Why Strategic Market Segmentation Matters
Driving Brand Growth and Differentiation Starts with Smarter Segmentation and Better Data
Written by Christine Odishoo, Vice President, Research & Insights, GBK Collective
Market segmentation is an essential tool in defining your product, brand and marketing strategy to fuel growth by focusing on the most valuable customers. And yet, not all approaches are created equal. There are a myriad of challenges or roadblocks that can impact the effectiveness of your segmentation approach — from how you identify and define your target segments to the quality of your data and ability to turn customer insights into actionable strategies.
As Daniel Yankelovich first articulated in the March 1964 issue of HBR, “segmentation analysis helps —
…direct the appropriate amounts of promotional attention and money to the most potentially profitable segments of the market;
…design a product line that truly parallels the demands of the market instead of one that bulks in some areas and ignores or scants other potentially quite profitable segments;
…determine the appeals that will be most effective in a company’s advertising…”
Even with all of technological and societal changes the past 50 years, much of Yankelovich’s perspective still holds true today. Clearly defining your target customers, and just as importantly, which segments you are NOT targeting forces the organization to make important choices and prioritizations across the business — from your overall brand strategy to the products and services you develop to your marketing, pricing and customer engagement approach.
During the current economic downturn, when marketing resources are constrained, having this clarity and prioritization is more important than ever. In today’s hyper-competitive market, broad customer base targeting no longer really works. Brands need to pinpoint with more accuracy who their most valuable customers are and apply better data, insights and analytics dynamically over time to develop the right products and offerings, and then deliver highly relevant products and services, content and messages to the right set of customers, versus trying to be all things to all people.
When done well, segmentation by market can be transformational – informing key decisions including:
What segments of customers are most attractive for your brand to target and build products and services for — and equally important, who you are intentionally not targeting?
What are the defining characteristics and key needs of the customer segments? Based on those differential factors, what products and services should you build, and how should you optimize the customer experience (CX) to create a competitive advantage?
What messages and positioning resonate most with each segment and how does that vary depending on region or country?
To answer these questions and make the right strategic decisions to attract target customers, brands need to take a holistic approach to market segmentation research — combining their existing internal data and expertise with supplemental qualitative and quantitative research and analytic tools.
While available transactional, behavior and demographic data is helpful in clustering customers and predicting future purchases, it’s not enough on its own. For segmentation to be truly impactful, you need to conduct up front primary research to understand why people choose your brand and products, and what drives their purchase decisions. You also need to understand who isn’t buying your products – those people beyond the reach of your transactional databases – and why they aren’t engaged with your company and brand.
With that overview in mind, let’s take a closer look at key requirements for a market segmentation study and best practices.
How to approach market segmentation
“In today’s hyper-competitive market, broad customer base targeting no longer really works. Brands need to pinpoint with more accuracy who their most valuable customers are.”
Before launching a market segmentation study, you first need to agree on your objectives and the purpose of the study, and how you will implement it. What variables will you focus on to define your target customer segments? What is your hypothesis around how you will apply the findings? By focusing on your end goals from the start, you can tailor the design of the study to meet the specific objectives and desired impact.
At GBK, we conduct stakeholder discovery interviews with senior execs from each relevant group in the organization that will be an end-user of the segmentation, or be important for implementation. Depending on the scope of the study, this typically includes senior leaders across marketing, customer insights, product development, analytics and other areas, as well as media agencies.
Based on feedback from key stakeholders, we define our research methodology, qualitative research approach (focus groups, online board discussions, interviews) as well as our quantitative survey to ensure we have the right content – in customers’ own language as we test and implement.
Key to success of any market segmentation study is making sure you have company-wide support to achieve maximum actionability. You need to have a cross-functional team in place, and anticipate the processes, training, technology and other resources that will be required to effectively act on the outcomes. This requires rigor not only in how you design the survey, but also the strategic recommendations and actionable plan you deliver based on the insights.
Another key success factor is doing advanced work to ensure you will be able to target and identify specific segments across marketing communications, customer support and other key customer interfaces. In other words, you need to assess how you will implement the segmentation in whatever customer databases, CRM and other tools you use to support these tactics. This requires a deep dive into database variables to make sure you have the right hooks between your database and the survey instrument, while also creating a segmentation algorithm to map to your database.
At the end of the day, your goal is to have a clear view of each of your priority market segments, to refine your overall brand, product and marketing strategy. Tactically, you also need to make sure your customer database is updated to reflect your market segmentation to successfully measure progress as you win new high value customers. In addition to retargeting existing customers according to their segment identification, this allows you to track new customers you acquire over time within your target segments, improve marketing effectiveness, while also validating the impact.
Implementation
“Strategic market segmentation requires a deep commitment across the entire company. Every team needs to have a clear understanding of your target segments, their key needs, motivations and journey across every touchpoint.”
At GBK, we have deep experience working with Fortune 100 brands on global segmentation research across categories and markets. In addition to research best practices to ensure data quality and rigor, we apply our expertise in analytics to explore and identify the best solution that strikes the optimal balance between the ‘art and science’ of segmentation.
Through both quantitative and qualitative research, segmentation research paints a detailed data-driven picture of the market landscape overall, and for each segment profile, including how attractive and addressable they are as a strategic target for your brand.
Once you have a comprehensive view of your audience segments, you can curate the content and experiences you deliver based on audience behavior or engagement across channels on hundreds of different parameters (i.e. similar audiences based on behaviors, shopping patterns, media sources they prioritize, etc.). This allows you to do a deeper level targeting down to the individual level.
Transforming the experience and marketing for each segment requires a deep commitment across the entire company. Every team needs to have a clear understanding of your target segments, their key needs, motivations and journey across every touchpoint.
A key aspect of this is building a customer journey map to align your team, processes and overall approach around the key needs of each segment. Once you have this customer-centric framework in place, you can apply analytics and machine learning to identify the specific triggers that lead to consideration and purchase by your most valuable customers, and respond with relevant and timely content and experiences.
Why this all matters
“When done well, segmentation should be transformative for companies — accelerating customer growth, engagement and CX by delivering messages that map to and even anticipate what customers will want.”
When done well, segmentation should be transformative for companies — accelerating customer growth, engagement and CX by delivering messages that map to and even anticipate what customers will want.
Ultimately, your understanding of your target customer segments and approach for applying better data and insights should underpin your entire business and brand strategy. And yet, as marketing becomes more technology driven, there can be a tendency to place less importance on primary research with customers.
As we discussed above, a common pitfall we often see is firms that make the mistake of thinking a demographically-driven cluster analysis from existing customer data is the same as an actual market segmentation. While these clusters are useful in pulling groups of people together based on data like demographics and even transactional metrics, they rely solely on existing data available from your customers, rather than a strategic segmentation of the most valuable customers for your brand.
