When less is more: The essentials of customer segmentation

Businesses often make the mistake of trying to sell to everyone – but why exactly is this a mistake?

The answer is if you try to please everyone, you end up pleasing no-one.

Your business needs to appeal to a group of customers who are looking for the solution your products offer.

This means that you need to make a choice about who to target among all the consumers in your relevant category.

Of course, this choice implies that you will have to ignore some consumers that you could potentially attract, which feels counter-intuitive.

Surely, you should try to attract the largest number of consumers possible?

This choice certainly worries many marketers, yet it’s the only way to sell more profitably.

Segmentation – that is, narrowing your target market down to specific consumer demographics – ensures that you have the best possible chance of satisfying needs and making sales.

Where to start

When deciding which consumers to target, conduct an analysis; this can be as simple as identifying target markets through observation – which consumers already purchase your products?

Is it young men, older housewives, or mothers of large families, for example?

Although this is easy to articulate, it has the weakness of not truly reflecting why those customers are choosing your brand over the competition.

Therefore, it makes much more sense to move onto a more sophisticated segmentation that is informed by values and reasons for purchase, rather than simply demographics.

For example, rather than young men, a sportswear business could target consumers who value a sense of freedom.

Even if the majority of the consumers who fall into this segment are young men, the description is far more actionable in terms of marketing strategies and product positioning.

roviding a detailed description of the target customers makes them easier to engage because your advertising messages can then ‘speak their language’.

Types of segmentation

You can use demographics to segment all your category users, but it’s not very distinctive, nor competitive.

The sooner you can run a more complex segmentation, the better.

There are five main types of segmentation:

• Firmagraphics – This is the most basic and frequently-used segmentation across different product categories.

An example of firmagraphics in the beverage category could be alcoholic versus non-alcoholic, still versus sparkling, or bottles versus cans.

The consumers of the different types of beverages are easy to identify since the products they buy are too.
However, as the grouping is based on the consumers of the different products, this is not a very useful segmentation for marketing, since consumers can appear in more than one segment.

And as you will see below, one of the criteria of a good segmentation is that customers can only appear in one segment.

• Demographics – As discussed previously, demographic segmentation categorises consumers based on factors such as age, gender, ethnicity, marital status, income, education, or employment.

Again, this form of segmentation is limited because consumers can be classified in more than one segment, and each segment also offers limited insights into consumers’ purchasing drivers.

• Geographics – Included in this section are all the possible descriptions relating to your customers’ geography – country, state, city, etcetera.

This could be relevant for products suited to different types of weather or language, or for businesses expanding into new markets.

However, because it groups people by geography alone, this form of segmentation assumes that all those in a group will be similar.

As we all know, although there are zones in cities and countries where inhabitants are similar, it is simplistic to assume that they all behave and purchase in the same way.

• Behavioural – At this level of segmentation, we look more at how customers behave, rather than simply who they are or where they live.

Types of behaviour included in this segmentation could be what solution they are looking for based upon the benefits of a brand; how, when and where they buy; and where they are in terms of life-cycle or engagement with a specific brand.

At this point, we group customers by what they do, so we at least know that they are behaving in a similar way.

However, behavioural segmentation doesn’t tell us all the reasons these consumers behave the same way.

• Psychographics – This is among the most sophisticated and complex forms of segmentation.

It involves grouping consumers by their values, attitudes and opinions, interests, personality, or lifestyle, and often offers a competitive advantage as it provides deeper insights into both the way the target market purchases and why.

If you do not have the time, money, or expertise to run a detailed segmentation study, you can still make an informed decision based on simple criteria.

This could be based on observation, or an analysis of your customer service database.

The ‘MIDAS’ touch

Whatever method you use, the final groups of consumers – the ‘segments’ or ‘clusters’ – need to meet the following five conditions, known by the acronym ‘MIDAS’:

• Measurable – The groups need to be clearly defined and numerically quantifiable; think size, market share, or value in dollars.

• Identifiable – Each segment must have a distinct profile and each customer must be attributed to only one segment.

• Definable – Every cluster must be easy to describe and share with others so that you have mutual understanding of them.

• Actionable – The groups must be easy to identify in order to target marketing actions and communications towards them.

• Substantial – The chosen segment must be financially viable to target, which means that it should, in general, be stable or increasing in size.

Good segments traditionally fulfil all five of these key conditions, however the last condition has changed slightly in recent years due to the rise of personalisation.

Instead of assessing substantiality, some prefer to assess whether it is sustainable. This will depend on the category in which you operate.

Taking action

Once you have identified the different types of consumers, you can then decide what to do with each segment – target, convert, grow, or ignore.

‘Target’ consumers are core customers; they are both profitable to the business and strongly attracted to the business’ products and services. Therefore, they need to be protected from competition.

Meanwhile, ‘Convert’ consumers offer the most potential as new customers. They are attracted to the business’ products or services, but the ability to ‘win’ them is currently low.

To turn them into customers, consider improving the product mix or marketing.

‘Grow’ consumers are those that are easy to convince to purchase, but perhaps not as profitable. This might change, so it is important to review them from time-to-time.

Finally, there are the ‘Ignore’ consumers. If you have neither the product/service they are likely to buy, nor would they be profitable to you, why spend time, money and energy going after them?

In order to determine which group your segments fall into, I suggest using what is often referred to as the ‘Boston Matrix’.

It takes the form of a scatter plot on two axes. While the criteria you use for each axis can vary, this simple analysis has the advantage of being able to be further refined over time.

These criteria can be grouped into ‘Attractiveness’ and ‘Ability to win’.

Examples of Attractiveness include segment size, segment growth rate, segment value, competitive environment, profitability, industry structure, distribution, and pricing.

Ability to win includes market share, differentiation, brand strength, distribution strength, company profitability, customer appeal, customer loyalty, or reputation.

All businesses want to sell more and increase profitability, but trying to sell to everyone is unlikely to accomplish these goals.

Instead, choosing the right group of customers to attract with your product or service is the essential first step.

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