How to Focus on the Most Profitable Segment for Maximum Growth Potential: Step-by-Step Guide

This article is an upcoming part of The Art of Staying Focused on the Right CX Strategy to Reach Success

Developing a business case for a Customer Experience Strategy is like riding a surfboard on the ocean. Just like a pro surfer anticipates the next wave and adjusts their position accordingly, you must adjust your strategy to ride the wave of success by analyzing profitable segments and their growth potential. With informed decisions and a laser focus on what matters most, you can win over your management team, stay ahead of the competition, and take your business to new heights!

In the last article, we talked about the importance of focus in creating a successful Customer Experience Strategy. By focusing on one thing and doing it really well, you can ensure that your efforts will yield the maximum benefits for your organization.

Today, we're going to take that same focus and apply it to finding your most promising target market for financial growth. And guess what? We're going to let you in on a little secret to help you sharpen your focus even more. Let's jump right in!?

Discover Your Best Customer Segment for Profitability

It's time to dive into your internal data to focus on the most profitable customer segment. It might seem selfish, but trust me, it's the key to building a successful business case. So, how do you find that sweet spot?

Start by narrowing down potential target segments based on factors like industry, product, psychographics, or demographics. To find the best segment for your business, you need to determine how much money each segment brings in. Start by analyzing your internal data and looking for the following:

1.???Higher profitability: What's the average CLV of the segment?

2.???Larger customer base: How many customers belong to the segment?

3.???Higher growth rate: What's the growth rate of the segment based on past data? (optional)

In most cases, profitability and customer base are the most important factors. But if you have growth rate data available, including it can strengthen your business case. Bain & Co. uses this approach, so you know it's a proven approach.

Once you have all your internal data, you can use a simple formula to calculate it:

Average Segment Profitability = (Average CLV of Segment x Customer Base of Segment) x Growth rate

If your organization doesn't have the CLV readily available, no worries! You can easily calculate it with some help from your finance team by using this simple formula:

Customer Lifetime Value (CLV) = Net profit per customer?x?Customer lifetime

Kamil’s BONUS: If you're still having trouble figuring out the CLV, don't worry! Just leave a comment on this article and I'll write a step-by-step guide if enough people are interested.

In marketing, it's critical to understand your competitors to truly understand your customers. The same goes for CX. Your competitors won't let you get away with your target segment. Let’s see what can we do about this in the following section.

Discover the Growth Potential of Your Target Segment

It's all about understanding your competition and how to stand out among your target audience. That's where CX Metrics come in.

(For simplicity, we’ll use the widely-used Net Promoter Score (NPS). You can replace it with any other metric to benchmark your customer experience against your competitors).

By comparing your brand's CX performance to your competitors, you can identify three possible scenarios:

1. You're leading the way in CX for your target segment, giving you a competitive edge.
2. Your competitors are outperforming you in CX, which may be hindering your success.
3. None of the above—every brand in the industry is failing to adequately serve the target segment, presenting an opportunity for growth and improvement.

To get started, benchmark your NPS against your competitors and review the report below based on different scenarios.

Scenario 1: Your brand is leading. Your NPS is a very high in the target segment, compared to the competitors.

Scenario 2: Your competitor is leading with very high NPS. Your brand’s NPS is very low in the target segment.

Scenario 3: All brands in the industry have low NPS in the target segment.

For Scenario 1 and 3: there’s some good news! Your brand has a higher potential for growth opportunities. Let's dive into why.

• Scenario 1: You're already a leader with an NPS of 60, but to maintain your perception as a leader in customer experience, it's important to continuously innovate and keep your profitable segment happy. With your brand's edge in CX, it gives you a golden opportunity to build a rock-solid business case.
• Scenario 3: Even with a low NPS like 25, you have a unique opportunity. It’s a classic case of ‘when everyone making the same mistake’—all your competitors are ignoring this profitable segment, giving you a chance to differentiate yourself and grab a bigger market share. Make strategic investments in customer experience initiatives and tap into this opportunity! Again, you have a perfect business case!

For Scenario 2: there’s some bad news. Your brand has a lower potential for growth opportunities. Here’s why.

