NW Strategic Energy Management: Guide to SEM Customer Segmentation

Transcription

1 NW Strategic Energy Management: Guide to SEM Customer Segmentation Market Analysis and Planning Team December, 2014

2 Table of Contents OVERVIEW... 2 BACKGROUND... 2 STEP 1: NARROW THE FOCUS BY DEFINING THE ADDRESSABLE MARKET... 3 STEP 2: GROUP CUSTOMERS INTO SEPARATE CLUSTERS... 4 STEP 3: PROFILE THE INDIVIDUAL SEGMENTS... 5 A. Preliminary Customer Segment Definitions... 5 i. Business Leaders... 5 ii. Cost Cutters... 6 iii. Premium Pragmatists... 6 iv. Process Differentiators... 7 v. Traditionalists... 7 B. Summary... 7 C. Completing the Assessment of the Current Set of Customers... 8 D. Organization vs. Individual Characteristics... 8 STEP 4: CHOOSE WHICH SEGMENTS TO TARGET... 9 Mapping the Segments STEP 5: POSITION SEM FOR THE TARGETED SEGMENTS Preliminary Value Propositions Value Proposition Pyramids WHICH SEGMENTATION APPROACH IS RIGHT FOR YOUR ORGANIZATION? The Abbreviated Path The Recommended, or Full, Path NEXT STEPS APPENDIX A

3 OVERVIEW In the initial stage of its Market Strategy development, the Market Analysis and Planning (MAP) work team began the process of customer segmentation during the Market Analysis step. The purpose of customer segmentation was to enable members of the Northwest Industrial Strategic Energy Management (SEM) Collaborative to easily target specific groups, and tailor solutions to Industrial facilities that provide a high return on SEM efforts. Segmentation is part of the first stage of the market strategy framework adopted by the MAP team (Figure 1). Figure 1: Market Strategy Framework Segmentation is a long-term strategy, and should be consistent with the Collaborative s mission and long-term objectives. Knowing that the characteristics of any one segment are stable over a long period of time makes it easier to forecast demand patterns and plan future actions. The work on Market Analysis has focused on the current set of SEM customers. The MAP team completed many of the key activities of their customer segmentation work, including defining and profiling five potential segments for the addressable SEM market. They also identified market adoption drivers and developed preliminary value propositions for the segments. To finalize the segmentation work, the MAP team needs to finish the market sizing process by evaluating their current customer set, grouping them into the segments, and completing an aggregate view of the total number of Industrial facilities in each segment. The purpose of this Guide is to provide a context for the segmentation process, describe the work that has already been completed, and recommend specific next steps for completing the SEM market segmentation step. The completed segmentation will help shape goals and strategies, as well as business models, for specific targeted segments. BACKGROUND Customer segmentation (also known as market segmentation) is the grouping of potential customers into discrete clusters with similar needs and behaviors. Segmenting the SEM market into smaller groups helps to identify facilities that provide a high return on SEM efforts. It can also guide the development and delivery of targeted marketing programs and SEM solutions based on the customers needs, their buying behaviors, and how they manage their operations. Customer satisfaction is related closely to value as perceived by the customers themselves; the closer SEM programs and solutions meet the perceived needs of individual companies, the more 2

4 likely those companies are to adopt SEM, continue with it, and achieve persistent energy savings. In order to be useful, customer segments must have the following characteristics: Meaningful Are the segments significantly different for developing marketing strategies? Distinct Do customers fall clearly into one segment versus another? Sizeable Are there enough of these customers to make it worthwhile treating them as a separate segment? Identifiable in real life Can members of the Collaborative cite actual examples of the segments in the PNW? STEPS IN THE CUSTOMER SEGMENTATION PROCESS There are five major steps in the segmentation process: 1. Narrow the focus by defining the addressable market 2. Group customers into separate segments 3. Profile the individual segments 4. Choose which segments to target 5. Position SEM for the targeted segments These steps offer a robust method for segmenting current customers. For those organizations that want to continue the segmentation processes, the Guide provides a step-by-step process to complete their work. However, not all organizations may want, or need, to complete all of the steps, based on their market goals and resources. The last section in this document describes two approaches, recommended and abbreviated, to help each organization determine the approach that works best for them. STEP 1: NARROW THE FOCUS BY DEFINING THE ADDRESSABLE MARKET In this first step the MAP Team defined the addressable market, choosing to segment by electrical energy usage (natural gas usage was not available in the database). Using definitions consistent across the major regional utilities (BPA and ETO), the Industrial sector customer facilities were broken out into four different categories to help understand the different industrial users. Very Large (3aMW and above) Large (1aMW to 3aMW) Medium (1M kwh to 1aMW) Small (below 1M kwh) The team found that Small facilities, roughly 15,000 of them, comprise over 80% of the overall Industrial facilities. However, they consume only 7% of the total electrical energy. Medium Industrials make up about 12% of the facilities and use about 16% of the total energy. Large Industrials constitute about 2% of facilities and consume about 14% of the total energy. Very Large Industrials make up only 1% of facilities but use about 63% of the total energy (Figure 2). 3

