Those companies who avoid the surprises and are wildly successful
manage four core and interdependent experiences:
1. They obsess over product experience.
2. They’re fixated on their customer experience.
3. They steer every aspect of their employee experience.
4. And they maniacally manage their brand experience.
-Ryan Smith, CEO of Qualtrics
- Instructor’s Guide
TABLE 3.1 – Part III – Learning Objectives and Outcomes
Concepts | Students will gain an understanding that:
- Companies that use segmentation analysis to do preliminary research are more likely to uncover patterns that differentiate potential customers and identify which market segments a product will be most likely to succeed in.
- Knowing as much as possible about customer needs and behaviors at the beginning of the design process allows teams to develop products with a good market fit without a lot of trial and error.
- A variety of different types of segmentation are available to build as accurate an understanding of the customer as possible.
- You don’t have to be a marketing professional to do some basic customer discovery and market segmentation.
Skills | Students will gain the ability to:
- Identify which market segments their product will likely succeed in.
- Ask the kinds of research questions that allow them to discover what their potential customer thinks and acts like.
- Collect and use customer data to inform the type of products sold, identify target markets, and select corresponding sales approaches.
- Key Terms
Part III | Key Terms
Segmentation Analysis: Also known as a Market Segmentation Study (MSS), it is an analytical tool used to learn as much as possible about potential customers in order to differentiate between groups or categories of people within a market according to typical characteristics and behaviors. B2B: Stands for “business to business,” which means that a business is primarily focused on selling products and services to other businesses rather than to consumers. B2C: Stands for “business to consumer,” which means that a business is primarily focused on selling products and services to consumers rather than to other businesses. Demographics: Characteristics of a population such as age, race, and sex. Firmographics: Organizational characteristics such as size, number of employees, and performance that can be used to do market segmentation. Behavioral Segmentation: Analysis that divides markets up by decision-making patterns defined by customer behaviors, such as purchasing, consumption, lifestyle, brand loyalty, and usage habits. Psychographics: Type of segmentation that takes the psychological aspects of consumer behavior into account to segment markets according to lifestyle, personality traits, values, opinions, needs, wants, and interests.
Segmenting Groundlings from Cushion-Bottoms
“There’s no way Mike will buy a drink for $2!” exclaimed my 7 year old. Michael was Naman’s best friend, and he knew him all too well — what he ate, liked, and disliked. He could tell you everything about Mike.
I smiled, thinking how Naman was instinctively profiling his prospective customer. Importantly, he was discovering who was not likely to be a future customer, and why. Michael was a price-sensitive buyer, as most seven-year-olds are.
Naman’s instincts were correct: before building any product, we needed to discover and segment the product’s potential customers and their price sensitivities through segmentation analysis. Segmentation is used to differentiate groups or categories of people within a market according to buying characteristics and behaviors. Companies that intentionally target a specific segment or type of buyer by developing strategies specifically designed for them are generally more successful than businesses with only a single strategy for the entire marketplace.
At the storied Globe Theater, they knew their customers well. A system of turnstiles was used to direct customers to their appropriate comfort level and price point. Price-sensitive customers, like Michael, could enjoy the play from the mosh-pit at the base of the stage for a single penny. These folks were called the groundlings.
At twice the price, one could stand in relative safety above the groundlings. A 300% price increase would get you a bench seat in a gallery. A 400% upsell would buy you a prime gallery seat complete with a seat cushion. Vendors would then upsell the crowd with all sorts of food options throughout the play.
This was an effective business model. A popular play could maximize the spend from its clamoring audience at every turnstile and intermission.
Market Segmentation Studies
When done well, segmentation analysis uncovers patterns that differentiate potential customers and help identify which market segments are the most likely targets for your product. According to Bain & Company, 81% of executives found that segmentation was crucial for growing profits. Bain also found that organizations with solid segmentation strategies enjoyed a 10% higher profit over a 5-year period.
You also need to discover what your typical customer looks and acts like. Which turnstile will they be attracted to? Are you selling to groundlings, to cushion-bottoms, or to those in between?
The following series of questions is helpful when framing this kind of study:
- Who are your profitable future customers?
- What is their typical gender, age, and income?
- What types of households do they belong to?
- What are their interests, attitudes, opinions, and values?
- What are their behaviors, activities, hobbies, and schedules?
- What products are they already buying, and what are their perceptions of those products?
- What are their possible price points for the types of products and services you may offer?
