Segmentation Analysis

In this article we'll be covering :

  • What is Segmentation?
  • Why Segment at all?
  • How Customer and Market Segmentation differ
  • How you can approach Segmentation
  • What do you gain from Customer Segmentation
  • Course5’s Segmentation Strategy
  • How Course5’s approach can benefit you
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Implementing Customer Segmentation Analysis for Better Understanding Your Customers and Your Business

Every organization through its growth reaches an inflection point, where it can no longer assume that its customers have the same requirements and expectations from the company. Figuring out who to focus on and how to address their requirements becomes an even bigger challenge. This is where the need for customer segmentation comes into play.

Understanding Segmentation

Customer segmentation is simply the creation of customer groups based on certain common characteristics. These groups help stakeholders and decision-makers to target potential customers, develop personalized marketing campaigns, and boost customer loyalty. Some of the most prevalent models of segmentation are:

Segmentation Model Segmentation Parameters
Geographic Segmentation Country, state, city, town, and locality
Demographic Segmentation Age, gender, income, education, and marital status
Behavioral Segmentation Tendencies, habits, frequent actions, purchase history, and product use
Psychographic Segmentation Personality, attitude, values, interests, preferences, and dislikes
Technographic Segmentation Software, applications, mobile and desktop usage
Needs-Based Segmentation Product/service requirements of specific customer groups
Value-Based Segmentation Economic value of customer groups within the scope of the business

 

Once the segments have been mapped out, you can enhance product development, position it and market the product to the right customers and improve your sales. You can keep refining the segments over time, and offer complete visibility into your clients to anyone within the enterprise looking to better understand the customer base.

But customer segmentation should not be misconceived as intuition related to customers, strategies for marketing or sales, and definitely not as a suggestion regarding which segment to target. It is not capable of considering every facet related to products or customers but is rather a continual process of harnessing relevant information – whether it is the difference between customers or any innate similarity that has gone unnoticed.

The Importance of Segmentation

Segmentation leverages massive volumes of data on both existing and potential customers, enabling you to identify specific customer groups and address them in an effective way. These groups are highly accurate as they are based on the analysis of real parameters as mentioned in the previous segment.

Marketing and sales professionals are always looking to maximize the revenue from every customer they interact with, and this makes it imperative to have as much knowledge about the customer as possible. Knowing your customers paves the way for targeted marketing strategies, where the customers feel like you know them and are addressing them personally. The focus is also not on short-term gains and profits but on impacting the customer lifetime value (CLV). Where a customer receives optimal satisfaction, has an exceptional retail experience, trust is developed, brand loyalty is generated and retention can be boosted. This also suggests that CLV can also be a potential parameter for enterprises choosing to focus on that aspect.  

Still, wondering why you should engage in customer segmentation analysis? The following are some ways that segmentation can elevate your business and processes.

  • Deep customer knowledge to help customize your content to match their requirements and challenges
  • Targeted ads and marketing campaigns to better resonate with your customers, generate conversions, and reduce churn
  • Better customer support and services because you can preempt the challenges specific customer groups may be facing
  • Personalization builds customer trust and loyalty
  • Identifying the most valuable customers and why they add value
  • Clarity of communication over preferred channels based on customer preferences
  • Discovering new opportunities for product development, enhancing the efficiency of services, and maintaining a robust customer support system

Market Segmentation vs Customer Segmentation

A common misconception when it comes to the topic of segmentation, is that market segmentation is the same as to customer segmentation. Market segmentation is a general view of the marketplace as a whole, and aspects within the marketplace. Customer segmentation on the other hand deals with specific customer groups within the market.

If you own a car dealership, market segmentation can help you view your performance when it comes to the overall sale of sedans, SUVs, and hatchbacks in a particular marketplace. But customer segmentation can help you dig deeper and take a detailed look at customers who are purchasing each type of vehicle. This helps identify common factors connecting each customer interested in a specific kind of car and group them accordingly. Once you have a clear idea as to why certain customers choose to buy a vehicle, marketing strategies can be developed to target this specific customer group. There is always a higher revenue from targeted marketing strategies that reach out to customers based on segmentation analysis.

Strategies for Segmentation Analysis

While developing an effective strategy for customer segmentation analysis, you have to first map out your team’s objectives and targets. You can then proceed with segmenting customers based on their characteristics.

  • `Identify your segmentation goals
    While formulating your segmentation strategy, you need to figure out why you need segmentation and what you want to achieve from segmentation analysis. Whether it is aimed at offering greater personalization to customers or creating better marketing strategies, decide on your goals and strategize in a way that will enable you to achieve them.
  • Create segments of your choice
    Once you have figured out what you want to accomplish from segmentation analysis, you need to decide how you are going to segment your customers. There is no fixed segmentation model as every enterprise is different from the next. Your business will determine who your customers are, the market you are operating in, and how you can create segments to better achieve your targets.
  • Target each segment
    When the customer segments have been determined, you have to target them across departments within your organization. Employees working in marketing, sales, or service departments all need to be aware of the segments and have to effectively target these segments through the work they are engaged in. Each department can adapt its efforts to offer customized content, identify commonalities, and provide customers with an optimized retail experience.
  • Analyze your customer segments
    Analysis of the segments offers a ton of insights into how you have set up the segments and grouped your customers. This gives you the opportunity to take a deeper look into the segments, and update them as required. The marketing, sales, and service teams will also be able to make suggestions regarding where the changes might be necessary, and their feedback is valuable as they are the ones working with the segments. Customers can also be a source of feedback, as segmentation affects them directly. You can check for accurate segmentation, and how effective your strategy has been.

