EDITOR’S NOTE: Because extended enterprise learning involves multiple disciplines, we sometimes ask other experts to share their insights with our readers. Today we feature market segmentation guidance from Laura Patterson, President of VisionEdge Marketing.
Laura is widely recognized as an authority in marketing measurement and performance, content management, marketing operations and data analytics. Business-minded learning professionals will find her guidance practical, relevant and useful.
Every business strives to grow. But in a competitive environment, growing your business takes insight and creativity. One of the smartest ways to drive growth is through customer and market segmentation. And as many organizations have discovered, artful segmentation can lead to a powerful competitive advantage.
Benefits of Market Segmentation
Segmentation is important because it informs your marketing strategy. This technique makes it possible to identify and qualify groups of potential customers based on shared interests, needs, priorities and other distinguishing characteristics. Through this process, you can efficiently pinpoint groups that are most likely to value a particular product or service you offer. It can also help you position that offering in ways that outperform your competition.
When segmenting a market, it’s essential to understand the motivations that drive purchasing decisions. When people consider competing offers, they typically choose the option that fits their needs better than any alternative.
So, if you want to win market share, retain customers and drive sustainable business growth, your offerings must be perceived as a superior choice, one value proposition at a time.
How does market segmentation help? It starts with useful data and analytics. Through structured analysis, you can focus on specific groups of prospects and customers who rely on the same (or similar) criteria when determining the value of an offer. Then you can use those insights to develop and implement a successful marketing strategy for the most promising groups.
How to Define a Market Segment
By definition, market segmentation focuses on dividing customers into unique groups. Unique. This is the essential word. Market segments are unique.
Each segment is defined by a distinct set of attributes. Every member of a segment shares these distinguishing attributes. This set of unique attributes enables you to predict the potential success of your marketing initiatives and establish relevant performance metrics.
- Demographic segmentation is based on descriptive variables such as age, sex, race, income, occupation, education, household characteristics and geographical location. (For B2B, think of organization size, revenue, industry, job title and so forth.)
- Psychographic segmentation focuses on lifestyle, attitudes and opinions. (For B2B, think of purchasing preferences, organizational culture, product use patterns and the like.)
When defining segments, keep these 3 guidelines in mind:
- The most attractive segments are accessible. They’re within your reach.
- Each segment should be large enough to provide a solid customer base.
- Success depends on your ability to develop specific metrics, marketing strategies and tactics for each segment.
4 Key Business Considerations
As you can see, segmentation isn’t a one-size-fits-all formula. But whatever approach you choose should help your organization achieve relevant growth outcomes. Therefore, before you begin, clarify your business priorities. Keep these questions in mind:
- Which method promises the strongest alignment?
When selecting a segmentation model – predictive, descriptive, behavioral or attitudinal – first evaluate market needs. Then focus on the approach that best connects these needs with your marketing strategy.
- What business question do you want to answer?
Beginning with a business question will help you determine what you need to know about target segments. Take the time to document this question as simply and succinctly as possible.
- What is the purpose?
If you want to classify newly acquired customers, you’ll want to choose a preference-driven descriptive segmentation model. On the other hand, if you’re looking to support cross-selling and upselling efforts, then you’ll want a behavior-driven predictive segmentation model. Or you may need to consider both. The former is a more explanatory approach, while the latter provides a better way to score and classify.
- Is the business need – not data – driving your actions?
Companies often focus on available data when choosing segmentation methods, rather than letting business interests guide their decision. For example, organizations with rich transactional data tend to build behavioral segmentation models (grouping customers based on factors like spending levels or purchase frequency). And organizations with a wealth of information about customer preferences tend to focus on attitudinal segments. But letting your data drive your segmentation model is a mistake. Instead, start with business needs.
Market Segmentation Models: A Needs-Based Approach
These guidelines suggest that the best customer and market segmentation models tend to focus on the customer’s point of view. In contrast, business schools tend to focus on demographics. But this can lead to a static view of segments that may not be effective in today’s dynamic environment.
For example, traditional B2B methods often classify targets by tiers based on company size, revenue and technology platforms used. These classifications remain until a customer moves to another tier.
However, when models are based on a customer’s perspective, they focus on needs, problems, requirements and behaviors. We recommend putting customer needs at the center of your segmentation framework. Why? Customers with the same demographics may actually have different needs.
For example, CFOs may share similar responsibilities and educational backgrounds. And company size or industry classifications may not distinguish one CFO from another in any meaningful way for your marketing efforts.
However, different CFOs often have very different needs and behaviors. Some CFOs may serve in a highly strategic capacity. Others may be responsible for functions outside of traditional finance roles, such as talent strategy and management. These distinctions are likely to be reflected in unique needs-based personas. If so, these needs may form the basis of meaningful segments.
What Makes a Segment Unique?
Remember, by definition, segments are unique. To test the uniqueness of a segment, answer the following questions:
- What does this specific group value most?
- What is the primary reason why this group chooses to buy?
- What features (product, service, experience) are most important to this specific group?
- What is the buying process for this group? What channels, touches and content resonate most?
