Those who attack Mount Everest often see other mountaineers, but they rarely think that the whole world are mountaineers. Yet, segmentation drives the minds of many marketers.
When I learnt how to drive, I saw many people who also learnt to drive. When my wife was pregnant, we met a lot of pregnant women. Suddenly everything around me was transforming into exactly the same that I actually was into. Or maybe I just showed up at places where those who were in the similar situation showed up as well.
The underlying myth is:
“To be more customer centric and to drive the business accordingly, segmentation is necessary. With the help of segmentation, I will understand my customers better.”
Mature companies can easily misuse segmentation. They have a decent position in their markets, their operations are mature, and yet, they need to show that they are customer centric. They start searching for the next level of customer obsession. So they might turn towards the wonderful tool of segmentation.
To meet a customer demand, you have to understand it, for which a basic marketing approach is the STP (segmentation, targeting, positioning).
It's easy to understand that if you can build shoes in general that doesn't mean that you will serve the different needs: everyday shoes, basketball shoes, occasional shoes, shoes for the summer or for the winter... are not the same, obviously.
In an ideal world, your marketing operation can cover each and every individual customer of your market. Of course, that's not the case. It's the nature of demand and supply, you simply cannot meet all the needs since they vary so much and you have your own capabilities you can exploit. That's why you start segmenting to have a subset of customers who have common needs.
You want to make it viable to generate the biggest profit. What do you have to face? In many cases, the group of customers can be described by normal distribution. It means that you have different needs on the market, but only a few have, let's say, basic needs, then the majority have regular needs (a.k.a. mass market), and again just a few have higher needs. When you draw it, it's a bell curve.
Using a mathematical analogy, you want to cover the entire surface of this curve (first chart) to maximise your performance. But you cannot meet all the needs.
In the second chart, you have a few segments. You define your marketing strategy accordingly and with this approach you can cover the surface of rectangles, which is definitely less than the whole surface below the curve. You simply miss some needs as you don't have the necessary tools (or resources) in place.
Okay, you want more and you carry out more market research, you gather more insights, so you do the finetuning. As a result, you end up at the third chart where you have more segments with more sophisticated activities. With this better targeting, you can be more specific, meaning you have rectangles of less width (better grouping of common needs) and of more height (so you reach more of that target group). Yes, you have covered a bigger surface, but at what cost?
That's your segmentation dilemma: what effort is worth doing so? If you spend far more money than what you can earn with your more specific approaches (more market research, more development cost, more sales channels, more communications...), then don't. Search for efficiency and economy of scale, and think of other revenue boosters (e.g. diversification) for growth.
Based on Michael Porter’s generic strategies, you can be a quality leader, a cost leader, or you can focus on a certain part of the market. For the latter one, segmentation is clearly a must. You must be specific in terms of the customer segment, its needs and how to align your capabilities to be able to serve those needs well.
A newly born company which aims for the entire market can define its operation based on segmentation. It is their initial step, they can be more conscious about what they are targeting. They cannot conquer the whole market at once, so they need to act step by step. They can clearly see which parts of the market they can manage efficiently or quickly and how they make progress in it.
While the tricky part comes later. Let’s take a company which operates in the entire market, it is mature, it has a huge customer base and it already covers many of the existing needs. For their growth, they start a segmentation approach and they cannot get to the next level, yet, they spend a lot of time and resources on something they already knew. Why is that?
Certain industries, typically in FMCG (fast moving consumer goods), serve different customer needs with different products (or even brands). You can buy toothpaste for your children, for someone who has sensitive gums, for whitening your teeth and so on. You can see clear segmentation in high value products like cars. You can have small city cars, sport cars, family cars and many others. The concrete product is designed for a specific set of needs.
Other industries have different logics. Telecommunications serve many people and households and they offer the same basic voice, internet or TV services for everyone. The difference among customers is more about the quantity they consume (how many minutes or unlimited, how many gigabytes or unlimited, how many TV channels) or about some quality aspects (how fast broadband). The basic service is quite the same. The streaming service providers also offer the same selection for everyone as content consumption varies a lot in time, so it would not make sense to create a separate platform for specific genres. The market needs are quite general in these examples so a general solution is needed. It stands for the main approaches, however, certain segmentation can be carried out via differentiation. Let’s discuss it a bit later.
When you have defined your segments and you start incorporating this way of thinking in everything you do (proposition, campaigning, communications), you will find connections for sure. You will be able to show that a campaign offer that was designed for a certain segment has achieved better results in that specific segment. That the modified wording has got more engagement within that specific segment. The question is if these connections are new or you have already known them but in other forms.
In technological industries, there’s a clear correlation among demand for the product, openness to innovation, level of education or regular income. Knowing this is already useful. You can optimise your activities accordingly. By executing a new segmentation, you simply get new descriptions for openness to innovation, level of education or regular income. You might get that the members of the high end segment have more from the latest technology or version of something (computer, car, whatever). It might seem that you have found something valuable, but you already knew that from the other aspects. You got no further.
Another illusion is when you start using a hammer, everything looks like a nail. Andrew worked for the communications department of a big company. They defined the brand values they believed in, and the values were also translated into executional elements for advertisements. To measure if they succeeded in the territories of the values, they executed market research on many campaigns. The results showed two things. One is that after a while, they performed better and better in terms of the values as they could manage to learn from the feedback and they aligned their executions. Two is that they overperformed their competition in the aspects of these values. Unfortunately both were fundamentally wrong.
The approach was to measure themselves based on the categories they defined. It was not an industry standard, it was not justified by business performance. It was a direction they believed it could work. And measuring it only verified that when they paid attention to something they wanted, they could nail it. Which is kind of what you would expect from paying attention to something.
So looking at things through the lenses of your new segmentation, will definitely show the connections between your things and the segments. While zooming out and questioning what you’re doing can help you get to know what you don’t know yet.
Segmentation can be based on various aspects: product, usage, need, demographics, etc. The different approaches are good for different purposes, no surprise. One key difference is whether we can use the segmentation in our operation systems or not.
If we use product based segmentation, we have a clear connection with our CRM and billing systems, we can easily analyse the business data and the segments together. However, when it comes to need based segmentation, it is hard to align it to our product and usage records. Provisioning and CRM systems do not know this logic, the segment can be a simple label which cannot really drive anything. Nevertheless it is expensive and exhaustive to define a simple questionnaire with golden questions that identify the segments quite well so that we can flag each and every customer’s segment. And why? Just to filter the reality another way we probably already filtered with another, already existing criterion.
Need and attitude based segmentation are more usable for communications purposes to define the right tone and wording that can resonate with the target group. Otherwise it remains a framework for discussions.
On the other hand there are business tools which are not explicitly segmentations, but by their effect they help segment the customers.
When we know the segments, we can create specific portfolios to cover those needs. That’s the classic way. But segmentation does not necessarily result in clear, distinguished portfolios like in the case of shoes or cars.
Sometimes the basic offering is exactly the same and segmentation is more about how you deliver that same content: e.g. with modifiers (add-ons) or with different treatment in servicing (VIP, digital). Or based on the position you got in your core area, you can address some other needs that can be linked in certain cases. Adding something will address different groups of customers and the modified proposition will not meet everyone’s expectation. These are also ways of segmentation managed via your portfolio even if it's not that spectacular as having separate product lines.
Please, note that even behind this approach there is market knowledge. You know there are segments, but instead of defining which customer belongs to which segment upfront, you create the offerings first and the customers will automatically fall into the segments by simply choosing from the portfolio. Then you can treat the customer according to that specific segment.
