Is it Time to Rethink Segmentation?

Knowing your market is fundamental to developing a growth strategy. Knowing the different customers that make up your market and their different needs and purchase behaviors is fundamental for developing a successful growth strategy. Segmentation provides the foundation on which a company’s growth strategy is built. When companies’ growth plans are challenged because they are uncertain where to target, are having difficulty developing distinct value propositions, or are not getting positive results in the market with their offering or sales and marketing activities, poor segmentation is likely a key part of the problem.

To determine if it is time for your organization to rethink segmentation ask three key questions:

1.) Is your organization’s segmentation effective?

Effective segmentation creates segments that meet a specific set of criteria. To be effective, segments need to be distinct, that is, having different customer needs and purchase behaviors, and are also readily identifiable.

We recently helped a client develop a new growth strategy. As part of this engagement, one of our many activities involved analyzing the client’s sales data. During this task we learned that the client segmented its market by categorizing customers by industry and size—a fairly standard approach to help organize sales and marketing activity. The company provided power monitoring and management systems for critical facilities and had four offerings: Low-Tier, Mid-Tier, High-Tier, and Custom. The differences in each offering were based on the breadth of systems monitored and specific functionality. An in-depth look at its sales data revealed, however, that the sales mix of the four different offerings across the organization’s segments hardly varied at all.

Another client, a provider of diagnostics equipment, focused its segmentation on different buyer types. The company defined its segments as efficiency buyers, cost buyers, and accuracy buyers. When asked how many customers were in each segment and how large each segment was, the client admitted it only had a rough idea on how the market was split. In discussions with the Sales Director, he commented, “We know an efficiency, cost, or accuracy customer when we see them. When we learn how the customer’s organization is structured, when we hear the Operations Director say this or that, we can get a pretty good idea.”

The segmentation scheme utilized by the power monitoring and management system supplier allows customers to be easily identified and placed into segments, but the segments are not distinct in terms of their needs or purchasing behaviors. Alternatively, the approach deployed by the diagnostics equipment provider clearly defines segments by different needs and purchasing behaviors, but does not provide an obvious way to determine which customers belong to which segment.

Ideally, effective segmentation should define segments that are both Distinct, and readily Identifiable. Additionally, there are four other criteria that should be considered for segmentation to be effective:Consistent, Responsive, Enduring, and Substantial (Figure 1).

Criteria for Effective Segmentation

2.) Is your organization segmenting on customer needs/purchase behaviors?

When business-to-business companies consider segmentation they often start with what they know and what comes easiest. They look at different types of customers they serve or see in the market. These customer types are typically defined by familiar characteristics, such as industry, size, location, channel, etc. However, segments should be defined based on different customer needs (e.g., enhanced product capabilities, surrounding services, business systems, etc.) and purchase behaviors (level of focus on price versus non-price factors, or a preference for strategic, long-term versus transactional relationships[1]). Characteristics are helpful indicators of customer needs but are not the basis of segmentation. When an organization understands customer needs and behaviors better than its competitors, it allows the company to better determine where to focus its efforts and how to develop differentiated value propositions, which are key elements to a successful growth strategy.

3.) Does my organization’s segmentation address multiple stakeholders?

Multiple stakeholders—sometimes within an organization and sometimes different entities along the customer chain—are involved in making or influencing purchase decisions and their needs and behaviors are different. Yet many segmentation approaches are one-dimensional. When there are multiple stakeholders in a market, your segmentation should reflect the diverse needs of these different parties.[2]

Different stakeholders’ needs and expectations will vary across markets. If your segments are multi-faceted your strategy and value propositions need to be multi-faceted as well to successfully serve the market. Adopting a multiple stakeholder segmentation approach can transform the way your organization talks to customers, help to reformulate your value propositions, better define and prioritize target segments and provide greater clarity for developing messaging and marketing programs.

In next week’s blog post we will outline a four-step methodology to develop a segmentation approach that can be utilized as the foundation for building a successful growth strategy.

Learn more about this topic with industry examples:

Is it Time to Rethink Segmentation?

[1] Valentine Pope, Atlee & Brown, Jr., George F. (2011). Segment Your Customers by Their Purchase Behaviors. In CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs (pp. 59-74). Austin, TX: Greenleaf Book Group Press.

[2] Valentine Pope, Atlee & Brown, Jr., George F. (2011). Define Your Customer Chain. In CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs (pp. 17-29). Austin, TX: Greenleaf Book Group Press.

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