- What supplier criteria are most important to this group?
Answers to these defining questions should be based on data, not your gut feel. Properly executed, market segmentation research can successfully differentiate customers in ways that are actionable and profitable for your company. So, it pays to do your homework.
Information Over Intuition
Research is an essential part of the segmentation process. Its purpose is to tease out the unique properties of each segment (pain points, product/service requirements, supplier preferences, buying criteria, buying process, and so on), so you can develop a coherent product, pricing, channel and promotion strategy that appeals uniquely to that target.
You typically need both primary and secondary research to properly define segments. Once you’ve identified each segment’s distinguishing variables, you’ll want to estimate how many potential buyers are included in each segment and the price they’re likely to pay for your offering. This will help you compare the overall value of each business opportunity, so you can determine which option warrants your investment.
Quantitative research can be costly. But there are affordable alternatives. For example, you may want to explore secondary data sources, such as trade and association publications and experts, basic research publications and key trade buyers.
The goal is to explore underlying market motives and needs that can reveal various needs-based personas. Your existing sales data also can be an excellent starting point. Examine the data available to look for patterns in customer behavior.
Although research is a very important facet of marketing segmentation, we can’t fully address it in this limited space. However, these four steps can help you begin to think about how to conduct segmentation research:
1. Define a market opportunity structure.
2. Create a segment scorecard. Map the components you’ll use to assess each segment. These components usually include a variety of factors, such as the segment’s value to your business and its penetrability.
3. Map segments to your value proposition. This lets you evaluate segments in a meaningful way, so you can find options that best fit your company.
4. Outline relevant marketing tactics and functions for each segment, so you can estimate internal requirements, processes and resources needed to tackle each segment.
Avoid Segmentation Research Missteps
Don’t try to boil the ocean. It’s important to establish a starting point for segmentation. Here’s one simple way to begin identifying segments for further research with a basic matrix:
- On a page or flip chart, list your products or services in the left column.
- Across the top, list the types of customers who buy your products or services.
- On the grid, place an “X” in customer categories where each product or service is actually purchased.
Typically, this exercise results in more combinations than you can effectively pursue, so you’ll need to narrow the field. By combining like items with like buying behaviors you can identify a workable number of market segments to analyze. Focus on the top 3-5 groups, because this is usually where you’ll find the largest overall business opportunities.
Unless you see a significant reason to include a small, isolated segment, you should either omit it or combine it with a similar segment. By consolidating products and services, as well as buyer groups with similar behaviors, and then analyzing these groups as specific market segments, you can begin to establish the discipline and rigor necessary for effective analysis.
When performed thoughtfully, segmentation research can help you identify new target markets and even new product opportunities that can drive growth.
But beware – not every segment will be worth pursuing. The key is to pick segments with the highest potential profit. This is why it’s also wise to conduct a profitability analysis.
Analyzing profitability by product or service is usually more straightforward than determining profitability by customer. However, customers generate revenue, so this kind of analysis can be particularly informative.
For example, you may discover that 20% of customers (perhaps those in a particular segment) actually generate 100% of your profit. This may mean that pursuing other customers or segments could be a more costly choice that would drain overall profitability and reduce shareholder value. You won’t know unless you look more closely.
One last point: Your largest customers may not generate the highest profits. In some instances, they may even generate losses. For example, larger customers may demand volume discounts while simultaneously requiring high levels of service. This can seriously erode profit margins.
Connecting Segments, Personas and Customer Journey Maps
Once you decide a segment is worth pursuing, you’ll want to develop and execute a marketing strategy to gain traction within that segment. When implementing this strategy, segmentation can also help you allocate resources more efficiently as you map the customer buying journey and create personas within each segment.
Meaningful segmentation depends on finding patterns in actual customer buying behavior for a specific product or service. To develop meaningful segments, you’ll need to gather relevant data about multiple variables:
- Benefits and features that matter to customers
- The price they’re willing to pay for a product or service
- Relative advantages and disadvantages they assign to your offerings
- Data on emerging social, economic and technological trends that may affect usage and purchasing patterns
Moving From Segmentation to Strategy
Once you select segments with the strongest potential upside for your business, you can develop a relevant growth strategy for each. Market segmentation can help guide your choices about how to engage with each segment.
For example, “mirroring” may be an effective growth strategy. This approach targets customers in new segments who mirror the characteristics of your best existing customer segments.
Another approach is to develop a strategy around a key customer issue. For example, sustainability may strongly influence decisions among some customers. Knowing if a purchase decision is based on pure functionality or a deeper issue can shape your strategy, accordingly.
For example, say you offer leading-edge technology and research reveals a “trailblazing” customer persona within one of your target segments. You’ll no doubt want to appeal to that pioneering early-adopter spirit.
Whatever strategy you choose, you’ll want to leverage what you’ve learned about each target segment, so you can focus marketing resources in the most effective and efficient way. This will help you grow your business within each market niche you pursue and ultimately lead to more profitable business growth, overall.
EDITOR’S NOTE: This has been adapted, with permission, from a post published on the VisionEdge Marketing blog.