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The Solution to Every Marketing Problem: Market Segmentation

Segmentation Framework

It’s difficult to call yourself a “Marketing Professional” these days because marketing has so many sub-categories and is defined differently across companies (I strongly recommend you take a minute to review the excellent “Anatomy of a World Class Marketing Organization” framework published by the Marketing Leadership Council). In many companies (like the one I in which I currently work) marketing is largely demand generation/marketing communications. In my prior company, Marketing was much more broadly defined to include pricing, product life-cycle management, business development, channel management, brand management, etc. and had full P&L responsibility. Marketing professionals were mini-General Managers at my prior employer and, as a regional Chief Marketing Officer, I was responsible for ensuring they were all doing marketing correctly. Finally, my first corporate employer defined marketing largely as communications and new product development. As you can see, the Marketing function can be a very confusing place!

I am famous among my colleagues and employees for saying, “Marketing is easy. No matter what the problem is, the answer is always ‘customer segmentation’.” Regardless of how marketing is defined at your company, what industry you are in, and what problems you are facing, I am confident that a strong segmentation model will help solve your problems and unleash profitable growth. How? The core goal of marketing is to uncover market needs and to create solutions (products, services) to address to these needs knowing that customers will be willing to pay to have their problems solved. You can only make money (profit) when a customer’s “willingness to pay” to have their problem solved is higher than their “cost to serve” which is a measure of how much time, money and effort it will take to create, develop, deliver and support the solution you provide to the customer.

Simple, right? Why, then, do most new product launches fail? Why do existing products lose value over time if they are not supported by innovation? Because most marketers treat all customers THE SAME and in doing so, develop average products that do not resonate strongly with an individual segment. Think of it this way: If you took the T-Shirt size of 100 random people you are likely to get a small number of XXL/XXS sizes, a decent number of Large and Small sizes, and a lot of medium size T-Shirts. Most marketers would take this data, average it, and say “Ah ha! The largest market is for medium size T-shirts!” They would then only produce medium size T-Shirts. But think about it; the Mediums sized T-shirt will not fit a very large portion of the population so it is not a viable solution for most customers. Because the medium size T-shirt will not fit many people, most potential customers’ willingness to pay is zero and they will not buy the product. With a little more research you may discover that XXL/XXS customers have very limited choices in T-shirt options so their willingness to pay could be very high. Because you only sell medium T-shirts you are missing out on this profitable segment. The example above is focused on product development (creating T-Shirts) but it applies to marketing communications, pricing, branding, etc. where people create “average” messaging, pricing and brand positioning to reach the “average” customer instead of focusing like a laser on the needs of individual segments.

What is segmentation and how can it help me avoid creating average products/brands/communications?

Segmentation is simply taking a group of people (generally, customers and potential customers) and separating them into groups based on some sort of criteria. Once the segments are defined, data is gathered to understand the willingness to pay and cost to serve each segment. The segmentation model is then used to drive strategy (which segments to focus on and which to avoid), product development (what are the needs of each segment and what solutions can be developed to address those needs), communications (what messages and delivery mechanisms resonate with each segment), pricing (how can we maximize profit by charging different prices to each segment based on their willingness to pay), branding (can we differentiate products within our portfolio and against competitors by targeting brand promises to segments), channel management (what is the best delivery method for each segment) and the list goes on.

There are lots of different segmentation models and my goal is not to provide an exhaustive list. Instead I want to discuss two common models (demographic and behavioral) and what I feel is the most robust and insightful model (needs based).

