition model is important because it will almost always determine the kind of conversion event you aim to drive in the end. Conversion events typically fall into two categories: 1) Direct Conversion (shopping, free trial, freemium) and 2) Considered Conversion (lead generation, long-tail customer engagement). Identifying both your preferred acquisition model and conversion events up front are the keys to building conversion journeys that can move customers from consideration to purchase a lot more quickly. Having these pieces in place makes it easier to optimize these journeys in real-time, allowing you to create a more frictionless path to purchase that can ultimately help offset rising digital marketing costs.

4. Apply Unit Economics to Understand and Measure Value

When we first introduced the concept of the “Digital Economist,” our goal was simple: we wanted to use the basic principles of economics as a lens through which our customers could see the direct link between digital customer acquisition and business growth (or profitability). To do this, we look at a breakdown of a business’s revenues and costs – on a per unit basis – to inform how we measure customer lifetime value (LTV) and profitability on a per customer basis.

You might be saying to yourself, “But we already measure clicks, leads, return on ad spend (ROAS), and cost per acquisition (CPA) – isn’t that enough?” The simple answer: no. Looking squarely at these vanity metrics can tell you a lot about the near-term effectiveness of your digital marketing campaigns but can’t really paint a picture around profitability. They only tell you what you’re spending, not what you can actually afford (based on your business model).

This is why measuring profitability – and not relying on vanity metrics – is much more valuable to your business in the long-term. By breaking down LTV across customer segments and channels, you will clearly know the marginal cost of adding one more customer through any given channel. Aligning your marketing investments directly to channels, volume, and sales helps provide greater visibility into how you should ideally adjust your acquisition mix and conversion journeys over time. This then makes it a lot easier to optimize your marketing mix in a way that minimizes costs and maximizes revenue and profit.

The problem is, until now, there hasn’t been a good way to measure this. That’s why we looked to unit economics for the answer. Not only is it a shared language that all business stakeholders understand intimately, but it also provides an easy way to optimize or manipulate your business model and digital customer acquisition plan – working in tandem – to increase profitability.

It’s Your Turn (Almost)

We know this was a lot of information. We don’t expect you to be Digital Economist pros quite yet. However, this should give you an idea of what every business must consider when they decide to double down on creating, executing, and measuring a digital customer acquisition strategy. But these are just the building blocks. And if you’re ready to learn more about customer segmentation, check out the next blog in this series. Check back to get more tips and advice around how you can transform your digital customer acquisition efforts into a profitability powerhouse for your business.