• Your competitor is a leader with an impressive NPS of 60, while your brand's NPS sits significantly lower at 25. Your competitor has already secured a favorable perception and is satisfying this profitable segment with ease, leaving other brands in the dust.
• Although it's important to analyze what your competitor is doing right and try to catch up, changing your brand's perception can be costly and challenging. Unless your competitor strategically falters and you have the resources to strike at the right moment, your options may seem limited. Alternatively, you could come up with a completely unique strategy to serve this segment (though there isn't yet a business case for this. So, forget it).
• However, all is not lost. While changing perception may be difficult, re-adjusting it is possible. Your marketing gurus can help come up with brilliant ideas to either Re-position the brand or even launch a sub-brand with a new Positioning (though this may also require some convincing of higher-ups, including your marketing team. No business case here as well).

Kamil’s BONUS: A bit more about competition. It's important to prioritize your key competitors, as it's likely that your target audience already has a strong perception of the top two players in your category.

If you find yourself ranked third, focus on taking down number two. If you're in second place, set your sights on overtaking the leader. Just remember to avoid direct confrontation with any of them. Strategize smarter, not harder!

Up till now, you’ve identified your Profitable Target Segment and uncovered its Growth Potential. Now, it’s time to weave your analysis together and craft a compelling story. Let’s do this!

Putting Profitable Target Segment & its Growth Potential Together To Build Your Business Case

Ready to Build Your Business Case? Follow These Simple Steps!

Step 1:

Start with your Profitable Target Segment. Identify your Target Segment, Average CLV of the Segment, Customer Base of the Segment, and Growth Rate. (Repeat the same process for other segments that you want to consider for comparison).

Step 2:

Use the following easy-to-follow formula for comparison.

Average Segment Profitability = (Average CLV of Segment x Customer Base of Segment) x Growth rate

Example based on Scenario 3:

It's pretty obvious that Segment A is taking the lead from a financial standpoint—an Average Segment Profitability of $1,000,000. However, you have to ask yourself, can we enhance the experience for our customers in this segment? Let's move on to Step 3 and find out!

Step 3:

You'll see your brand's NPS as well as your competitors'. When you compare them in Scenario 3, you'll notice a High Growth Potential for both you and your competitors. What does this mean? Simply put, no one is currently delivering a customer experience that satisfies everyone—but you can. This creates an exciting opportunity for your brand to step up and be the one to make a difference. Intrigued? See the details below:

Congratulations! Your business case has already been sold. However, the story doesn't end here. Your management will ask "That's fantastic, but how will you make it happen?" Don't worry, this is where your secret plan comes into play!

Secret to Sharpen Your Focus

Step 1:

Start by highlighting the areas that need the most improvement and growth. The following green bar chart will help you pinpoint where to focus your management’s attention. Once you've got that sorted, it's time to activate and retain your loyal Promoters while addressing any concerns from Detractors.

For example, you might point out that “while Detractors offer growth opportunities, the largest customer base is made up of Promoters who bring added value and loyalty to your business."

Step 2:

To take it a step further, consider the second bar chart as well. It's important to prioritize activating, retaining, and growing Promoters, while also addressing areas of improvement that Detractors have pointed out. For example: take a look at the graph below—Discount Offers, Personalized Recommendations, and Live Chat Support are all vital to NPS. However, it's interesting to see how Promoters, Passives, and Detractors view these features differently.

Kamil’s BONUS: I’ve delved deeper into this topic in my previous article. Learn more about sharpening your focus here ?‘Put a Hollywood Spin on Your CX Insights with the Three-Act Structure’

From here onward you can further drill down to the 3 NPS drivers: Discount Offers, Personalized Recommendation, and Live Chat Support as an example. You can also identify the journey steps that customer takes to meet their need, identify the moment of truth, and recognize key drivers impacting a specific journey. This will lead you to prioritize your next actions. Again you can quickly learn how to do this today, through this article.

The focus will help you understand both your competitors and customers better, allowing you to find the sweet spot between them: providing excellent experience while still achieving great profits. By leveraging data and CX metrics, you can further sharpen your focus to make sure that your efforts are successful in driving sales. By focusing on what matters most you’ll be able to increase your chances of success and drive financial growth.

P.S.: This article is the second part of a series. In the next article, 'Measuring the Impact: Discovering the Influence on CX, Value, and Revenue (Step-by-Step Guide)' , we will talk about how to make changes that have a big impact and how to decide when it is best to make those changes.

Did I miss something important? Let me know if you have any ideas, thoughts, or questions.

Kamil’s Blog at CXPA

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