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Growth in a competitive environment takes some creativity.  One way to address your growth challenge is through customer and market segmentation. Segmentation is probably one of Marketing’s most common tools. The basic concept behind segmentation is that grouping targets together that share characteristics can increase your company’s ability to grow more effectively and efficiently.  Market segmentation models should be a basic tool in every organization’s growth arsenal.

Market Segmentation Informs Your Strategy

Market segmentation informs your marketing strategy. It is a technique to identify and qualify a market and its opportunity.  Segmentation involves dividing a broad target market into subsets of customers, regions, or industries that have, or are perceived to have, common needs, interests, and priorities.  With market segmentation, you company can determine which customer groups it is best suited to serve and which of your solutions will meet the requirements of its selected segments and outperform your competition.

To segment a market you need to understand the requirements of customers and, therefore, how they decide between one offer and another. When choosing between competing offers, customers select the offer that meets their needs better than any other. To grow, win market share and retain customers, your company must ensure that your offers meet these needs better than any other and are perceived as being the most attractive customer value propositions.

Successful segmentation takes data and analytics. From the analytics applied to the data, you can derived insights that enable use to form groups of prospects and customers who share the same or very similar value criteria. You can use the insight you gain into what the segment values to develop and implement a strategy.

Defining a Market Segment

The process of market segmentation entails dividing customers into distinct groups. Unique. This is the essential word. Market segments are unique. Each segment has a discrete set of attributes. Those within a segment share the attributes. This set of unique attributes is what enables you to define and predict the success level of your sales and marketing initiatives and to establish metrics.

 The key is to pursue market segments most receptive to your value proposition and solutions. There are a number of  methods of segmenting, two of the most commonly employed are demographic and psychographic. Demographic variables are based on social statistics: such as age, sex, race, income, occupation, education, household status, (in B-B think size, revenue, industry, title, etc) and geographical location. Psychographic segmentation is based on lifestyle, attitudes and opinions. In B-B think purchasing preferences, culture, legislation environment, product use patterns, and product benefits.

These 3 guidelines apply when creating market and customer segments: 

  • Make sure the segments or target markets are accessible to you.
  • Make sure each segment is large enough to provide a solid customer base.
  • Develop separate metrics, marketing strategy and tactics for each segment.

Four Segmentation Considerations

As you can see there are a number of ways to approach customer and market segmentation. There is no one size fits all methodology.  Whichever approach you select it should help the organization achieve its business outcomes. This means that before you segment you should have a clear understanding of the business. Keep these considerations in mind as you apply the guidelines.

  1. Alignment: Before deciding whether to use a predictive, descriptive, behavioral, or attitudinal segmentation approach, evaluate your customers needs and then align these needs with your product/service offerings. Select a segmentation approach that connects the organization’s marketing needs with the customer needs.
  2. Start with the business question. Beginning with a business question will help you determine what you need to know about your customer and market segments. Take the time to write out your question as simply and succinctly as possible.
  3. Clarify the purpose of the segmentation. If you need a way to classify newly acquired customers into a segmentation model, you will want preference-driven descriptive segmentation. If you are looking to create a segmentation model to support cross and up-sell efforts, then you will want a behavior-driven predictive segmentation approach. The former is a more explanatory approach, the latter provides a better way to score and classify. You may need to consider using both.
  4. Let the business need drive your segmentation not your data. Companies often select their segmentation approach on the data available rather than on the business need. Companies with rich transactional data tend to build behavioral segmentation models (grouping customers based on spending levels, frequency of purchase, etc). Those companies with a wealth of information about customer preferences develop attitudinal segments. It’s a mistake to let your data select your segmentation. Make your segmentation decision based on the marketing need.

A Needs-Based Approach to Market Segmentation Models

The guidelines and considerations tend to encourage us to recommend building a market segmentation model with the customer’s point of view. This is a bit different than what you may have learned in business school, where the focus was on using demographics as a way to create segmentation schemas. The traditional approach tends to create a static view of segments that may not be effective in today’s dynamic environment. For example, in the traditional approach segmentation may be based on revenue, company size, technology platforms, etc. to classify targets. The classifications remain until the customer achieves the next stage in the schema.

By taking the customer view, the model is built more on needs/problems, requirements, and behaviors. We would encourage you to make needs the basis of  your segmentation approach. Customers who share demographics may actually have different needs.  For example, someone in the role of a CFO may have similar education and responsibilities.  The size or industry may have little impact on how to create segments around CFOs. However, different CFOs have different needs and behaviors. Some CFOs may need to serve in a more strategic capacity. Others may have responsibilities for functions outside of the traditional finance roles, such as responsibilities for talent. These different needs may reflect different personas. If so, you may have the makings of separate market/customer segments.

Remember market and customer segments are unique from each other.  There should be separate answers to these five questions for each segment:

  1. What does this specific set of customers and prospects value?
  2. What is the primary reason this set of customers buy?
  3. What features (product, service, experience, etc.) are most important to this set of customers?
  4. What is the buying process for this set of customers and what channels, touches, and content resonate with this group?
  5. What are the most important supplier criteria for this set of customers?

