Segmenting for Success in Today’s Marketplace
It is axiomatic that not all customers are alike. They don’t look alike. They don’t act alike. They don’t have the same feelings about brands. They don’t drive the same amount of value. These differences are why customer segmentation is an essential element of every marketer’s analytic toolbox—at least every marketer who wants to maximize both the effectiveness and the efficiency of his marketing investments.
Segmentation is not a new concept. Companies have been segmenting markets at least as long as the idea of product line extension has been around. They have been segmenting advertising messages as long as they have realized that people develop different connections to their brands and therefore are stimulated to purchase by different motivations. And they have been segmenting customer portfolios as long as information technology has let them see what specific customers look like and what they have been buying, how frequently and through what channels.
The most successful marketers I know are companies that have embraced segmentation and are looking constantly for ways to enhance and evolve their segmentation strategies. They have seen the power in differentiated marketing and have taken advantage of the variability in the investment economics associated with different customer groups. They have allocated their spending toward customers who not only provide the highest value now, but also have the best potential to provide the highest value in the future. And to do this they have allocated spending away from unproductive parts of their customer bases, not unlike an investment banker who limits his losses in nonproducing assets and multiplies his bets on the sure winners.
Today, getting the best returns from segmentation requires businesses to employ multiple segmentations. That’s because in the complex world in which marketers now operate, where markets are fragmented but customers and businesses increasingly are connected, it is vital to know the who, what, how and why of customer behavior. In other words, to build relationships with customers, and not just promote products generally, means understanding customer characteristics, attitudes and behaviors. And no one segmentation scheme can depict all that.
No, to create true competitive advantage you need to view customers through several segmentation lenses simultaneously. By overlaying multiple segmentation schemes, marketers can determine not only who is buying, what they are buying and how they are buying, but also why they are buying. The converse is true, too. Moreover, finding and developing the highest potential pockets of customer value (which is, after all, the end game) requires this kind of capability. Here, very briefly, is an example of a company I think is on the right track.
A full-service investment and trading company I am familiar with has developed several segmentation schemes that it now has knitted together for business planning and marketing purposes. It has an attitudinal segmentation scheme, derived from survey research, which enables it to classify customers according to their financial needs and attitudes toward investing. This has been great for the strategic planning and product development departments. It also has lots of demographic data that allows it to slice its customer population into life-stage groups, an additional lens valued by its advertising department.
But the company found out that those segmentation lenses were not enough. To assess specifically who was engaged with the brand, whose relationship was expanding and whose was contracting, to discover who represented the best opportunities to increase its share of wallet as well as decrease where it was dangerously exposed to predatory competitors, and to determine who was driving its profit and who was detracting from it, the company realized it needed to leverage its vast amount of internal customer data on product ownership, financial transactions and channel interactions. So it developed a behavior-based segmentation.
Now it has overlaid the various segmentation schemes together and analyzed the finely cut customer subgroups that have been created. It has used this information in its long-range planning process and to inform its service model, customer experience and direct marketing programs. It has set segment-specific performance goals and has aligned diverse communication themes with the appropriate customer groups. Importantly, too, it has focused customer development efforts on the 50 percent of customers on either end of the spectrum who produce extremely high or low levels of profit.
In short, the multiple segmentation view has shown it where to allocate its marketing spend (and where not to) and how to make its programs more effective and efficient. The approach is more complex, but it is the kind of big idea that can have far-reaching consequences. And for firms seeking to separate themselves from the pack, this is an innovative approach that can make that happen.
Don Ryan is senior partner at iKnowtion, a marketing and analytic consultancy located in Burlington, Mass.