Benefits of Segmentation

There are several ways that your enterprise can benefit from segmentation analysis. The most common benefits experienced are as follows.

  • Effective Messaging
    Segmentation analysis can allow you to better understand your customers at a personal level, and thus create customized content for each segment. This captures the customers’ attention, gets a better response, and results in more conversions. Analysis can help you figure out which section of your customers offers the most returns, and determine how effectively your messaging strategies have been performing. You can now produce more powerful content, and make the messaging more effective.
  • Innovative Products
    Segmentation analysis is also extremely effective for enhancing the viability, quality, and practicality of both your products and services. A better understanding of your customers’ requirements, preferences, and pain points can help you adapt your offerings to best suit their needs. You can also design new products that better address the needs of customers, offering the ideal solutions and outperforming your competitors.
  • Customer Focus
    Identifying your highest-performing segments is one of the greatest benefits of segmentation analysis. This helps the sales teams to extend their reach, increase conversion rates and generate a higher ROI. This also helps to identify segments that have the potential to become high performers and thus target relevant communication and products to them. The entire business can enhance its offering and practices, once you know your customers and the ideal strategies to connect with them.
  • Marketing ROI
    Just as segmentation analysis can reveal a lot of details about your customer base, it also offers you a chance to analyze how you are performing in your marketing and outreach programs. It can be easy to attract certain segments, whereas it may be comparatively more expensive while trying to convert prospective customers with a less effective marketing strategy. Rather than incurring major investments for tougher conversions, analysis can offer easier and inexpensive routes to marketing success. A more economically efficient strategy, when effective, delivers a higher return on your marketing investments.

With all this being said, no two enterprises conduct their customer segmentation analysis in the same way. Companies have different products, services, and audiences, making segmentation a completely unique process for each. You also have the option of outsourcing your segmentation analysis requirements to a service provider, and saving yourself the trouble and expense of hiring and maintaining an experienced in-house team. Course5 Intelligence offers state-of-the-art services and we have our unique modus operandi when it comes to segmentation.

The Course5 Approach

Course5 Intelligence takes a very comprehensive and structured approach when it comes to identifying, defining, and profiling segments within a product category. While most companies focus their approaches to segmentation on lifestyle/psychographic variables and needs, Course5’s approach is multidimensional and integrating. Fundamentally we believe that purchase decisions within a category are based on a multidimensional gestalt that is the sum total of normative beliefs, attitudes, behaviors, and needs. We have provided a more detailed description of our overall approach below.

Segmentation Basis Dimensions

Course5 believes that in any given product category, there are five key dimensions that mitigate customer purchase decisions:

Segmentation Basis Dimensions

Personal Identity

This dimension is related to how customers see themselves in terms of who they are as individuals, their lifestyles, and how they relate to the world around them. The core thought process here is based on “I will buy things that are consistent with and reinforce who I am as a person.” In order to capture a holistic view of personal identity, Course5 has developed a battery of attributes designed to assess customer beliefs about who they are based on lifestyle factors including beliefs about leisure, the role of work, the role of family, personal health, finance and spending, environmental concerns, fashion, charity, and social interaction.

In addition, to assess personality dimensions, we utilize the “Big Five” model to assess personality dimensions. The Big Five model is a comprehensive, empirical, data-driven research finding. These five broad factors were discovered and defined by several independent sets of researchers. These researchers began by studying known personality traits and then factor-analyzing hundreds of measures of these traits (in self-report and questionnaire data, peer ratings, and objective measures from experimental settings) in order to find the underlying factors of personality. The Big Five metrics we use include

  • Openness to experience – (inventive/curious vs. consistent/cautious)
  • Conscientiousness – (efficient/organized vs. easy-going/careless)
  • Extraversion – (outgoing/energetic vs. solitary/reserved)
  • Agreeableness – (friendly/compassionate vs. cold/unkind)
  • Neuroticism – (sensitive/nervous vs. secure/confident)

Habits and Practices

These are the actual behaviors related to the category and address questions around how customers behave within the specific category, how much time they spend on activities related to the category, what types of activities they engage in, etc. The items we use in this section include assessments of time spent on various activities such as work and personal email, instant messaging, discussion group participation, gaming, online research, digital entertainment and music, online shopping, online banking/investing, working on documents, spreadsheets and presentations, etc.

Emotional Connection with Category

This dimension is related to how customers relate to the category, which in this case translates to understanding how customers relate to technology and technology products. Our battery of category attitude measurement tools, customized to the technology space includes early versus late adopter, technology opinion leader versus follower, the role of technology in life (anxiety, confidence, liking, and usefulness), and the importance of various emotional attributes (global brand, heritage, youthful and exciting, etc.).

