What is the art of segmentation? – Not all customers are created equal!

This post discusses what segmentation truly means. This is often misunderstood and thought about in a single dimension model which often only considers the “marketing” and customer aspect of segmentation.

It is essential that small business owners and SME investors and managers consider the cost to serve. Not all customers should be treated equally.

The economics of customer experience dictate that the intended experience should be designed based on the value derived from a value based segment.

I have often noted that marketers and companies normally execute the application of their segmentation strategies too narrowly.  Segmentation is often myopically thought of in a single dimension as clustering customers in homogenous groups for marketing purposes only. This is a fallacy as segmentation drives the very essence of how an organization operates, serves and meets the needs of its customers.

Before I dwell further, I think I ought to refresh you on what a market is. Most of us know it in generic terms but do not stop and think about what it really means. It is important for a business of any size to think through the essence of what a market is, before marketing their propositions to their customers.

Are your customers ready, willing and able?

So what is the essence of a market?

First and foremost, a market has to have customers with unmet needs or wants. If there is no unmet need, or if your value proposition does not offer anything incremental, or if you don’t differentiate your proposition, then there is no point in being in business.

Secondly, consumers and or businesses should have a willingness to buy. You don’t just “build” and have customers flocking to you.

Thirdly, there has to be buying power. Consumers and businesses have to able to afford what you offer.

Last but not least, whoever is buying has to have the authority to buy. In other words, how do you make your customers ready, willing and able? It is important that we keep this simple logic before we embark on an expensive proposition development or segmentation exercise.

Segmentation is commonly known as a process in which customers are grouped or clustered into homogenous groups based on demographics, psychographics, needs, spending patterns, cultural background,  education, language, mobility and others.   As you will see later, segmentation is not just for marketing purposes only. A proper segmentation strategy will help you not only target and attract customers better but also helps set the tone and framework for how you serve them and how you are organize to serve your customers better.

The M.A.S.A rules of segmentation – The musts of segmentation!

Most folks often ignore the fundamental rules of segmentation. For any segmentation exercise to succeed, it is important that these basic rules must be met. I have often seen marketers using psychographics and other segmentation ways that are not relevant to their industry. The reason they do it is because they fail to clearly understand the M.A.S.A rules.

Measurability (M)

Any segmentation of a market should be able to measure the size and purchasing power of the segments. Without this you will not able to know if the market that you are after, is attractive, viable or sustainable.

Accessibility (A)

You should be able to effectively reach a segment. If you cannot economically, emotionally or logically reach a segment, it is not worth pursuing.

Substantiality (S)

Size does matter here J There is no point going after a segment where the volume or the profit pool is minuscule. I know the naysayers might not agree. I am referring to the primary segmentation framework here. Yes of course you can have secondary, tertiary and micro segment. You can even practice one to one marketing (that is a topic for another time). What I am referring here is only about the primary segmentation rules.

Actionability (A)

Any segmentation framework has to be actionable. You need to clearly think if your marketing strategies and plans can attract the segments that you are defining.

How do you segment the market?

This is often done through a combination of primary and secondary research. There are many ways to approach the problem. A common way is to first do a set of qualitative studies (using limited focus groups). The outcome of these qualitative studies is then used to formulate a segmentation hypothesis, which is then validated through a detailed primary research, encompassing a much larger and statistically valid sample. Then, using advanced statics modeling, the segments or clusters are derived.

If you are a small business, you probably cannot afford the cost and sometimes the incompetency of outside firms doing this. The point here is to make you think about the different possible segments as you craft your propositions for your customers.

The outcome of a good segmentation exercise

A good segmentation exercise will not only be able to group and quantify the size and value of each segment but also enable you to develop portraits of each segment.

The portrait of a segment could include their lifestyle and values, priorities, aspirations, needs, demographics, attitudes and preferences to your company’s and competitors products and services. Other valuable information could include triggers and barriers to adopting your products, durable and white goods ownership and how disposable income is spent as well as internet, TV viewing habits and print readership benefits among many others.

The applications of segmentation

A good market segmentation framework will help you design and craft propositions that are relevant to a target segment, develop retention strategies that prevent certain segments of customers leaving you as well as enable to you to spend your communications spend more effectively.

The segmentation work that you have done will also enable your company to have optimal and differentiated pricing strategies for different segments. After all when economists refer to a demand curve, they are actually referring to the aggregate average demand curve across all different segments in the market. Now you see the link between economics and marketing J

A good segmentation exercise will also enable your frontline sales and service folks to identify a customer upfront as to which segment he or she belongs to. Just imagine the opportunity costs lost in trying to close a deal with a wrong prospect.

A two dimensional segmentation model – Value matters

Market based segmentation alone is not enough. You will also need to know where you are getting your value from. If for example, 80% of your customers generate about 20% of your revenue, then resources have to be disproportionately allocated to the ones that matter. My post on this blog Life is too short! Grazie mille signor Pareto! Explains why focus on value is important.

Value based segmentation will help you to ensure that your customer services are prioritized at all customer touch points albeit at the call center or your channels. It will ensure that your credit and collections policies reflect the dependency of your profits on your high value customers.  Therefore, it is imperative that you know that a single dimension market based segmentation alone is not enough but that you also need to have an overlay of a value based segmentation to ensure that high value customers deserve the royal treatment that they so fully deserve.

Segmentation and organization structures

In the old days, most organizations are grouped or segregated around their product lines. If “customer is king”, then it behooves you to organize around your customers. World class marketing companies in the Fast Moving Consumable Goods (FMCG), telecoms, banks and other industries organize around the customer segments that they serve.

I recently met 2 executives from a well known and very popular smart phone maker. Out of curiosity, I asked them what their segmentation and differentiation strategy was. I was bluntly told that they do not do any segmentation and that they do not need to. I dismissed this to either their arrogance due to their high market share or sheer ignorance. I am tempted to believe that it is their ignorance rather than arrogance, as these two were from one of their regional offices in Europe and are probably not enlightened yet to the strategies being formulated and planned at their head quarters.

No matter how big or small, you need to segment and organize around your target segments within the market or markets that you are after. You can only ignore this if you are into commodities or if you are a monopoly, otherwise, segment and differentiate or be damned!

Email: john.lincoln@gmail.com Twitter @lincolnjc

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This entry was posted in Customers, Leadership, Management, Marketing, Segment, Segmentation, Strategy and tagged , , , , , . Bookmark the permalink.

6 Responses to What is the art of segmentation? – Not all customers are created equal!

  1. Dalmar Sheikh says:

    Hi John,
    Thank you for this I have thoroughly enjoyed all the posts. I wanted to get you thoughts on couple of things with regards to segmentation. Does it make sense for a company to segment along industry lines; finance, pharma., media, etc.. When they do not have industry specific products.
    Would sizing or rather level of attractiveness, 80-20 rule, be more appropriate.
    Segmentation along industry lines would group customers that have different level attractiveness for you. You could end up with a case where your best customers are being grouped with some of your least attractive customers and not being serviced by the best teams with in the organization.

    Thanks
    Dal mar

  2. Irving Smith says:

    I think other site proprietors should take this website as an model, very clean and great user friendly style and design, as well as the content. You are an expert in this topic!

  3. SMS says:

    You have a great talent of writing.Best of luck and get going.And yes i have tweeted your site johnlincoln.blog.com .

  4. Thumbprint Cookie Recipe says:

    Wow!, this was a top quality post. In theory I’d like to write like this too – taking time and real effort to make a good article… but what can I say… I procrastinate a lot and never seem to get something done.

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