Segmentation is the process of clustering prospective or customers into different groups so that each group is comprised of individuals that share a similar level of interest in the same or comparable set of needs. Market and customer segmentation matters when you want to tailor your offer (product, channel, price, and communication) more precisely to different groups based on their needs. Marketers employ customer segmentation to understand the economic value and economic potential of each group.  It is one of the most basic responsibilities of marketing. It is marketing’s job to match a distinct value proposition with a unique segment.

The Process of Customer Segmentation

The process of customer segmentation starts with research and market analysis to identify key segments. This process generally requires some type of qualitative and/or quantitative research. Most organizations do not have the resources to pursue every potential segment. Therefore one of the key goals is to identify those customer segments with the greatest opportunity and potential economic value that your organization can access. The challenge comes in being able to compare segments.

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Create a Data-Driven Method to Customer Segmentation

The best way to avoid pursuing segments based on internal biases is to take a criteria-based approach. This data-driven approach requires you to establish criteria that you apply equally to the customer segments.  With this approach you focus on making fact-based decisions to your segmentation. Criteria-based segmentation entails identifying and selecting criteria that you can use to evaluate segments to determine those with the best fit.  We advise choosing criteria that fall into two dimension:  accessibility and opportunity.

Define your criteria and use data to define your segments

Two Dimensions for Creating Your Customer Segmentation Model

Accessibility addresses how easy it will be for your company to enter the segment.  For example, it might be easier if you have some existing customers in the segment that will serve as references and/or advocates. So existing customers might be a criteria.  The degree of competition might be another criteria to consider regarding accessibility.

Opportunity addresses whether the segment is large enough or profitable enough to pursue.  The number of companies in a segment, their size, or the number of potential partners, and even the degree of adoption of a particular technology are all examples of opportunity criteria.

Once you determine the criteria, you will want to weight and rank them.  Then you can begin your research and evaluate each potential segment against the criteria.  This approach creates an apples-to-apples comparison.  Want to automate the process?  Check out our patent-pending Avantage Tools Suite(r). This web-based, easy-to-use, easy-on-the wallet tool was designed to help any organization address evaluating market and customer segments and build a customer segmentation model.

Segmentation Best Practices

The idea behind market and customer segmentation is that customers can be organized into discrete groups, enabling you to tailor your product, message and even channel that that segment’s “hot buttons”.  Segmentation improves the effectiveness of your marketing program and messaging. Intuitively market segmentation makes sense, yet it can be hard to put into practice.

Research suggests that those firms that can effectively operationalize segmentation reap between a 20% to 150% increase in marketing effectiveness. We do quite a bit of segmentation work for our customers and we’ve been able to identify some best practices.  Here are five best practices for approaching market and/or customer segmentation.

1. Identify the fundamental values that drive observable behaviors. Each market/customer segment has a set of discrete and identifiable beliefs that drive their purchasing behavior. For example, some customer sets make their purchasing decision based on whether the product increases their level of control. Others may be care more about the degree of customization available. The traditional approach to segmentation primarily focuses on surface-level tendencies, such as channel preference or demographic data. While this information is helpful, good segmentation also addresses the values that influence the purchasing decision and process.
2. Effectiveness over efficiency: The whole point of segmentation is to recognize the differences between groups. Yet, if the outcome is that every target group receives the same message, the exact same mailing, hears the exact same outbound telemarketing script, then the whole effort was for naught. While it may be more efficient to send everyone the same direct mail campaign, it will be less effective. A truly effective campaign design must be driven from an understanding of that segments values and buying motivations, creating engagement rather than simply transactions.
3. Look beyond marketing communications. A segmentation schema impacts how the business competes. It is about more than the copy or images used in a campaign. Segmentation has implications beyond marketing communication program. Segmentation can impact the alliances you pursue, your technology and product roadmap, your channel and pricing strategies, the kind of sales people you hire, and so on. Therefore members of the leadership team outside of marketing need to understand and be engaged in the process.
4. Do your homework. Guessing at the attributes to develop a segmentation schema is a lot like guessing what this week’s lottery numbers are going to be. Sure, you might win, but the odds are not in your favor. Good segmentation is going to require you to engage in research. If your company’s future is riding on the segments you target, do your homework and gather some data points outside what you think you know and build a model based on observed behavior.
5. Track the right metrics: Lack of metrics, ineffective metrics, and misleading metrics all contribute to keeping marketing departments from operating on a higher productivity plane. Calibrate your metrics to look at market share, share of preference, share of wallet and lifetime value in regards to your market and customer segments rather than on response rates, click through rates, etc.

For more help with segmentation consider our Market Segmentation Workshop. 

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