One of our podcast listeners Vijay Patel has a pickle, and many of you probably have the same one. Patel’s company isn’t getting the sales they need, and Patel asked us how we can tell if they are focused on the right segments. Today, we are discussing customer segmentation and whether your organization is doing it right.
Before we get into that, let me share an example of a segmentation that works. The airport in Atlanta separates travelers into business and leisure. Essentially, the airport is separating the experienced passengers at security from those who need a bit more time.
If you have ever seen the George Clooney film Up In the Air, then you are familiar with this strategy. But, he says, “I stereotype; it’s faster.”
Stereotyping works in these situations, and it is faster. I use it, too. I look at the person, and if they look like they know what they’re doing, I queue up behind them. But if they are idly chatting to their partner, not preparing their items for the bin, and are surprised by routine requests from the TSA agent regarding electronics, then I look for a better option.
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To be clear, customer segmentation is not stereotyping. Instead, it is an attempt to understand your customers better so you can provide something they value and earn more of their business.
In the case of the airport, they are trying to provide a different experience based on what that type of traveler wants. Business travelers, like Clooney, want efficiency and organization. By contrast, families want extra time to wrangle their children without feeling death stares from fellow passengers. So this segmentation is a win-win.
So, all of that leads to the first question I pose to Patel and all the other organizations that want to improve their customer segmentation:
Question #1: What are the differences and changes you will make due to your segmentation?
If I were in a one-to-one meeting with Patel, I would ask him that question, along with one about the segmentations they have for customers. The idea here is to identify whether the segmentation has reasoning behind it. Without a strategy for presenting your offer to the various groupings of customers, segmentation isn’t doing anything for your sales.
Moreover, the segmentation should, in some way, answer the question of why that group is buying from you or not. Finally, the segmentation should give you insights into the behavior you care about to lead to specific strategic decisions about what you will do.
In other words, the segment should provide insights into how people differ in terms of their preferences. Without that, the exercise isn’t helpful.
Question #2: What data are you using to form your segmentations?
Most segmentations that I come across are basic. For example, the most common thing for customers to do at an elementary level is to divide their customers based on their databases.
So, we get responses like, “We have big customers, small customers, and medium-sized customers,” or “well, we’ve got customers in health care, we’ve got customers in insurance, we’ve got customers in construction.”
These are accurate but unhelpful. Why? These data points are unhelpful because they don’t go into customer behavior or, in other words, why these customers do what they do.
To segment, you need to know some of the emotions involved, the values, and the driving force for why customers need and want (or don’t want) your product or service.
In addition, using the database alone eliminates a vast pool of people that might not be on your radar. For example, your database is people who have bought or contacted you. There could be a giant segment that is a perfect match for your offering of which you are not yet aware.
Moreover, using demographics as a segmentation tool has inherent stereotyping built into it. If you segment by sex, age, and income, you have some helpful information about your customers. However, you don’t have all the valuable information about your customers.
For example, if you have a group of men aged 18-24 with upper-middle incomes, what do you know about them besides this? I would argue that any answer you are giving in your mind now is a stereotype, probably driven by your life experience. We only know their sex, age, and income, and virtually nothing else about them.
The same goes for psychographics. Psychographics is a term that combines psychology and demographics and is used to project probable characteristics on a group of people based on their age, sex, and life stage. Different people use the term in various ways, but the idea is that it can enrich your data about customers by employing probable psychology. However, these are still incomplete pieces of data.
Regarding Patel’s Pickle, I would encourage his organization to consider the source of the data they used to segment. For example, are they using helpful information from their existing customers, and are they considering all the potential customers they might not have yet? Unless you can use the data to answer why people do what they do, the segmentation doesn’t help them target effectively.
Question #3: How many segments do you have?
The number of segments you have can also be an indication of your effectiveness. If you have three, i.e., small, medium, and large, that’s not enough. If you have ten, it might be too many. So, a general rule of thumb is to have around five to eight groupings.
However, when it comes to marketing messaging and targeting, you should choose one segment. To use a customer segment effectively, you must craft a message that speaks to that segment and what drives value for them. Once you open up the message to include more groupings, it isn’t targeted anymore.
The basic idea of segmentation is that people are different and want different things. The best way to meet somebody where they are as a segment is to speak to them specifically, to treat them as a segment of one.
Artificial Intelligence (AI) technology can help, assuming the data fed into it includes the preferences and values essential for understanding customer behavior. However, if the data doesn’t get into a sense of what the individual cares bout, then it won’t be any more successful at targeting than a grouping of the small, medium, and large customers will.
So, for Patel’s pickle, my advice is to go through and answer these questions regarding their current segmentation. It’s a garbage-in, garbage-out situation. If the method for segmentation isn’t sound, then the efforts to target will not be practical. In other words, if your segmentation is not producing insights about what people want, their preferences, and how they make decisions, then your segmentation will not help you.
If you have a business problem that you would like some help with, contact me on LinkedIn or submit your pickle here. We would be glad to hear from you and help you with your challenges.