- More concretely, what are their needs and wants?
The customer discovery process shifts the focus away from developing a product by trial and error to a customer-centric plan that tests product hypotheses first. Knowing your customer helps design teams craft products that come closer to a product-market fit. One tried and tested method of doing this, the Market Segmentation Study, or MSS, helps create a snapshot of target customers.
Unearthing Features, Ads, and Turnstiles
Products can be tailored to core customer realities and limiters as defined by a completed MSS. An MSS helps avoid a mistake often made by entrepreneurs of tailoring new products to meet the needs of an existing or prospective customer. Gut instincts, personal impressions, and traditional “wives-tale” assumptions will lead entrepreneurs astray. The only thing worse is actually creating a product and hoping to identify customers for it after the fact.
Market segmentation, as the name suggests, defines subsets of a market based on demographics, needs, priorities, common interests, and other psychographic or behavioral criteria. This is aggregated to better discover and define the target audience.
As you scale, MSS can empower your product development cycles by informing how you create product offerings for new segments like high-roller cushion bottoms or price-conscious groundlings. You can define the marketing and sales turnstiles you want them to select.
As we will explore in more detail later, you can use the results from your MSS to design your marketing and ad campaigns. And for those of you using online advertising, the results can also be used to target advertising platforms or differentiated “turnstile” apps like Instagram, Twitter, Facebook, and Google, with far better response rates and lower acquisition costs.
Four Types of Segmentation
There are four primary types of segmentation illustrated below. This is as applicable to B2B (Business to Business) or B2C (Business to Consumer) as it is to the kids’ lemonade stand business.
|Definition||Classification based on individual attributes.||Classification based on company or organization attributes.||Classification based on attitudes, aspirations, values, and other criteria.||Classification based on behaviors like product usage, technology laggards, etc.|
|Decision Criteria||You are a smaller business or you are running your first project.||You are a smaller business or you are running your first project.||You want to target customers based on values or lifestyle.||You want to target customers based on purchasing behaviors.|
|Difficulty||Simpler||Simpler||More advanced||More advanced|
The definitions in this table are from the Qualtrics Market Segmentation site: https://www.qualtrics.com/experience-management/brand/what-is-market-segmentation/
1. Demographic Segmentation
Demographic segmentation sorts your potential customers by demographic elements such as:
- Family size
- And more
Demographic segmentation is one of the simplest and most commonly used aspects of segmentation because the products and services we buy, how we use those products, and how much we are willing to spend on them is often based on demographic factors such as the ones listed above.
Can demographic factors be over-emphasized? Certainly. But demographics are remarkably great predictors and are accurate more often than they are not.
For the kids’ lemonade stand business, we hoped to segment what the neighborhood kids and their parents were like in terms of their purchasing habits. What is the age range of kids who would stop by for a lemonade? What about their parents? Would an accompanying parent be the mother, the father, an older sibling, or all the above? What about grandparents? Can we predict when they are likely to walk by the lemonade stand and thus predict a logical traffic flow?
2. Firmographic Segmentation
Where demographics look at individuals, firmographics look at the demography of organizations. Firmographic attributes or variables, such as industry, company size, number of employees, location, structure, and performance, can be used to segment organizations and consider them along various dimensions. Firmographic segmentation takes these attributes into consideration while also addressing how a small business differs from a larger corporate enterprise.
For our lemonade study, we imagined the household that bought lemonade as a firm.
- Would the father or mother (the CFOs) be making the purchase decisions?
- Do the kids have the money and the authority to make an independent decision?
- Who are the influencers in the firm? Are the younger kids influencers? In other words, do they get their way quite often and therefore have an outsized influence on the purchasing decisions?
Knowing all of this can have a dramatic influence on the type of products sold and on the corresponding marketing and sales approach.
3. Behavioral Segmentation
Behavioral segmentation divides markets by decision-making patterns defined by customer behaviors, such as purchasing, consumption, lifestyle, brand loyalty, and usage habits.
For instance, younger buyers may tend to purchase body wash, while older consumer groups may lean towards bars of soap. Segmenting markets based off of prior purchase behaviors enables marketers to develop targeted approaches and appropriate turnstiled gateways.
For our lemonade stand business, this translated into questions such as:
- What makes people purchase lemonade versus an alternative drink?
- Do kids drink lemonade in the afternoon more than at any other time?
- Do office-goers prefer to stop by a lemonade stand on their way home, or during lunch?
