Customer and Market segmentation – A New Way To Look At Your Market
Customer Segmentation: A Fresh Approach
Customer and market segmentation are associated with large enterprises and big budgets. They have risen and fallen (and risen again) as popular techniques for resource planning and strategy development.
In reality, segmentation works for any size company and customer base. Small and medium-sized businesses can borrow this concept from big business, and do it better.
Here’s a few new ways to look at customer segmentation and how it can work for you:
What is Customer Segmentation? Market Segmentation?
Customer segmentation is the process of taking your current customers and categorizing them into “buckets” to help you make smarter business decisions. The goal is to figure out which segments are most profitable and prioritize resources to serve these customers better as well as grow the segment. Resources include product development teams, support staff and marketing budgets.
Segmentation can be based on many different factors such as geography, demographics, behaviors, etc. Within a segment, customers should have the same needs and behave in the same way. If they don’t, you need to break customers down into smaller or different segments.
Market segmentation is similar in that it defines segments based on customer characteristics and behaviors. There is one specific difference: you typically use market segmentation BEFORE you launch a product or service while customer segmentation occurs AFTER you are already serving this market.
How does Customer Segmentation apply to Small & Medium Businesses?
Large enterprises embarked on customer segmentation long ago to try to prioritize resources with the theory that they could be more profitable overall. However, small and medium-sized businesses tend to use simpler resource models – they don’t need a complex algorithm to figure out which leads to contact or which customer requests to address.
Small and medium businesses use segmentation to…
- Organize the sales teams by assigning individuals to specific customer segments
- Assign individuals from support teams to specific segments
- Create and prioritize targeted marketing campaigns
- Identify new products and services for profitable customer segments
Why did some companies stop using Customer Segmentation?
Not all segmentation variables are useful. According to Kotler & Armstrong, “Consumers must respond in similar ways to marketing efforts; there is no use separating businesses or customers if their behavior is the same.” For example, if you are selling everyday silverware, it doesn’t make sense to segment customers based on occupation – nurses use the same spoons as accountants.
Lack of Results
According to Bain & Company’s annual survey, the percentage of companies using customer segmentation has steadily declined in recent years. A few experts regretfully admit that customer segmentation has failed to deliver the results promised. While customer segmentation is still regularly practiced, we may be looking at the wrong variables.
New Ways to Look at Segmentation
The answer to using customer segmentation may lie in the original definition – analyzing customer behaviors and using those behaviors to drive how you segment customers. For too long businesses segmented on easily identifiable characteristics such as consumers’ age and gender and businesses’ revenue and size. Instead, we should be focusing on what customers actually want to do.
Leo McGinneva captured this perfectly in his quote about people purchasing drill bits; “They don’t want quarter-inch bits. They want quarter-inch holes.”
Bayer and Taillard promote a new framework for customer segmentation in the Harvard Business Review based on what customers actually want to do with a product.
How can you use Segmentation for your business?
Perhaps customer segmentation is useful after al IF we approach segmentation with customer needs in mind. Here’s a practical guide to begin using segmentation in your business:
Step #1 Capture customer data
We know we just said to stop segmenting on the easy variables. However, some of these segments may turn out to be useful and they provide the perfect starting point for any segmentation project. As appropriate, capture the following information about your customers. (Tip: Do NOT interrogate customers during the sales process – you don’t want to be annoying.)
- Marital Status
- Business size
- Physical address / proximity
- Surrounding areas
It’s best to gather this information in a Customer Relationship Management (CRM) system. Next, if possible, identify the most profitable customers. Look for trends and commonalities across your customer base.
Step #2 Interview customers
Now that you’ve identified some of your most profitable customers and several common trends, begin interviewing customers. Ask these questions:
- How do you use our product?
- How often do you use our product?
- What problems does our product solve for you?
- How does our product benefit you?
Step #3 Combine behaviors with characteristics to define customer segments
Use the combination of customer characteristics and customer behaviors to identify specific segments within your customer base. Remember that the behaviors within each segment should be the same – whether it’s how they use the product or the types of marketing information customers appreciate.
Here are a few example segments based on characteristics, behaviors or both:
- Consumers who travel frequently and need mobile solutions
- Medium businesses experiencing rapid growth with a desire to be more efficient & invest in technology
- Small businesses in the manufacturing industry
Step #4 Apply what you’ve learned
Finally, you can use what you’ve learned about your profitable customer segments to make smarter business decisions
- Assign your best sales professionals to the most profitable customer segments
- Organize support staff by customer segment and invest in extra training for each specific segment
- Create marketing campaigns with specific messaging for each segment
- Target marketing campaigns to specific segments (This is easier than ever on social media, where you can target interests, characteristics and more.)
- Identify new products and services for existing customer segments
- Identify new potential market segments that are similar to existing profitable segments