  • Demographic Segmentation models are very common and you probably see them all the time especially around election time. These models cluster people based on their demographics including age, race, gender, etc. For example, “47% of White Females aged 35-50 prefer Candidate X”
    • Marketing Quality: Low
    • Pros: Demographic segmentation is easy to conduct as demographic information is readily available (this is why it is so common)
    • Cons: This model assumes all people within a demographic unit act the same. Do you ever read newspaper articles stating “Generation X/Y/Millennials all tend to [insert bad behavior]” and think to yourself: “I am in that demographic but don’t think that way at all!” Of course you do because humans are diverse and don’t act the same because they were all born at the same time, have the same skin color, gender, etc.
  • Behavioral Segmentation models cluster people on behaviors they have. For example, “Adolescent males who play basketball at least once per week.”
    • Marketing Quality: Moderate
    • Pros: Better targeting as it focuses on behavior. Easier to identify target potential customers. Airline loyalty programs are good examples as they categories people based on how much they travel and provide rewards accordingly.
    • Cons: More difficult to conduct as behaviors are challenging to measure and quantify  
  • Needs Based Segmentation models are the most difficult to develop but are the most powerful in providing business insights. These models cluster people based on the NEEDS they have or the PROBLEMS they are trying to solve. Good needs based segmentation focused on needs at the INDIVIDUAL level and how people act to meet those needs.
    • Marketing Quality: High
    • Pros: Deep insights into customer needs and behaviors. Highly focused. Provides actionable information and insight (example below)
    • Cons: Most difficult to create. Often requires Observational Voice of Customer (OVOC) techniques and/or deep understanding of individual customers.

I am a big fan of Needs Based segmentation and using this method has unquestionably turbocharged my career. For example, in a past job I was responsible for a business that sold very expensive, customized data management solutions to State Departments of Motor Vehicles (DMV). Every DMV had an executive that was appointed by the Governor of the state which made it a high profile, political role. I conducted my research and segmented the market into two broad categories:

  • DMV Leaders for whom their role was a stepping stone to higher office. I named this segment the “Rising Stars” and their characteristics included:
    • Tended to be younger and dynamic
      • Wanted to have a track record of successes they could draw on when they decided to run for higher political office [Core need]
      • Wanted to see their names in the media around improving efficiency, saving taxpayer money, and strong leadership
      • Willingness to Pay: High
      • Cost to Serve: Moderate
    • DMV Leaders for whom their role was their last job prior to retirement. I named this the “Risk Averse” segment and they had the following characteristics:
      • Tended to be within 5 years of retirement
      • Are extremely risk averse
      • Wanted to avoid negative media coverage that could put their retirement at risk or get them fired [Core need]
      • Willingness to pay: Low
      • Cost to Serve: Low

Once I defined these segments, the business strategy and execution model fell into place:

  • Since there are only 50 DMV leaders in the US, we assigned each individual into one of the two categories.
  • We made a strategic decision to Prioritize the “Rising Stars” as they had the highest willingness to pay, wanted to differentiate themselves through innovative solutions (our strength in the market place) and winning in this segment would only help our business in the future as many of these people would be become Governors in their states.
    • We created a dedicated messaging campaign for Rising Stars with key messages around improving efficiency, enhancing the citizen experience, and innovation [messages directly related to their core needs]
    • We developed case studies of former DMV leaders who used our solutions and went on to win higher offices within the state
    • We developed new product feature sets (it was software so it was an “add on package”) of additional, innovative features with a separate brand and premium pricing with innovative delivery systems (Citizen Apps, etc.)
  • However, we DID NOT ignore the Risk Averse segment. Rather, we de-prioritized them to ensure our business model was only investing minimal resources to maintain profitability (because the willingness to pay of this segment was lower, we needed a model that minimized our sales and support costs).
    • We created a dedicated messaging campaign for Risk Averse with key messages around our solution being low risk and cost efficient (easier to obtain government funding) [messages directly related to their core needs]
    • We developed case studies focusing on retied DMV officials who could testify to the ease of use and robustness of the solution
    • We developed a less customized, “basic” version of our solution that was easier to install and reduced implementation time and risk.

Finally, we completely changed our metrics to match what we were trying to accomplish in each segment. These actions resulted in an increase in growth from 7% to 23% in the first year with increased margins in both segments (Rising Stars margin increased due to increasing price knowing their willingness to pay was higher, Risk Averse margins increased due to our lower cost to serve business model).  Additionally, we gained share (dramatically) against competition and won numerous “Top Vendor” awards in multiple states (across both segments) as our customer satisfaction increased dramatically as many customers stated “I finally feel like I have a vendor who understands my needs.”

I hope this post provides you with an overview as to the positive impact good segmentation can have on your business. Segmentation is not easy and it is as much art as it is science, but it can lead to tremendously powerful insights into your business and turbocharge your career when done appropriately. If you are a marketer struggling with product, communication, profitability, brand or strategy issues, I encourage you to step back and segment your market in a meaningful way as I firmly believe at almost all marketing issues can be solved with proper segmentation.

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