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Needs-Based Segmentation: Unlocking Growth
The foundation for any successful growth strategy is knowing your market. Unfortunately, many business-to-business (B2B) companies fail to develop a robust method to clearly identify their target customer. As a result, they struggle to realize their true growth potential and often find themselves significantly underperforming in the market, particularly during times of change in competitive landscapes or customer preferences. Why? It’s because customers’ needs are diverse and fluid, and without effective customer segmentation companies fail to know what customers to target and how to win with them. Needs-based segmentation helps guide the way to unlock growth opportunities.
In this blog, we will explore an example of a struggling B2B company that utilized a needs-based segmentation approach to better identify its customer segments and deploy effective defensive and offensive strategies. These strategies helped unlock incremental top and bottom line growth by allowing the company to solidify its position with core customers (defensive) and identify customer segments with unmet needs that could be served with new products or solutions (offensive).
Before we dive in, let’s clarify the difference between needs-based and traditional segmentation, and the critical roles each plays in an effective growth strategy. (See Figure 1)
- Strategy: A strategy based solely on traditional segmentation, using only demographic and firmographic elements—and not needs—often results in failure because the method does not capture why customers buy certain products and services over others. This creates the dilemma discussed above: how should we react and who should we target? Effective strategy begins with needs-based segmentation, which classifies customer segments based on a common set of needs (met or unmet) and/or purchase behaviors.
- Identification: Traditional segmentation is then used to help identify those customers within the needs-based segments according to identifiable demographic and firmographic characteristics.
- Tactics: Traditional segmentation can be used to further sub-segment these customers, allowing companies to tailor tactics (price, channel, incentives) to these sub-segments.
Now, let’s consider an example highlighting the challenges faced by an IT hardware access and control equipment provider with their existing segmentation approach, and the benefits that materialized once they began segmenting end-customers based on needs.
Our client found its core offering being replaced in the marketplace by a competing solution that embedded itself into the IT equipment. This reduced the need for our clients’ stand-alone IT hardware access and control equipment. The challenge was to find customers who still valued our client’s solution over the new technology.
Our client thought of their customers as being segmented by vertical (finance, government, retail) and size of data center their equipment went into (large, medium, small). Once the competitive landscape changed, this traditional segmentation became ineffective, because it left them without knowing who to target and what value proposition to utilize. They looked at sales and received feedback from their salesforce that referenced verticals and size of data centers, but they couldn’t determine any patterns to identify the right customers to target. Competitive dynamics and consumer preferences are always in motion, and our client required an actionable segmentation approach.
Adopting Needs-Based Segmentation
The solution was to define customer segments based on needs. We helped our client identify four new segments, each with a different set of needs (see Figure 2). We found that effective value propositions differed for each segment depending on whether they needed a stand-alone product (client’s technology) or an integrated solution (competing technology).
Our client’s main target customer, “Core Product Loyalists”, valued compatibility and ease of use of a stand-alone product. “Multi-Tool Users” had a high need for reliability and redundancy and used both stand-alone and integrated solutions to have two systems in place to guarantee they had access and control to their IT hardware. “Alternative Product Advocates” focused on simplicity, and used alternative products—not stand-alone or integrated solutions—to gain access and control to their IT equipment. Lastly, “New Technology Adopters” focused more on cost and functionality, and were prone to adopt the integrated offering and eliminate the stand-alone product.
For each of the four segments, we used traditional segmentation to identify and characterize the customers who were more likely to fit in each segment based on firmographic elements, such as operations, processes, and sophistication.
For more information on segmentation, visit our blog post: An Approach to Rethinking Segmentation
Benefits of Adopting Needs-Based Segmentation
Adopting a needs-based segmentation approach resulted in several benefits:
- Our client was more effective in identifying “Core Product Loyalist” and the needs and customer characteristics that defined that segment. It became easier from a marketing and sales perspective for the client to target their core offering towards these customers who saw a lot of value in their current offering. This resulted in our client reducing their decline in sales by 10%, which was a major win for them.
- The new segmentation exposed future growth opportunities. One opportunity involved “Multi Tool Users” where our client recognized a need to develop a new core product design to help integrate traditional access control technology with the new access technology to allow them to play together.
- In addition, the new segmentation helped identify an opportunity with “New Technology Adopters.” It helped uncover unmet needs in these segments in terms of managing all the different types of integrated access control protocols across the IT hardware. There was an opportunity to consolidate the integrated access control protocols into a single screen solution which would allow customers to use it more effectively. As a result, our client discovered an adjacency to create a software-only solution to help companies manage access and control technology. This was estimated to result in a $400M opportunity for them.
- Lastly, in order to support the strategies above, our client further defined the four needs-based segments by data center size (small, medium, enterprise), industry vertical (i.e. telecom, high tech, etc.), and geography. This allowed them to target sub-segments with different, effective tactics (communication, incentives, services, price, etc.), which helped our client further differentiate themselves and win business.
Changing our client’s perspective to focus on needs and bucket customers around those needs was extremely valuable in terms of helping them not only concentrate on their current offering, but also on new potential offerings to drive future growth.
Our client’s successful growth strategy depended on a robust needs-based segmentation to develop customer segments, and traditional segmentation (demographic and firmographic elements) to identify and develop effective tactics for those segments. Ultimately, this allowed them to know what customers to target and how to win with them.