Customer segmentation principles are often described as an effort to better understand the market, comprehend customers’ buying behavior, motivations, and needs, and develop products and services to address those more effectively. In practice, segmentation is also the process of grouping customers into segments where all share similar needs and behaviors. While this description is simple and descriptive, it still lacks the broader objective of segmentation.
Segmentation is a marketing approach designed to address specific business needs. Since these needs vary greatly, multiple customer segmentation models can coexist. Segmentation is not solely defined by what it does but by the problems or challenges it aims to resolve. The “why”—discussed in the decision chapter—precedes and shapes the “what” and “how” of segmentation.
Segmentation is much more than an exercise in grouping customers. It provides clarity and efficiency by addressing critical business needs. It can resolve issues related to product positioning, define future products, and identify features for optimal market performance. Segmentation can also optimize distribution channels or address factors like country-specific or product-specific considerations.
As a result, multiple segmentation schemes can coexist to address different business needs. Segmentation, therefore, is defined by the specific business questions it seeks to answer, allowing various schemes to work together harmoniously. A simplistic definition—grouping customers based on similar needs and behaviors—becomes misleading if it leads users to believe that a single segmentation can meet all business needs. This assumption often results in constant redesigns, wasting time and resources while missing opportunities.
It’s also important to note that even simple segmentation methods can be effective. Dismissing small-scale segmentation efforts in favor of only large, complex projects risks overlooking valuable insights and actionable outcomes.
Highlighting the benefits of customer segmentation shows how even modest schemes can deliver business value.
Multiple customer segmentation strategies addressing different business needs can coexist, with some originating from external market research and others developed in-house using straightforward methods. Reflecting on the history of your company’s segmentation practices can uncover valuable insights. Identify the reasons these segmentations were created, their objectives, and the context in which they were designed. This exercise provides a wealth of lessons for constructing future segmentation schemes.
Segmentation must align with specific business needs to avoid becoming a misdirected effort. Without this alignment, segmentation risks undermining prior work, leading to regression and missed marketing opportunities. Here’s why defining business questions is crucial:
Tailored solutions: The segmentation is designed to address a specific business need, ensuring that the budget, timeline, and results align with its purpose.Before initiating the segmentation design process, ensure the objectives and scope are well-defined. If external consultants are involved, include stakeholder interviews to refine and consolidate these objectives. A management team should oversee the project to secure its execution.
Segmentation objectives must serve a clear business purpose. For example, questions like “Who are my customers? What are their preferences, needs, and behaviors?” are insightful but do not define the purpose of segmentation. Instead, focus on questions like:
Segmentation will likely vary by country, product, or product group. In summary, segmentation must align with key business questions that impact company performance. When aligning business needs with segmentation models, also consider the types of customer segmentation most relevant to your market.
Discarding Previous Segmentation Models
Each segmentation is designed for specific needs. Avoid discarding prior segmentations unless the new model addresses those same needs effectively. Existing models may still provide valuable insights for other purposes.
Outdated Segmentation Models
Customer segments evolve over time. Periodically reevaluate your segmentation’s accuracy and relevance, considering updates to reflect new technologies, shifting customer preferences, or market changes.
Cost and Complexity
Segmentation can be resource-intensive, particularly with external consultants or advanced methods. However, simpler, low-cost models developed by in-house teams can be effective. Identify patterns, validate hypotheses, and create straightforward models or personas to address specific situations.
Classification vs. Segmentation
Classifying customers based on criteria like age or gender is not wrong but may limit segmentation’s benefits. Avoid focusing on classification criteria too early. Instead, explore broader segmentation axes and introduce classification only when identifying proxies for these axes.
Sales Resistance to Segmentation
Sales teams may initially resist segmentation. Involve Sales early in the process, encouraging their input on customer profiles and product optimization. When Sales champions the effort, adoption and feedback improve.
“Each Customer is Unique” Objection
While every customer is unique, segmentation synthesizes strategies to address groups with shared characteristics. If concerns arise about customers being excluded, reassess the actions implied by the segmentation rather than the segmentation itself.
To strengthen these solutions, include customer segmentation examples drawn from practical cases, showing how different approaches overcome real-world obstacles.
Segmentation is a powerful tool for understanding the market, customers, and competitors, as well as for refining offerings, placement, and communication. However, segmentation must remain aligned with its intended business objectives and adapt to a changing environment and evolving business needs.
For more information, the Wikipedia article on market segmentation provides an insightful overview and historical context. As emphasized, segmentation should address specific business questions, and multiple schemes can coexist to meet diverse needs. Recognizing the value of prior efforts ensures their continued relevance while encouraging strategic clarity and efficiency.
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The content of this page is offered as a free guide to segmentation work. Whether for small or large projects, segmentation typically follows a similar framework. Some methods rely on large data samples, leveraging both internal data and multiple customer interviews. Working with a market research company can help ensure that interviews are unbiased and results are reliable. In general, the cost of segmentation is linked to the volume of customer interactions—the more interviews conducted, the more robust the results.
As mentioned in the customer segmentation introduction, it is important to use tools that engage and motivate teams, such as the stakeholder analysis tool. Properly scoping the segmentation project with all stakeholders and sponsors from the outset is also essential. This helps prevent the project from going off track due to shifting objectives or requirements that could have been identified early on.
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