An Introduction to Market and Customer Segmentation

Note: This article originally published by my colleague David Tang.

Segmentation. Everyone’s doing it, but are you doing it right?

Although segmentation should help target the right customers, it does not always bring the intended value. Inappropriately or incorrectly defined segments may lead management to make bad strategic decisions.

Market and Customer Segmentation defines a number of different groups of people or organizations, which our company aims to reach and serve. The intent of the segmentation exercise is to two-fold:

  1. Create the foundation for a relevant Value Proposition…
  • With products matching customers needs;
  • With adjusting pricing and discount schemes; and
  • With service offerings attracting and keeping the relevant customers loyal.
  1. Adjust the Go-to-Market Strategy (GTM) in order to…
  • Utilize the best use of a multi-channel approach;
  • Optimize sales efforts across the full Customer Experience journey; and
  • Align marketing and messaging toward our target customers.

There are many obstacles to conducting a segmentation exercise properly and effectively. Here are just some such obstacles:

  • Companies try to use just one segmentation model for all/different purposes.
  • Companies have multiple segmentation models without a clear and consistent linkage among them.
  • Companies base the model on data at hand vs. data needed to make the insights relevant.
  • Management is not aligned on what drives and what describes the market.
  • Companies allow complexity of a few key customers interfere wit ha simple market view.
  • The purpose of the segmentation is “lost in translation” when executed on an operational level.

There are 3 distinct types of segmentation levels–Strategic Segmentation, Tactical Segmentation, and Operational Segmentation.

Strategic Segmentation

Otherwise known as Market Segmentation, Strategic Segmentation seeks to:

  • Understand the market landscape of our business.
  • Evaluate where we are doing business.
  • Identify and prioritize attractive market segments.

Strategic Segmentation seeks to answer the questions:

  • Where do we grow?
  • What industries and verticals? What geographies?
  • Who are our primary market segments?

Tactical Segmentation

Otherwise known as Customer Segmentation, the common objectives of this segmentation include:

  • Determine the needs and drivers for our customers.
  • Understand the characteristics of the valuable segments.
  • Define the criteria customer groups make their purchases by.
  • Determine their average transaction and annual spend.

Customer Segmentation seeks to address questions, such as:

  • How do we differentiate within the prioritized market segments?
  • What do we offer our customer segments?
  • What are our customer demographics?

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Operational Segmentation

The basis of Operational Segmentation is prioritizing market segments based on Time, Resources, and Value. It seeks to understand these business decisions:

  • Determine which customers are most attractive to our business model.
  • Know the size/value of our customer segments.
  • Understand how we service different customer groups.
  • Determine how we differentiate our products and services.

Questions that can be answered from Operational Segmentation include:

  • Who are our most loyal customers?
  • Who do we call and visit?
  • Who do we provide discounts and benefits to?

You can download an editable PowerPoint about conducting Market and Customer Segmentation here on the Flevy documents marketplace.

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