5 Figure 2: Customers Segmented By Electrical Energy Use STEP 2: GROUP CUSTOMERS INTO SEPARATE CLUSTERS Once the MAP team had sized the addressable market, the next step was to begin to gather more of what is known about regional customers and to look for like groups that had similar behaviors, values and needs the actual customer segments. In order to cluster companies within the addressable market into distinct groups, the MAP Team identified the following parameters: By company descriptions (who they are) By usage (how they use energy) By needs and preferences (what they want) By attitudes (how they think) The team then brainstormed a list of attributes that fit within each of the parameters (Figure 3). Figure 3: Clustered Attributes 4

6 STEP 3: PROFILE THE INDIVIDUAL SEGMENTS Based on the brainstormed attributes, patterns of common characteristics emerged to form parameters from which the team defined five clusters. When describing the segments, the Team used the following guidelines (Figure 4): No one parameter is comprehensive enough to adequately describe a segment Within a segment, individual companies may display a range of No segmentation grouping is perfect Figure 4: An Imperfect Grouping Is the Norm With those precautions in mind, the MAP Team identified the following five segments for the current Industrial SEM customer set: Business Leaders Cost Cutters Premium Pragmatics Process Differentiators Traditionalists A. Preliminary Customer Segment Definitions i. Business Leaders The Business Leaders track their company progress from a triple bottom line (financial returns, social responsibility, and environmental impact). Although their businesses are typically mature, they continue to effectively grow and expand. Part of what separates them from other potential SEM customer segments is their ongoing focus on evolving their business models and delivering new or enhanced products and services to their customers. They are often early adopters of new solutions, and they have a strong track record of results they are not just good thinkers but also good doers. 5

7 The Business Leader cluster is composed of companies that are politically or socially involved and participating in activities that align with their business values. They often encourage their senior management to be involved in social and political activities, and follow through beyond initial efforts. While the Business Leaders are certainly attuned to financial considerations and see that as a benefit of SEM, their progressive culture and desire to succeed enables them to see SEM s contribution to the environment and their companies brands as equally desirable. Consequently, SEM implementation appeals to them on various levels. Their company leadership is personally committed and will likely support being closely involved in SEM implementation. From their point of view, SEM implementation reinforces the adoption of other new practices and technologies. The Business Leaders strategic orientation, coupled with their ability and willingness to invest, means they will are able to look beyond the numbers and assess intangible benefits as well. They are attuned to their organizational cultures, and clearly see and value how SEM impacts their cultural environment. ii. Cost Cutters Customers in this segment typically provide commodity, low-margin products, and are in the mature phase of their business cycle. Typically, their margins are continuing to shrink and they are looking for multiple ways to save money. Sustainability isn t a core value, but their downstream supply chain may be making demands on them to show improvements in this area. They may also be facing new regulatory restrictions that may impact their energy use. Investments in energy management are likely to be incremental (Operations and Maintenance), and evidence of cost savings must demonstrated early on. They will weigh the potential allocation of resources against other priorities very carefully. iii. Premium Pragmatists Customers in this segment have specialty or custom products that reward them with higherthan-average profit margins. While these customers are focused on the bottom line, they are in a position to invest human or capital resources in their business operations. They may either be in an early growth stage or a mature stage. They enjoy steady growth to maintain profitability but are not in such a rapid growth mode that they have no time to consider or make changes. These companies have manufacturing and supply chain processes in place already, but they are willing to make changes if it impacts the bottom line and provides a solid return-oninvestment without impacting their product. If improvements in energy efficiency can help make them stand out even further from the competition, all the better. These customers may be willing to invest in capital improvements and/or more long-term energy management activities, and consequently will evaluate comprehensive solutions. While the return has to be there, there s more room for greater investment than with Cost Cutters. 6

