Malcolm Gladwell, in his famous TED talk, "Choice, Happiness, and Spaghetti Sauce," makes the case for segmentation. He discusses how, in the food industry, companies moved away from the quest to find one product that would please everyone, to create derivatives of the same product for clusters of users with different tastes and preferences.
By tailoring variations of a product to the tastes of different customers, companies managed to dramatically enlarge their brand's market share.
But is what's true for food also true for customer marketing?
We set out to investigate just how powerful segmentation is in regards to customer marketing campaigns. My company conducted a cross-site study to measure the correlation between the granularity of target groups and campaign uplift. Would presenting a different offer to small groups of consumers with similar attributes generate more uplift than sending the same offer to all consumers?
We assumed that the more granular a segmentation, the more the offer can be tailored to customers' specific needs and wants, and therefore higher engagement would be achieved.
A personal value proposition
Our data set consisted of over 30 million customers and 2,000 campaigns, delivered to target groups ranging in size from one customer per group to groups of over 100,000 customers. For each target group size, we measured the average campaign uplift.
We plotted the results—average uplift per customer and the extent of each group's results volatility—on a graph.
Looking at the results, one can see that when conducting customer marketing campaigns, segmentation does stand up to its promise.
The smaller the target group, the larger the uplift. For the smallest size group, the average uplift is $3.2 per customer. When extremely large groups of customers are targeted (100,000 or more), the average monetary uplift is merely $0.1.
With the decrease in average uplift as group sizes grow bigger, one can see that small target groups—say, up to 150 customers per campaign—clearly dominate all large target groups. For example, all target groups with up to 150 customers had at least a $1.9 uplift per customer. Target groups of 1,500+ had an uplift of at most $0.5 (almost a 4:1 ratio).
Small groups tend to have higher volatility, meaning that because the sample sizes are smaller, the variation in results tend to be greater.
The results of our study showed that the smaller the group is, the larger the range of possible campaign outcomes. That is an expected result; small groups tend to suffer from high variance, regardless of the subject being tested.
The implication is that even though marketers can expect better results from smaller, more targeted segments, there are exceptions to this rule.
With smaller groups, the best results are achieved the more homogeneous and coherent a target group is, and the better the offer is suited to that group.
The overall message is clear
As you cater to smaller and smaller segments, the average uplift you can expect to gain from your total customer base grows.
In smaller groups, each customer will generate more uplift on average than if he or she were approached as a part of a larger group. When a group of customers is segmented and targeted by many small campaigns, the accumulated uplift is much higher in comparison to the results of a "spray and pray" campaign. This is clear if we envision targeting all customers, as opposed to granular, coherent customer segments:
The results of this comprehensive study of target group granularity resonate with our real-world experience. The better we know a customer, the more personal the value proposition we can offer him or her, and the higher the chance that this offer will result in the desired brand engagement.
From a wince to delight
Malcolm Gladwell wraps up his TED talk with an example from the world of coffee. When people are asked which coffee they like, he says, the universal answer is "a dark, rich, hearty roast." But if you were to serve them exactly that kind of brew, it would receive a general score of 60 on a scale from 0 to 100.
However, if you broke the population down into coffee clusters according to their coffee preferences and make coffee for each of those individual clusters, the score would go up from 60 to 78. According to Gladwell, "The difference between coffee at 60 and coffee at 78 is the difference between coffee that makes you wince and coffee that makes you deliriously happy."
Granularity has the potential to make customers deliriously happy. And as our study shows, embracing the diversity of human beings by speaking to each according to their own tastes—even when they are unarticulated—is a surefire way to speak to their hearts and to affect your bottom line.