Jun
02
2013

The 10 common traps of segmenting customers – Part 1

Segmentation is a powerful technique, but it can be misunderstood and misused. Therefore it’s important to have a clear idea about what segmentation should be used for. Read on to find out more about the 10 common traps of segmenting customers:

1. Segmentation is the action – not the objective
Think of segmentation as a verb, a ‘doing’ word. It has to stem from clear objectives and strategy. All too many businesses are still picking through the leftovers of static, research-based segmentation projects based on little more than executive philosophy. With no financial modelling to back them up, no wonder these projects failed.

The Smart Marketer’s Handbook (circa 1970) may well say ‘segment or die’ but that doesn’t mean segmentation works – or that it has to be the same for every business.

2. Too big to handle
To make segmentation easy to grasp, it’s all too tempting to split the marketplace into a few simple customer segments. For instance, five to ten segments makes it all straightforward enough for a business to understand, and large enough to allow economies of scale in product development. However, it’s no help with customer management or value engineering. After all, for any large business, some of the segments could contain millions of consumers. That’s hardly ‘getting close to the customer’!

3. The customer chimera
In Greek mythology the chimera was a fabulous beast with the head of a lion, the body of a goat and the tail of a serpent. Much like the following profile:

Young Fun

  • Mix of male and female (40% / 60%)
  • One of the youngest segments, but 56% aged over 35. Mean age: 38
  • Both single and married
  • Over half have children
  • Lower social classes – over 57% C2DE grades
  • Tend to be Manual / factory workers, Clerical / office workers, Some students, Some unemployed

Have you ever met anyone who could possibly tick all these boxes? If you were talking to customers directly about your latest product or service, would you find this information useful? How would you deliver a successful ROI-based strategy to this person? Albeit slightly disguised, this very profile is being used by a major consumer organisation right now.

4. The frozen state
Another key requirement of most legacy segmentation approaches is stability. If an organisation is going to create a few large segments and develop propositions for them, the last thing they want is customers jumping from one segment to another.

That means segments are designed to be static, or frozen. Businesses can then measure performance over time and be confident about return on investment. But the awkward customers keep getting in the way. They will insist on changing: age, jobs, homes, marital status, parental status, consumption to name but a few. Fixed state segmentation fails to reflect the dynamic behaviour of customers and becomes increasingly irrelevant in marketing campaigns.

5. Problems with referencing
Market research can be a wonderful thing, but when an individual focus is needed it becomes less helpful. Unfortunately, many companies rush into segmentation by starting with market research. Customers and prospective customers are asked what they want, need and do, and the research project then builds segmentation models.

However, once a company starts referencing these segments back to the existing and prospective customer databases it hits some serious problems:

  • The only way to create references, within the rules of the Marketing Research Society on respondent anonymity, is to set up algorithms using common data and recreate the segments on the database. However, if you didn’t start with the database itself, there will be very few common items to draw upon.
  • The scoring process therefore becomes very unsophisticated and Insensitive.
  • Companies can spend years (and millions) picking up the pieces.

The solution is to start with your own data, and any data from a third party, to build the segmentation upwards. Once you’ve identified the key variables, then you can do the market research.

Don’t miss The 10 common traps of segmenting customers – Part 2 to read about:

6) Differentiation or just different coloured envelopes?

7) Poor resource allocation and ROI assessment

8) Segment bleed

9) Segmentation isn’t monotheism

10) Organising based on customer segmentation

 


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