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Not all customers are created equal – the art of segmentation

Not all customers are created equal – the art of segmentation

The essence of a market and how you can make sure your customers are ready, willing and able

One of the unwritten secrets of a successful business is that not all customers should be treated equally! But marketers normally execute the application of their segmentation strategies too narrowly. It is short-sighted to look at segmentation in a single dimension, 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 all of its customers in the market. There is a tendency too, to think only in generic terms about what it is that makes a market, and before marketing a proposition to a customer segment it is important to think through the essence of what a market is:

  • A market has to have customers with unmet needs or wants. If there is no unmet need, or if the value proposition does not offer any incremental improvement over market norms, or if the proposition isn’t differentiated, then there is no point in being in business.
  • Consumers and/or business customers should have a proven willingness to buy. “Build it and they will come” is for the brave and the foolish.
  • There has to be buying power. Consumers and business customers have to able to afford what is on offer.
  • Last not least, whoever is being targeted as the customer has to have the authority to buy.
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In other words, how do you make sure that your customers are ready, willing and able? It is vital this simple logic is held in front of mind, before embarking on any expensive proposition development or customer segmentation exercise.

A good segmentation exercise will enable frontline sales and service folks to identify customers according to the customer segment he or she belongs to.”

john lincoln, author

Market segmentation work-out – MASA in practise

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. Segmentation is not just for marketing purposes. A segmentation strategy will help target and attract customers better, but will also help set the tone and a framework on how to serve customers, and how to organize to serve customers better.

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For segmentation to be practical, it must meet four fundamental criteria

 

Most folks often ignore the fundamental rules of segmentation – those that get it right, clearly understand and follow the MASA rules…

  1. Market segmentation is often done through a combination of primary and secondary research. There are many approaches and a common way is to first carry out a set of qualitative studies (using focus groups of limited size and number). The outcome of these qualitative studies is then used to formulate a segmentation hypothesis, which can be validated through a detailed primary research program, encompassing a much larger and statistically valid sample. The segments or clusters can then be derived using statistics and modelling.
  2. The outcome of a good segmentation exercise will not only allow the size and value of each segment to be accurately grouped but should also enable you to develop portraits of each customer segment. The portrait of a customer 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 adoption, and how disposable income is spent as well as internet, TV viewing and print readership habits, among many others.
  3. A good market segmentation framework will help to design and craft a proposition that is relevant to a target segment. It will also help shape retention strategies that prevent customer churn and business losses in certain segments, well as steering more effective communications spending.
  4. With segmentation comes an opportunity to develop 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 we can see the link between marketing and macroeconomics!)
  5. A good segmentation exercise will also enable frontline sales and service folks to identify customers according to the customer segment he or she belongs to. (Just imagine the opportunity costs lost in trying to close a deal with a wrong prospect!)

If you don’t get noticed, you don’t have anything. You just have to be noticed, but the art is in getting noticed naturally, without screaming or without tricks.”

Leo Burnett, advertising pioneer

Two-dimensional value-based segmentation models – Customer value matters

The ultimate goal for a business is to turn a profit. The trick then is to find ways of increasing the level of product profitability, customer by customer, year on year.

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The cost-to-serve analysis is essential for the growth of your business

 

Businesses generally have a good handle on their manufacturing costs, their distribution costs or their point of sale costs – expressed as a percentage of revenue, or in terms of unit cost per item. What is often less well understood in business are the total costs relating to a particular customer and the so-called cost-to-serve.

Cost-to-serve involves analysis and quantification of all the activities and costs incurred to fulfil customer demand for a product through the entire supply chain. It’s a well-established approach for exploring which customers and products matter most to company profitability, and how to manage them at the appropriate cost.

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Cost-to-serve is fundamental to profitability and understanding its influence on the bottom line is vital. It needs to be closely watched because without cost-to-serve indicators across the different customer segments, a business can’t even begin to improve product profitability.

Market-based segmentation alone is never enough. The economics of customer experience dictates that the intended experience should be designed based on the profitability derived from a value-based segment. When 20% of your customers can generate about 80% of revenues, then resources have to be disproportionately allocated to the ones that matter.

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An overlay of value-based segmentation can be used to ensure high value customers are identifi ed for royal treatment

 

Value-based segmentation will help ensure that customer services are prioritised at all customer touchpoints, and it will ensure that credit and collections policies reflect the dependency of profits on high-value customers. A single dimension market-based segmentation alone is not enough. An overlay of a value-based segmentation can be used to ensure that high-value customers are properly identified as deserving the royal treatment they are given!


JohnLincoln.oneThe business growth hacker

 

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