8 iv. Process Differentiators As a group, the Process Differentiators are companies that use their process acuity as a competitive advantage. Their ability to deliver product faster, better or more reliably sets them apart. These companies are typically engineering or operations-focused companies who are smart, process-oriented, and emphasize continuous improvement from top to bottom in their organizations. They engage their employees, and see them as valuable assets and key components of future change. They are unafraid to make changes, and will embrace those changes if they see the potential business benefits, especially if the changes can be integrated into their current infrastructure. They do not rely as much on what others do but focus on how to strategically make the best with what they have. Process Differentiators are likely to be experiencing or expecting to experience either regulatory or supply chain demands, and want to get ahead of the curve. v. Traditionalists The companies in the Traditionalist cluster are most likely in the mature phase of their business cycle, larger than many other industrials, and they have survived many changes. As a result, their management tends to value tradition, complacency and uniformity. These companies have manufacturing and supply chain processes in place and they ve been successful, but they have implemented many initiatives and unless the line of sight between the changes and their bottom line is crystal clear, they don t initiate additional programs. Otherwise, they have it covered or it doesn t fit our business. It is not complacency. They doubt that most new management approaches, including energy management, are worth the time and expense. Some Traditionalists are suspicious of green initiatives and are unlikely to willingly adopt SEM under any circumstances. Traditionalists tend to rely heavily on references from other companies. Anything new or different is to be treated warily until proven out. Regulatory or upstream supply chain requirements may have been forced them to involuntarily adopt various programs. Given their overall concern about anything that seems new or different, along with the rate of change they ve already experienced, SEM feels very much like the next management flavor of the week. Traditionalists tend to have well-defined processes for evaluating return on investment (ROI), and once energy management programs can be shown to have a positive impact, they are more likely to implement them. Like the Cost Cutters, changes tend to be incremental (Operations and Maintenance-based) rather than company-wide. B. Summary A summary of the key characteristics of each of the customer segments is outlined in Table 1. 7

9 Business Leaders Cost Cutters Premium Pragmatists Process Differentiators Traditionalists Table 1: SEM Customer Segments Politically and socially progressive Engaged leadership Strategic, long-term planners Strong management and business processes Strong results ( doers as well as thinkers ) Early adopters Mature stage of business cycle Need to improve margins Focused on cost savings May have other business drivers (supply chain or regulatory) Early or steady growth stage of business cycle Have good margins Able to invest in programs that help the business Looking for market differentiation Willing to make changes Process-oriented Belong to process-focused groups Sophisticated management and manufacturing processes Drive continuous improvement throughout own companies Influence improvements up and down the supply chain Risk adverse Resistant to change Initiative fatigue Suspicious of green initiatives Established ROI methodologies C. Completing the Assessment of the Current Set of Customers Bonneville Power Administration (BPA) and NEEA have already put together a preliminary grouping of their current customers from the addressable market into the five segments. Other Collaborative organizations, including the Energy Trust of Oregon (ETO), intend to complete segmentation in early Using the summary of the key characteristics already provided, a checklist has been created to help Collaborative members match the characteristics of individual companies within their customer set (Appendix A). As Collaborative organizations complete this process, the Industrials identified for each organization by group can be rolled up into an aggregate view of the number of customers within each segment. D. Organization vs. Individual Characteristics When evaluating the accuracy and usefulness of the segment descriptions, the question often arises, Are we talking about the company or the individual? This question is closely related to Chooser vs. User in Business-to-Business (B2B) marketing. In some cases, the individual (or group of individuals) who chooses to adopt SEM into the business is not representative of the employees who will carry out the SEM programs. 8

10 The Industrial SEM segments and descriptors were developed primarily with buying characteristics in mind. Psychological descriptors, such as socially progressive, usually apply to the individual or group that makes the final buying decision. Some descriptors, such as risk adverse, may reflect the overall organizational culture. A rule-of-thumb is to market and sell to the Chooser and design solutions for the User. STEP 4: CHOOSE WHICH SEGMENTS TO TARGET The next step is to critically evaluate the segments, and define the criteria to aid identification of facilities with the most potential for return on SEM investment, or just as importantly, identify the types of facilities that provide little or no return. Prioritizing the segments is important since clearly customers are not all the same. This kind of evaluation helps Collaborative members be clear about when and how to engage with different types of customers. Using a segmentation map aids in prioritizing different segments. The map has an X and Y axis (Figure 5). The MAP team developed a set of adoption drivers for each of these axes: Value to Collaborative Members (x-axis) Adoption Readiness (y-axis) Value to Collaborative Members represents the potential value of customer segments to the Collaborative and how the segments would contribute to achieving regional goals. Adoption Readiness assesses the likelihood of both adopting SEM and implementation success. Figure 5: Adoption Drivers Some information about the segments is known from the beginning; other information is gathered over time. For example, this kind of assessment might be used in the initial stages of an engagement to decide whether or not the resources required to implement a program are likely to be justified. Gathering additional information about a particular customer within a cluster might change that point of view. This helps Collaborative members be clear about when and how to engage with different types of customers, or even if they choose to do so. Figure 6 summarizes the prioritization criteria proposed by the MAP team. 9

