What is it?
How to segment our customers is a key strategic decision that will fundamentally shape how we look at the business. Many new strategies start from a new segmentation.
Whether we are a B2B or B2C business, we can’t consider each customer individually – we need to group similar customers together into segments so that we can develop targeted strategies for them.
There are many possible ways to segment our customers – in B2B, by industry verticals, size, ownership of enterprises. In B2C, by demographics – gender, age, income, or lifestage. These “user-based” segmentations are fine for tactical marketing efficiency, but they do not work well for strategic decision-making. Use a needs-based segmentation, based on the different jobs customers hire our product for (Jobs-to-Be-Done).
In a good segmentation, all customers within the segment will have very similar needs, and those needs will be very different to other segments. This means that companies can have a different target strategies for each segment. Companies have to decide whether to specialise in targeting a single segment, or target multiple segments accepting the trade-off involved. One indicator that you have correctly separated different needs is that each segment has different competitive market shares. This indicates that customers in each segment have different buying criteria.
Usually, the sweet spot is to identify 3-5 discrete segments:
- With only two there is not enough granularity
- Six or more segments are usually too much complexity to manage
When is it useful?
Customer Segmentation Analysis is the most critical analysis in understanding your customers, both the current situation and dynamically in the future- how are segments changing in size and needs? Undertake a new segmentation analysis whenever customer needs are changing fast.
Imagine a B2B chemical supplier. They used to segment their market based on industry verticals (e.g. automotive, high tech, FMCG), however they found that this did not separate different needs very well. They found that the needs were most similar when they identified which job the customer wanted their product and service to do:
- Innovative Solutions – Help them differentiate their product to end users
- Proven Solutions – Create specific end-product result with off-the-shelf formulation
- Cost-Effective Solutions – Reduce customer’s total manufacturing costs
- Price Seeker – Reliable quality and delivery at lowest price
With segments identified, you can assess their overall attractiveness of each segment by quantifying the size, future growth and price sensitivity of each segment.
This could be cross-referenced with an analysis of your competitive position in each segment and each segment positioned on a GE Matrix.
How do you do the analysis?
I want to know more
All marketing textbooks will have a section on customer segmentation