The element of segmentation is often misunderstood. John Lincoln takes us through what this marketing element means beyond the single customer aspect dimension model.
It is essential that small business owners, managers and SME investors consider the cost to serve. Not all customers should be treated equally and the economics of customer experience dictate that the intended experience should be designed based on the value derived from a value based segment.
Marketers and companies normally execute the application of their segmentation strategies too narrowly. Segmentation is often myopically thought of in a single dimension as clustering customers in homogenous groups for marketing purposes only. This is a fallacy as segmentation drives the very essence of how an organisation operates, serves and meets the needs of its customers.
Most of us know it in generic terms but do not stop and think about what it really means. It is important for a business of any size to think through the essence of what a market is, before marketing their propositions to their customers.
Defining market essence
First and foremost, a market has to have customers with unmet needs or wants. If there is not an unmet need, or if your value proposition does not offer anything incremental, or if you don’t differentiate your proposition, then there is no point in being in business. Secondly, consumers or businesses should have a willingness to buy; You don’t just build and have customers flocking to you.
Thirdly, there has to be buying power. Consumers and businesses have to able to afford what you offer.
Last but not least, whoever is buying has to have the authority to buy. In other words, how do you make your customers ready, willing and able? It is important that we keep this simple logic before we embark on an expensive proposition development or segmentation exercise.
Segmentation is commonly known as a process in which customers are grouped based on demographics, psychographics, needs, spending patterns, cultural background, education, language, mobility and other factors.
As you will see later, segmentation is not just for marketing purposes only. A proper segmentation strategy will help you not only target and attract customers better but also helps set the tone and framework for how you serve them and how you organise to serve your customers better.
The pillars of segmentation
People often ignore the fundamental rules of segmentation. For any segmentation exercise to succeed, it is important that these basic rules be met. I have often observed marketers using psychographics and other segmentation ways that are not relevant to their industry. The reason they do it is because they fail to clearly understand the MASA rules.
Any segmentation of a market should be able to measure the size and purchasing power of the segments. Without this you will not able to know whether the market that you are after is attractive, viable or sustainable.
You should be able to effectively reach a segment. If you cannot economically, emotionally or logically reach a segment, it is not worth pursuing.
Size does matter here. There is no point going after a segment where the volume or the profit pool is minuscule. I know the naysayers might not agree. I am referring to the primary segmentation framework here. Yes, of course you can have secondary, tertiary and micro segments. You can even practice one-to-one marketing. What I am referring to here is only about the primary segmentation rules.
Any segmentation framework has to be actionable. You need to clearly think if your marketing strategies and plans can attract the segments that you are defining.
How do you segment the market? This is often done through a combination of primary and secondary research. There are many ways to approach the problem. A common way is to first do a set of qualitative studies (using limited focus groups).
The outcome of these qualitative studies is then used to formulate a segmentation hypothesis, which is then validated through a detailed primary research, encompassing a much larger and statistically valid sample. Then, using advanced statics modelling, the segments or clusters are derived.
If you are a small business, you probably cannot afford the cost and sometimes the incompetency of outside firms doing this. The point here is to make you think about the different possible segments as you craft your propositions for your customers.
Good segmentation exercise outcome
A good segmentation exercise will not only be able to group and quantify the size and value of each segment but also enable you to develop portraits of each segment. The portrait of a segment could include their lifestyle and values, priorities, aspirations, needs, demographics, attitudes and preferences to your company’s and competitors’ products and services.
Other valuable information could include triggers and barriers to adopting your products, durable and white goods ownership and how disposable income is spent as well as the Internet, television viewing habits and print readership benefits, among many others.
The applications of segmentation
A good market segmentation framework will help you design and craft propositions that are relevant to a target segment, develop retention strategies that prevent certain segments of customers leaving you, as well as enable to you to spend your communications spend more effectively.
The segmentation work that you have done will also enable your company to have optimal and differentiated pricing strategies for different segments. After all when economists refer to a demand curve, they are actually referring to the aggregate average demand curve across all different segments in the market. Now you see the link between economics and marketing.
A good segmentation exercise will also enable your frontline sales and service staff to identify a customer upfront as to which segment he or she belongs to. Just imagine the opportunity costs lost in trying to close a deal with a wrong prospect.
A two dimensional model
Market based segmentation alone is not enough. You will also need to know where you are getting your value from. If for example, 80% of your customers generate about 20% of your revenue, then resources have to be disproportionately allocated to the ones that matter.
Value-based segmentation will help you to ensure that your customer services are prioritised at all customer touch points, albeit at the call centre or your channels. It will ensure that your credit and collections policies reflect the dependency of your profits on your high value customers.
Therefore, it is imperative that you know that a single dimension market based segmentation alone is not enough, but that you also need to have an overlay of a value based segmentation to ensure that high value customers receive the royal treatment that they so fully deserve.
Segmentation and organisation structures
Traditionally most organisations are grouped or segregated around their product lines. If the “customer is king”, then it behoves you to organise around your customers. World class marketing companies in the Fast Moving Consumable Goods (FMCG), telecoms, banks and other industries, organise around the customer segments that they serve.
No matter how big or small, you need to segment and organise around your target segments within the market or markets that you are after. You can only ignore this if you are into commodities or if you are a monopoly.
John Lincoln has over 20 years telecommunications experience in the USA, Japan, Europe, India, Dubai, Malaysia, Latin America and various other countries. He has extensive senior expertise in international telecommunications sales, marketing, business development and customer service delivery.
John also has executive experience with general management, marketing, P&L, product development and revenue management responsibilities in both consumer and enterprise segments for both the fixed and mobile sectors. In addition John has an impressive operational and management portfolio of established proven expertise in incremental business value creation and management of large multi-cultural teams in Vodafone Global in the UK, Japan Telecom in Tokyo, AirTouch and Pacific Bell (now AT&T) in San Francisco and Tokyo, Airtel in Delhi and other telecom and technology companies.
You can find John’s personal blog at www.johnlincoln.biz. He can be contacted via: firstname.lastname@example.org, and followed on Twitter: @lincolnjc.
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.