Base Your Segments on Information Not Intuition

The answers to these questions should be based on data not your gut feel. Do your homework.  Properly executed, market segmentation research can help successfully differentiate customers. Research is an essential part of being able to segment the market and successfully differentiate customers. The purpose of the research is to tease out the unique properties of the segment, such as pain points, product/service requirements, supplier preferences, buying criteria, buying process, and so on, so you can create and design product, pricing, channel and promotional strategies that best appeal to the target.

Generally you will need both primary and secondary research to create the segments. Once you have identified the distinguishing variables, you will want to size both the number of potential buyers and the opportunity to determine if the segment warrants your investment.  

There are affordable alternatives to conducting quantitative research. Explore secondary data resources and consider conducting qualitative research. Trade and association publications and experts, basic research publications, key trade buyers, can be good sources for secondary research. Use qualitative research to explore underlying motives and needs. This will be vital to creating persona needs based segments. A good starting point is your existing sales data. Examine the data you already have to look for patterns in customer behavior.

These  4 primary steps will help you begin to think about how to approach your market segment research. This is a very important facet of marketing and we probably can’t do this question justice in this short space. 

1. Establish a market opportunity structure.

2. Create a segment scorecard. The scorecard will be comprised of the components you will be using to assess each segment. Often these components take into account a variety of factors such as the segments’ value to your business and the segments penetrability.

3. Map the segments to your value proposition. This allows you to evaluate the segments and select those with the best fit for your company.

4. Then map the segments to your tactics and functions to determine appropriate internal requirements, procedures & processes necessary to tackle each segment.

Don’t boil the ocean. It’s important to have a starting point for your segmentation.  Here’s one way to identify an initial segments for your research. Make a list of products or services down one side of a page or flip chart.  Then listing the types of customers to whom they are sold across the top and putting an X in each row and column where each is actually sold. Most often, this will result in more combinations than you can effectively work with.

By combining like items with like buying behaviors you can usually get to a workable number of market segments to analyze. Focus on the top 3-5 groups, because this is usually where the largest overall business opportunities are. Unless there is a significant reason to include such a small segment by itself, it should either be omitted or combined with a similar segment for analysis. By consolidating the products/services and the customers to whom they are sold into groupings with similar behaviors in the market place and analyzing these groups as market segments, you can begin to establish the discipline and rigor necessary for effective analysis.

When done well, segmentation research should help identify new target markets and even new product opportunities to support your growth initiatives.  Beware not every segment is worth pursuit. A key aspect of selecting a market is whether it will be profitable. Therefore before you pursue a market,   we recommend conducting a profitability analysis. Profitability analysis is a crucial part of the segmentation process because it helps in determining which customers you should target.

Profitability analysis by product or service is usually much more readily at hand than profitability analysis by customers. Customers are however what generate revenue. When doing profitability analysis you may learn that 20% of customers or a segment actually produce 200% of the profit, which means that pursuing other segments or customers may actually cost money and reduce shareholder value. One last thought on this subject, it is not necessarily the largest customers that generate the greatest profits; in some instances they even generate losses. The bulk discounts the larger customers often demand and the service levels they require can seriously hurt your margin

After you determine a segment is worthwhile to pursue, you will need to develop and execute the strategy that will allow you to gain access and traction within the segment.

Segmentation, Personas, and Customer Journey Mapping are Related

Market segmentation helps you discover niche markets and enable you to be more efficient with your marketing resources. Market segmentation provides a means to explore the underlying constructs driving customer behavior and initiate the first step in mapping the customer buying journey and create personas within that segment. These three competencies are interrelated.  

Create a segmentation model to support targeting

Select a Customer and Market Segmentation Method

Meaningful segmentation depends on finding patterns in your customers actual buying behavior. To develop meaningful segments, you will need to gather the relevant data about which benefits and features matter to your customers, what customers are willing to pay, the relative advantages and disadvantages customers identify with your existing offerings, as well as data on emerging social, economic and technological trends that may affect purchasing and usage patterns.

From Segmentation to Strategy

After you define the segments and have selected the segments that matter most to your company’s financial performance, you can formulate a strategy using the segmentation.

Incorporate your market segments into your strategic planning process. Market segmentation serve as a guide to how you and your customers can be engage with each other. 

For example, perhaps one growth strategy might be mirroring.  This strategy is based on targeting customers in new segments who mirror the characteristics of your existing best customer segments.  Another approach is to design your strategy to target a specific customer issue, such as sustainability.  By knowing whether the product or service selection is based on pure functionality or something of more consequence allows you to think differently about your strategy. For example, if your research reveals a persona a “trail blazing” persona and you have a leading edge technology then you’ll want to develop your strategy accordingly.  Whatever  strategy you choose, it’s important that it make sense to the targeted segment and that it enables the organization to focus its efforts.

We have a few resources available to you to help you start. Check out the market segmentation lab. Learn more about how we can help you with your segmentation efforts using our QuickStart Intelligence(tm) and Avantage Target services and products.

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