Customer Segmentation

The advantages and limitations

By Tyler Anderson

It’s time to take an honest look at what segmentation studies can and can’t do…and whether it’s what you really need.

Too much information, running through my brain.
Too much information, driving me insane.
— The Police

The Police declared this back in the early 80s, and it’s truer today than ever before.

Over the last decade in particular, the dropping cost and rising ease of online data collection and analysis have encouraged retailers and packaged-goods companies to gather lots and lots of information. It’s often used to conduct detailed consumer segmentation – from a regional to global scale. Sounds like a good thing, right?

Of course…but I think The Police were on to something. We’re creating huge quantities of data to absorb and make sense of. And with big data comes big responsibility. Just because you have it, doesn’t mean it will lead you to the right conclusions.

Take segmentation, for example. It’s a research and insights methodology that divides shoppers into subsets, or segments, that share common demographics, needs, behaviors, attitudes, and more. All that thin-sliced data can help you make better marketing and design decisions. But it’s important to know, going in to a segmentation program, what you can realistically expect and accomplish.

Customer Segmentation

Here are eight key ideas every marketer should keep in mind as they gather, and sort, all that information about their customers.

What segmentation can do:

Uncover what makes your customers tick

Motivating attitudes can be uncovered to understand what is driving shopping and consumption behaviors. These attitudes can range from product- or service-specific attitudes (“I need a lighter widget to carry up the steps”) to more macro lifestyle attitudes that dig deeper into the consumer psyche (“I want a widget that makes my family happier”). Often the macro lifestyle attitudes offer more meat on the bone for marketers and merchandisers to create emotional connections with customers that drive brand loyalty and increased value perception.

Identify the size of opportunity segments

A customer segmentation study can help identify, describe, and size the subsets of your current and potential customers. While most brands and retailers want anyone and everyone to become a customer, segmentation can help the organization focus efforts on the largest opportunities to avoid being all things to all people.

Understand who isn’t your customer

Segmentation can help rule out those who are not your target customers and help you create more focused strategies, from product development to customer experiences and marketing messaging. It is important to present the total results, including non-target segments, to give context and provide rationale for your segmentation decisions.

Create a common language for your organization

In addition to the science, the art of segmentation helps create segment names and visual representations that can become shared lingo across your organization. An organization’s ability to refer back to the priority segments keeps the consumer at the heart of important decisions – “But will this work for X and Y?” Using clever and memorable segment names and visuals increases the likelihood of the segmentation becoming part of daily dialogue.

What segmentation can’t do:

Create a monolithic target segment

Unless you offer extremely niche products or services, your segmentation will be a bit messy. The most effective segments typically divide the total addressable market (TAM) into 6-10 segments, and then highlight 3-4 of those as the target segments. A segmentation helps organizations makes choices – it does not dictate decisions.

Define your brand strategy

Your brand strategy needs to be the core of your organization. It should define everything you do, from product development to SKU rationalization to ad campaigns. The goal of segmentation is to highlight differences between groups. Your brand strategy needs to be the consistent idea that unites and spans across segments and geographies. Your segmentation should be one input when creating a relevant and differentiated brand strategy. Creating a modular brand strategy for different segments and geographies is a potential recipe for disaster.

Determine innovation

Segmentation is a snapshot in time that can help drive innovation by highlighting the key attitudes and behaviors of your priority segments. Creating innovation in products and customer experiences requires an understanding of your audience coupled with future thinking that takes into account a variety of inputs – both tangible and intangible.

Replace ongoing consumer/shopper research

Segmentation is typically done when an organization is at a pivot point, whether it’s a new store design or a comprehensive rebranding effort. This holistic assessment of your customers and your business strategies helps your organization make big decisions. As a rule of thumb, a segmentation remains relevant for 3-5 years and then needs to be refreshed to account for shifts in your customer’s lifestyle and market fluctuations. In addition to segmentation, an organization needs to consistently collect data (in various forms) to make sure your brand, your product, and your stores are aligning with the ever-evolving needs and wants of your customers.

A consumer segmentation is a an excellent tool in your tool belt to create compelling brand strategies and consumer experiences, but like any tool in needs to be used appropriately and in the right situations. Any information, including segmentation, needs to be used judiciously with ample amounts of common sense.

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