Decision Drivers

Different categories have a different mix of brands. Customer decisions on what product to purchase depend on the category itself, the number and types of brands in that category, and their general perceptions regarding the incremental value that a specific brand brings to the products in that category. The list of attributes in this section includes items related to the number of brands, the importance of brands, similarity or differentiation among brands, etc. Additionally, we include attributes related to information-seeking behavior associated with purchases in this category, as well as perceptions regarding discounting and promotions.

Product/Service Needs within Category

These are the core product-related needs – the extent to which a customer is likely to purchase a specific product depends on the extent to which they feel the product meets their specific needs. Course5 typically develops a custom set of attributes for specific categories. For instance, because of our significant and long-term experience working in the technology space, we have identified a comprehensive list of product/service-related needs that customers in this category typically have related to design, style, colors, weight, performance, multimedia performance, advanced features, reliability, security, battery life, screen size, need for touch screen, customer service and support, warranty terms, etc.

Putting it all together

Because customers can be segmented on each of the above five dimensions that mitigate the purchase process, Course5 then develops an optimal set of segments separately based on each of the five dimensions detailed above (Segmentation Basis Dimensions – SBD), and then integrates the results to develop a final set of segments. The process by which this final set of segments is developed is a combination of art and science.

First, the segmentation results for each of the five SBDs are examined to determine which of the solutions offers the best set of segments in terms of size and differentiation across segments, and homogeneity within segments. Each set of dimensions is rank-ordered on the basis of the segment yield, differentiation across, and homogeneity within segments (Segment Yield Efficacy Rank – SYER). The dimension that yields the strongest solution (SYER=1) then forms the foundational framework against which the next two dimensions (SYER=2 and SYER=3), are combined in a “matrix” to yield a more detailed set of “cascading” segments. This approach ensures that we are using the three strongest dimensions (in terms of Segment Yield Efficacy) to determine the final segment solution.

The final set of optimal segments is then “profiled” using the segments from the remaining two segmentation basis dimensions. Additionally, each segment is further profiled using demographic variables, product/brand ownership variables, key influencers, and media habits (TV/Radio Programming, Newspapers/magazines, and Internet Sites). Finally, Course5 is able to develop perceptual maps for each segment that show the relationship between brand perceptions and key product/service needs and emotional connection attributes, to help identify “white space” opportunities for product development and marketing communication strategy.

One of the key elements of the approach we have outlined above is the iterative process which is used to arrive at the final segmentation solution. It is important for our clients to understand that they will necessarily need to be an important and engaged partner in the iterative process. For a segmentation study to be ultimately successful and resilient within an organization, it is important for key stakeholders to have a say in the final segment solution. Thus, at each stage of the process, Course5 will share our findings and provide recommendations; the client will have the opportunity to review our findings and recommendations at each stage and provide feedback based on stakeholder outlook, expertise, and understanding of the client’s long-term goals and strategies. This collaborative process will finally yield a set of key, actionable segments that can then be effectively targeted by our client to drive share growth.

What are the benefits of our approach?

We believe our approach has several key characteristics that make it a superior approach to market segmentation. Our rationale is outlined below:

  1. Customer-Centric
    While most market segmentation approaches are based on a priori attitudinal and needs-oriented analysis, our approach puts the customer at the center of the stage. We start with the customer as an individual, with an identity, as a member of an underlying group, similar to birds of the same feather, but different from others. We start with customer lifestyles, personalities, and category-related behaviors which typically constitute the root causes behind purchase decisions within a category. We are then able to determine how they differ based on their category-specific needs, allowing us to uncover unmet needs for product development. Understanding their attitudes towards the category and brands in the category provides a significant opportunity to develop targeted marketing communications.
  2. Multiple Basis Dimensions for Segmentation
    We develop the best segmentation options from each basis dimension, and combination of basic dimensions, and evaluate them against key business criteria, to determine the final segments. The key benefit is that we identify the best solution without preconceived notions.
  3. Multiple Analytic Techniques
    Commonly used analytical techniques have advantages and disadvantages. Depending on the final set of questions, the length of the questionnaire, and the interim results, we use a variety of statistically sound approaches that help to maximize the value of the results.
  4. Combination of Art, Science, and Business Savvy
    While many segmentation approaches are based purely on mathematical results, our approach places a great deal of emphasis on actionability, accessibility, simplicity, and consistency.
  5. It’s About You
    We don’t dictate the ultimate solution. We understand that segmentation is an immersive outcome. We provide potential solutions and share our perspectives on the pros and cons of each with you, but the ultimate solution is based on your feedback. We work with you and your stakeholder to determine the business criteria against which each solution will be judged. This makes it easier to “sell” the final solution internally, and for key stakeholders to “internalize” the results.

Get in touch with us, and let us help you better understand your customers’ requirements, identify relevant and actionable segments to target, and enhance your offering to both customer and enterprise markets.