Customer segmentation

Understanding the Shifts in Customer Segmentation

It’s important to establish needs-based segmentation for indirect and direct customers. As we have previously discussed, we believe segmentation exists to mitigate the inevitable problems that evolve from a one-size-fits-all approach. Instead, best-in-class suppliers develop needs-based segmentation to understand how to create, position, and communicate the value of their offering to address the different needs inherent in different customer segments. However, we work with industries that are dynamic—will today’s segmentation hold true tomorrow? Why or why not? This blog post will explore some of the changes to markets, customers, and competitors that force us to rethink and allow flexibility in how we define customer segmentation.

Changing Customer Needs
The first thing that can affect a segmentation model is changing customer needs. Customer needs can change over time, and one reason for these changes can be a shift driven by adoption. In the case of a new technology, for example, early adopters have needs that are quite different from late adopters. You may see the majority of customers having one need during early adoption phases, and as a second group of customers adopts later on, they have very different needs, as illustrated below:

Let’s consider an example. We recently helped a client explore a new alternative energy product. The market for this product was growing and evolving rapidly, yet was still in an early stage. The first adopters (Segments A, B) were non-economic buyers; their incentives to buy this product were to improve their brand perception/reputation. Late adopters (Segments C, D, E), in contrast, needed to save cost by way of total cost of ownership (TCO) and energy efficiency. The result is that one sub-segment of the market is most attractive early on, but as the market matures and stabilizes, a different sub-segment is a better target in the future.

Changing Customer Chain Roles
Segmentation can also shift when customers in the customer chain change their roles and take on new responsibilities. In a rapidly developing and maturing market, customers’ roles can change quickly. Firms that merely influence transactions can quickly become direct customers, and thus change/disrupt the existing customer chain.

For example, consider the existing power generation and transmission market. Utility companies traditionally influence emerging power generation technologies in the market. Several years ago, utilities were discouraging alternate grid solutions because many had interests in avoiding disrupting an already-profitable market. However, as nano- and micro-grid solutions became better defined and more broadly adopted, utilities shifted their roles to embrace this technology and are now predicted to be leaders. This is all happening very rapidly, sometimes even over a couple months.

So what can we learn from the inevitable changes in markets, particularly when dynamics are shifting customer needs and their roles in customer chains? First, a changing market requires flexibility. Customer needs can change in an instant—or, rather, the prevailing customer trends can change as adoption evolves—so you need to be flexible to stay on top and respond. Second, it is necessary to monitor your needs-segmentation and adjust for new entrants/evolving roles in real time. With the right flexibility, it is possible to evolve your customer segmentation in tandem with a rapidly maturing market, to better serve customers, and reach a win-win outcome.

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