Segmentation can mean many things
Updated: May 30
Segmentation has become a popular tool for marketers and business strategists alike.
The ability to group the market or customers into recognisable segments in order to focus on differentiating messages, propositions and product developments to increase reach and to move away from one size fits all.
But, before you say “great, I want one” there are various different approaches to segmentation depending really on what you want to get out of it and how you want it to support the business.
It also does depend on what your business sells and the size and make-up of your customer base. Sometimes demographics (age, gender, life stage, family make-up, affluence and location) can be very informative and a reasonable basis for segmentation but for other businesses, a more nuanced approach is required based on attitudes, differing needs and the relationship with the brand.
Personally, I don’t believe there is an uber segmentation methodology that will allow you to look at the opportunity across the market, identify different needs of customers and be used for targeting.
However, you can make your multiple segmentations work well together by having a segmentation strategy and clear guidelines as to when you use each one and how they complement each other.
I’ve pulled together an overview of the approaches to segmentation that we have developed for businesses, over and above demographics, to show how they can support your business in different ways.
Market needs or psychographic segmentation
This is based on the whole market for your product and will often be a combination of qual, quant and customer analysis.
It will provide an overview of the market and the needs of different types of customers that will be interested in purchasing your or your competitor's products.
Depending on the questionnaire design and responder volume, you could establish where the penetration of your customers is compared to your competitors across the different segments, which could be useful to establish where to focus product and proposition development.
To fully understand how your customers fit into the segmentation, segment rules will need to be applied to your customer database. Most customer databases will typically only have some demographics data and maybe some hard transactional data, i.e. what they bought and when, and are unlikely to have attitudinal information at an individual customer level.
A concept of ‘golden questions’ is often used to capture attitudinal information from a sample of customers on the database to identify where they fit into the needs segmentation. The most successful approaches are when these questions can then be modelled back onto the database to predict a customers need segment.
For example, a fast-food restaurant may have identified a segment ‘weekly treaters’, modelling this onto the base could use the frequency of purchase to identify them.
Often though this is where it falls down and the modelling isn’t predictive and the match tends to be based on demographic data which, in my opinion, is not discriminative enough for needs or attitudes.
If this is an approach that you are considering, make sure there is enough thought to how the ‘golden questions’ are going to be modelled back on to the base.
Customer behaviour segmentation - 'you are what you buy'
A pioneering approach that dunnhumby and Tesco used based on the transactional data from the Clubcard to group customers by what they purchased. They categorised products to establish the use of the product ie flour & butter to determine groups that were more likely to be baking or making from scratch, or ready meal & tins to identify time-poor convenience shoppers.
Once groups of customers are identified additional profiling through supplementary qual and quant research can be done to establish further needs and attitudes of the groups to help inform messaging and proposition development for the groups.
This approach is very much a bottom-up approach and requires businesses to have transactional data about their customer's purchases. This used to be restricted to business with loyalty cards, but now with brands being more established on-line, this approach is more accessible.
Once you have the segments identified you can use them to identify shoppers as they come on-line and promote products that would be relevant to them, making their customer experience more tailored by enabling them to find relevant products and services easily.
As it is customer-driven, this segmentation can have the potential to miss out groups of the market that aren't covered by your product but are by your competitor. Tesco had a pretty representative view of the UK market when they used this approach so it was less of an issue for them, but it would be worth thinking about that if this was an option you were considering.
Customer value segmentation - recency, frequency and value
Most business customer value will follow a Pareto Principle, where 20% of customers accounting for 80% of spend.
Conducting a Recency, Frequency and Value (RFV) segmentation is a very useful approach to establishing this for your business and a way to identify your most valuable customers, the ones with the highest potential and the ones that used to be high value but haven’t purchased for a while.
Recognising the different values of a customer will enable you to treat them accordingly at each touchpoint that you see them interacting with you. This is a particularly useful segmentation to establish the customer relationship with your brand and to support your direct communication strategy, incentive strategy and your customer services.
By having an objective for each segment you can see where the potential could be to grow and move customers from one segment to another and what strategies are needed to be put in place to enable it. One of the most common use cases for this type of segmentation is when developing customer journeys.
This segmentation is very internal focussed and won’t enable you to look at the full market place, it is also limited in the ability to identify the needs of customers towards the product or customer.
Further research is often conducted to give more colour about the segments but it’s worth noting that this should be primarily about what their ‘needs’ are in relation to the relationship with the brand - ie a new customer, loyal or inactive customers rather than the needs about the product as this won't necessarily change much between each of the groups.
However, an RFV segmentation works very well in conjunction with a ‘you are what you buy’ segmentation and can help to construct messaging hierarchies on-line and with email communications.
Engagement segmentation or lead score
In the absence of a monetary value, using the RFV methodology but substituting value with the level of interactions, can help establish how engaged a customer is with the brand. Using interactions with the website, type of content that is being viewed and responsiveness to communication can ascertain the level of engagement and the likelihood they are to continue to respond or make further actions.
This can be a very useful segmentation for businesses where there is a long consideration process that requires a degree of research and trying to establish when they are most likely to be ‘in market’ to make a purchase.
B2B organisations will use this to manage their sales pipeline to see when the optimal time might be for a salesman to pick-up the phone to a prospective customer.
This is when a segmentation approach is being used tactically to select groups of customers for a campaign who will have similar characteristics, for example, campaign teams will be selecting customers based on their demographics, time since last purchase or products last purchased.
A lot of the campaign tools are now set-up to be able to create quite sophisticated targeting criteria that easily determine niche groups and connect up to other platforms to improve the selection criteria based on their profile data. This is very useful for acquisition and social media targeting. It is also a good way in which to find groups of customers who are showing specific characteristics like ‘discount heavy’, ‘organic and green’ products etc.
Whilst this approach does drive responses it can become very campaign focussed and the customer becomes purely seen as a marketing channel, rather than looking at the wider opportunities and being customer focussed.
It is unlikely that one segmentation will enable you to map out the market and be used for targeting purposes. The success of using them to drive growth for your business is having a segmentation strategy to have clarity about the application of each and how they can work together.
This will also determine how you embed a segmentation into a business as if you are creating pen portraits you need to ensure that you don’t create them for every segmentation or research project that is being conducted as you will soon become overrun with competing groups.
Creating a matrix approach to combine the segmentation can be a successful way to overcome this and often using some of the customer's segments as profiling tags on the base to support the targeting.
We work with clients to produce segmentations that support their business rather than using a one-size-fits-all approach. To do this we always start by understanding your business and an opportunity for you to pick the brains of one of our experts.
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