In principle, Customer Segmentation was to indicate to the companies how to tailor their offer to market expectations and customer preferences
The aim was to discover unmet needs and to help make decisions about product development and market entry.
However, today customer segmentation is perceived in terms of Facebook Ads, and anyone entering a particular word in Google Search and clicks your ad in Google Ads is often considered a customer.
But neither demographic, nor psychographic (values, tastes, preferences, lifestyle) segmentation concept enables you to identify the market segments to enter (and with which products).
What distinguishes the market segmentation only aimed at increasing brand identity and establishing emotional ties between the customer and the brand, from the segmentation which will provide the answer to the basic business questions?
Can we work on our product personas without customer segmentation?
Customer Segmentation approaches
Over the past 100 years, the approach to Customer Segmentation has evolved along with the market challenges.
World War II redefined the demand. Many new consumer products appeared which did not require a lot of advertising.
All it took was to ensure product availability and describe their features. It was so easy to succeed.
We targeted the advertising at the groups of customers of specified age, education, place of residence and economic situation.
Soon, the customers were on longer so predictable. In the 1960s even the least educated customer group had money in their pockets, and the rich began to look for more sophisticated products.
The demographic segmentation no longer made sense since the criteria of education and wealthiness have ceased to be determining factors.
In the 1970s a belief was coined that convincing a customer to a buy a product involves presenting a person similar to the customer or a person he/she would like to resemble.
The advertising focus shifted from functional features of a product to the emotions related to owning it and status raising.
The logical consequence was a market segmentation that reflected a target group characteristics and lifestyle.
Functional differences between products began to blur as the companies copied and developed them faster and faster.
In 1978, Arnold Mitchell and his colleagues at the Stanford Research Institute proposed a new customer classification system, named VALS (Values, Attitudes And Lifestyles).
The principles of this system were based on theories developed by David Riesman, a sociologist at Harvard University, and Abraham Maslow, a psychologist at Brandeis University, the author of the well know hierarchy of needs.
The VALS system divides people into 9 basic character types. The behavior of a given customer can be explained based on his/her belonging to one of the types.
Despite the fact that Customer Segmentation in terms of psychographic profile does not answer the question regarding the market segments to enter and with what products, it proves helpful in brand positioning and relationship building.
What the Customer Segmentation should be like?
This is described by David Meer and Daniel Yankelovich in Harvard Business Review. According to them, a segmentation brings tangible benefits to a company when it reveals certain customer habits and preferences.
The information is needed about the benefits and features of the products that matter most to the customers. Which customers will be willing to pay more, and which will rather seek lower prices. Or, how they perceive the company offer against the competitors.
Customer Segmentation should divide the market in order to:
- Reflect the company strategy;
- Indicate the sources of income and profit;
- Define the impact of the customer values, attitudes and beliefs on the products and services they purchase;
- Emphasize the real-life customer behavior;
- Constitute a clear indication for the top management;
- Include or anticipate the changes in the market environment and customer behavior.
How to prepare to Customer Segmentation?
A company should ask itself a number of questions.
What is our objective? A restaurant will consider which menu to introduce. A legal firm can make a decision which area of expertise to choose to expand its business and get the most profit.
A medical company will analyze which diseases are reimbursed in given countries. Banks, for their part, will think how to keep their clients from leaving and encourage them to get fast cash loans.
Where do our profits come from? The market segmentation should indicate the most profitable customer groups.
These are the customers who leave the most money or whose service takes the least time. Or, the service in conjunction with with the ease of winning them and sales result in the best profitability index.
What is the customer guided by? In order to learn this, the customer profile analysis should be conducted, and their lifestyle, attitude, self image and aspirations taken into account.
However, when analyzing your customers, you should bear in mind that their attitudes, lifestyle and aspirations are changeable.
What is our customers behavior?
We analyze this paying attention to several factors: product use intensity, customers inclination to exchange a solution for a competitor’s offer, preferences as regards a specific service channel (for B2B, these are: phone, email, Instagram.
Telegram and other communicators as well as face-to-face meetings and teleconferences) or type of sale.
While we’re on the subject of B2B, you need to answer the question whether it is enough to write an offer email or to prepare a nice presentation, meet the customer face-to-face, or at least conduct a teleconference.
Is our Customer Segmentation change-sensitive? Many companies believe that it is sufficient to define Customer Segmentation once only. Nothing could be more wrong.
Customer Segmentation is an ongoing process. It should result in a multifaceted target group portrait.
Therefore, segmentation should include dynamic criteria: instead of personality traits, we should analyze the customers according to attitudes, needs and behavior. Customer group analysis varies with the environment.
This is affected by the advent of new technologies, changes to legislation, trends and global issues (e.g. in response to global warming and pollution, the plastic free trend and electric cars appeared), which redefine the prospective customers criteria.
It is the first step on the road to strategy creation. Customer Segmentation leads us to the work on Persona.