11 Figure 6: Preliminary Adoption Drivers Mapping the Segments The MAP team has already ratified the adoption drivers for the Collaborative. The next step in the process is to complete sizing the segments. Once this sizing exercise has been fully accomplished, the MAP Team can create the segmentation map, plotting each segment on the x and y axes. Figure 7 shows an example of the map could look like. The size of the circles represents the relative size of the segment in the Collaborative s market. Note that in this example, segment 5 is a very large segment, but may not be a good segment to target because of its low value to the Collaborative and its low likelihood of successfully adopting SEM. Again, a segmentation exercise can reveal which customers to target, and which to ignore. Figure 7: Example Segmentation Map 10

12 STEP 5: POSITION SEM FOR THE TARGETED SEGMENTS Preliminary Value Propositions As a prelude to the next stage of market strategy development, shown in Figure 1, the MAP team has been establishing a preliminary set of value propositions for each of the customer segments. A value proposition, or positioning statement, summarizes why a customer should use a particular program or a service. Basically, this statement should convince a potential consumer that one particular program or service will add more value or better solve a problem than other similar offerings. Key questions that are current being considered for each segment include: The problem being solved with SEM for that segment What SEM is and how it solves that problem Why investing in SEM is better than any alternative strategy (e.g. including doing nothing ) Value Proposition Pyramids Once the positioning statements have been created, value proposition pyramids can help prioritize the benefits that are most attractive to each segment. The pyramids can help align program designers and messaging experts. The base of the pyramid identifies benefits that are common to all SEM segments. The upper part of the pyramid identifies the benefits that are unique to a particular segments (Figure 8). Figure 8: Example Value Proposition Pyramid for Cost Cutters Once the benefits are identified, strategic messaging can be developed for the specific segment (Figure 9). This high-level messaging is not meant to be copy material, but to drive overall messaging strategy. It can be adapted as need. 11

13 Figure 9: Example of Messaging with the Value Proposition Pyramid WHICH SEGMENTATION APPROACH IS RIGHT FOR YOUR ORGANIZATION? As noted earlier, there are different methods to segmenting customers. These approaches include: 1. Using External Data: Using external data is the simplest approach, but has limited use. Here Collaborative members group customers based on available data such as energy usage to create distinct groups of customers within a market. Since companies in the same industry and of the same size may have very different need, this approach has limited use. This approach corresponds to Customers Segmented by Electrical Energy Use (Step 1). 2. Needs-Based: A second option is to group customers based on differentiated needs for SEM programs or services being offered. Ideally, the needs are discovered and verified through primary market research. The needs can be business, program and/or behavioralbased. This approach corresponds to the needs and attitudes specified in the Preliminary Customer Segment Definitions (Step 3). 3. Value-Based: One more option is to group customers by their value to the Collaborative. This approach corresponds to the X-axis value on the segmentation map, Value to Collaborative Members (Step 4). These different approaches provide distinct outcomes. They can be done alone or in combination. Market goals and available resources will help define the appropriate path to use. The Abbreviated Path If an organization has limited growth goals and is more interested in prioritizing the companies in its acquisition pipeline, then it should use an abbreviated approach (Figure10), or information from approaches 1 and 3. In the Abbreviated Path, an organization uses the addressable market data to segment customers by energy consumption. It can then assign a lifetime value to each potential customer, based on 12

14 the return of energy savings, minus the costs to acquire that customer and to maintain energy efficiency programs. In that way, the organization can prioritize which companies should next be brought in for SEM solutions. Figure 10: Different Market Strategies Need Different Segmentation Approaches The Recommended, or Full, Path The most robust method is to combine all three approaches, or the Full Path (Figure 10). The Full Path follows all five of the Guide s customer segmentation steps. It provides the most insights and can be used to target customers with messaging and programs designed to fit them. NEXT STEPS Based on their individual market goals, each of the utilities may take a different course of action in completing and using the segmentation models. Once complete, the MAP Team can revisit the customer segment definitions, update as required, and complete the Collaborative segmentation map for regional use. 13

15 APPENDIX A CUSTOMER SEGMENT CHARACTERISTIC CHECKLIST Customer Name: Date: Segment Business Leaders Cost Cutters Premium Pragmatists Process Differentiators Traditionalists Characteristics Politically and socially progressive Engaged leadership Strategic, long-term planners Strong management and business processes Strong results ( doers as well as thinkers ) Early adopters Mature stage of business cycle Need to improve margins Focused on cost savings May have other business drivers (supply chain or regulatory) Early or steady growth stage of business cycle Have good margins Able to invest in programs that help the business Looking for market differentiation Willing to make changes Process-oriented Belong to process-focused groups Sophisticated management and manufacturing processes Drive continuous improvement throughout own companies Influence supply chain improvements Risk adverse Resistant to change Initiative fatigue Suspicious of green initiatives Established ROI methodologies Strongly Present Somewhat Present Not at All 14