By Mike Farrar
Back in the day, one of the dumbest activities I ever engaged in was to develop a program we called "The Segment of One."
The big idea was to develop a business-rules-based process to create a decision tree to assign a cascading set of offers so that every customer would get what we thought was the best offer uniquely targeted to that customer. Our philosophy was that there ultimately might only be a single customer at one of the terminal nodes of the tree, but that customer would be getting the very best set of offers possible.
Oh so young and oh so foolish. Notice that we weren't using optimization. We were just declaring our decisions "best" and calling it a day. Fair enough. When all you have is marketing judgment to go on, you go with it.
Unfortunately, fully ramified, the tree would have given us something like 2^15 permutations to try to manage. The program never quite lived up to its billing.
The big point we ignored was the incremental value of such a fine segmentation. If 1,024 segments delivered value, then great. But was that 1,024th segment delivering that much more financial value than 1,023 segments? Would the extra targeting give you more revenue? Would it make a customer all that much more loyal? Would it give you better logistics and inventory control? Would it improve efficiencies in your marketing? Would it give you enough to cover the extra costs and headaches of having that extra segment?
Could we have gotten away with 512 segments, or 256, or 128, or even eight?
It's not all that bad to have eight segments. Lots of firms get away with it and do just fine.
I’ve seen several recent presentations, white papers and articles arguing for the death of segmentation, which is equivalent to saying a Segment of One. Maybe that is the way the world is headed, but I doubt it. People are complicated, but we're not all that dissimilar.