How much customer segmentation is too much? Are you slicing the pie into too many pieces? Is there real meaning and significance to your buckets?
To adequately make this point, first allow me to explain marketing segmentation in manner more formal than I am usually comfortable:
Customer segmentation has often been used by marketers to break a large audience into smaller subsets. The practice of creating audience segments, sometimes referred to as ‘buckets’, allows skilled marketers to deliver unique messages to a clearly defined group and monitor that group’s response to various marketing stimuli. Each group is defined by a common set of criteria that distinguishes them from other types of customers. The lines of demarcation when classifying customers are often aided by:
- Demographics (gender, age, employment status, location)
- Psychographics (personality, attitudes, interests, lifestyles)
- Technographics (ownership, usage patterns and attitudes toward specific technologies)
- Brand-specific behavioral measures (purchase history, purchase frequency, purchase amount), also known as the RFM model
- A mix of the four above.
If executed correctly, audience segmentation allows marketers to provide more relevance to individual groups of customers which in turn spawns greater ROI for the business.
Now, here’s the more laid back approach to describing segmentation:
There was always that kid in high school who could get along with every clique. He could talk about beer and girls with the jocks, compare notes on lyrics from The Cure with the goths, play hacky sack with the stoners and share TI-82 calculator tricks with the geeks. He could even make nice with the teachers in a way that wouldn’t alienate himself. Proper use of segmentation is the ability to be that kid.
In a perfect world, we would have the time, resources and knowledge to communicate to every individual customer in a unique way. For most businesses, that is near impossible and most of us are not ready for retina scan marketing. However, examination of what matters most to your customers about your offering (and why) will provide some guidance to create the right buckets. While the merits of segmentation can be described in much more finite detail by people smarter than me, it is possible to be too good at segmentation or perhaps just overzealous. Here are a few common problems and some potential solutions.
Problem #1: Imagine you have identified your various customer groups, but when it comes to communicating with them, you literally don’t have enough time. Now that you have X number of segments, the time required to prepare and deliver unique, relevant messages to them just increased by a factor of X. Your segments are so many that you lack time and resources to adequately communicate relevant messages to all of them and still turn a profit. In a way, you’ve gone and bucketed your way to inefficiency.
What do you do?
Solution 1A: Do More with Less. Several years ago, I worked for a Fortune 500 national home builder that had about a dozen customer segments. Here’s the thing – we were a Fortune 500 national home builder. We could afford to have so many segments because we had so many unique kinds of customers and so many resources at our disposal. If you are just starting with segmentation work, roll out with 3 to 5 customer segments. Any more than that can quickly become too expensive, confusing and arduous. Be honest with yourself and tackle only what you can handle as an organization.
Solution 1B: Calculate Segment ROI. Just in case, here’s the equation:
ROI = (Gain – Cost) / Cost
Now run that same calculation against each individual group. If the overall takeaway is not greater than the time and materials investment you make with each segment, determine a way to consolidate smaller segments or come up with an alternative way to cut the pie.
Solution 1C: Automate the Process. Work smarter, not harder. Automate the process of communicating specific messages with technology that can determine customer segment and define unique message for every individual audience member automagically. Examples include CRM tools tied to email marketing platforms and behavioral targeting networks for online advertising.
Problem #2: You have carefully divided your larger audience into neat little groups, but no matter what you do to communicate with them, you don’t see a lift in results. You understand the potential value for segmentation, but you just aren’t seeing it. Your return is about the same as communicating to the entire group.
Solution 2A: Get Samples and Start Over. Let’s face it – right out of the gate, your segments might just be crap. Work with existing customer data to extract meaning and define legitimate customer groups. If adequate customer data is readily available, the correct segments are probably already there. You just have to find them. Try to avoid dividing customers into buckets solely on demographic or psychographic attributes. While those measures can play an important role when combined with purchase behavior, the decision to purchase is not driven by demographic characteristics alone.
Solution 2B: Get Scientific and Survey. Construe a hypothesis about what your segments might look like by determining the product/service attributes to which customers may gravitate. Work with a pro to create a survey that collects all necessary data elements (demographics, phychographics, etc.) and allows you to cross-tab product attributes with customer characteristics and behavior.
Solution 2C: Double-Check Your Marketing Tactics. Actually implementing your segmentation strategy is akin to applying a culture change within an organization. Time and care is needed to ensure everyone who interfaces with customers is familiar with your segments and knows how to apply the right message to the right person at the right time. Allow your message to become more relevant and meaningful in time with testing to each segment. Also, consider how your segmentation strategy applies to areas outside of marketing in the traditional sense (i.e. customer service, product development, research, hiring and staffing practices, etc.)
Ultimately, creating buckets for your marketing program can be a very good thing. Just be careful about overdoing it or segmenting in ways that don’t produce a positive impact.