- Do they mind parking by a curb?
- Do they prefer a lemonade to go?
- Do they buy it when out with their family, or do they prefer sipping it alone?
4. Psychographic Segmentation
Psychographic segmentation accounts for the psychological aspects of consumer behavior. It segments markets according to consumer lifestyle, personality traits, values, opinions, needs, wants, and interests. Large markets like the fitness market use psychographic segmentation when they turnstile in customers that care about healthy living and exercise.
In the case of our lemonade stand, this would translate into asking questions around what customers value.
- Do they prefer sweet drinks over tangy ones?
- Do they prefer milk-based drinks or carbonated sodas?
- Are they interested in staying healthy, or tend to look for healthier alternatives?
- Are they willing to indulge novelty drinks?
- Is a drink worth a few extra calories?
Designing a Survey
An effective MSS doesn’t need to be complicated to be effective. Surveying is essentially just asking questions you are seeking answers to. However, there are several facets of good survey design that we need to take into account, or else the answers could be misleading.
There are five primary steps to an MSS:
- Conduct Preliminary Research: Get to know your customers better by asking some initial, open-ended questions.
- Determine How To Segment Your Market: Decide which criteria (e.g., demographics, firmographics, psychographics, or behaviors) you want to segment your market by. You could ask about more than one, but make sure the survey is not too long.
- Design Your Study: Ask a mix of demographic, firmographic, psychographic, and behavioral questions. Be sure to make your questions quantifiable.
- Create Your Customer Segments: Analyze your responses either manually or with statistical software to create your segments.
- Test and Iterate: Evaluate your segments by ensuring that they are usable and helpful. If they aren’t, try segmenting based on other criteria.
Breaking the Ice in the Neighborhood
“So let’s start asking questions!” Moksh said impatiently.
“One more step,” I replied. “We need to design our survey first.”
Our little team brainstormed questions and discussed what we hoped to learn from each. We discussed how to “break the ice” with our neighbors and solicit their willingness to help. “We can’t ask too many questions, so each one has to count. So, how can each question tie to our hypothesis?” I asked.
- Do our neighbors like mixing lemonade with soda or other flavors?
- Do they buy lemonade often?
- Are there non-lemonade drinks they prefer?
- Do they buy in any weather or only when it’s hot outside?
- Do older people have different buying patterns from younger people?
- Are there different purchasing patterns by gender?
In a simple way we also discussed demographics with the boys; for instance, how age and income (money in their pockets) could influence buying decisions. We also discussed audience sensitivities. Quite clearly there are questions you can ask as an anonymous researcher that you wouldn’t ask your neighbors as a five and a seven-year-old. Some sensitive topics, like income level, are really “none of our business” given the context.
And there is another bottom line: you can only ask a limited number of questions or data collection becomes burdensome for your audience and for you. Granted, you may not get a second chance to make this kind of query, so make each question count.
Customer Case Studies on Segmentation
The jewelry market is ferociously competitive. To stay on top, a large retailer frequently tests new designs using PX-based market opportunity analysis. Jewelry designs often cater to niche market segments. Knowing the type of custom designs that will appeal to definable groups of customers helps identify profitable designs. The new designs are often wedded to marketing messages that appeal to the segment.
In their research, jewelry retailers ask questions around buyer tastes and preferences for new designs; for instance, why potential buyers like or dislike certain styles, choice of metals used, diamond cuts or other gem choices, plus their willingness to buy along a range of price points. Based on this data, a retailer is able to focus on profitable buyer segments and the designs that will drive the greatest marginal return.
Inside the Mind of a Customer
“Your most unhappy customers are your greatest source of learning.” – Bill Gates
“Got it. Naman, let’s start knocking on Aunt Steffanie’s door and sell her some lemonade flavored with some tang. After all, seems like women who are moms of three to nine-year-olds are the most likely to buy lemonade that is tangy and sweet!” said Moksh. He was excited to see a potential customer emerge from the annals of the research we had done so far.
Well, not so fast. My mind went back to my days at McKinsey, where I used to consult many clients on Market Opportunity Analysis and Segmentation research. I had learnt that all this research was ineffective if it was not followed up by one question. It was probably the only question that really mattered:
What is the job these customers are trying to get done?
Consumers usually don’t go about their shopping by conforming to particular segments. Rather, they take life as it comes. And when faced with a job that needs doing, they essentially “hire” a product to do that job.
For example, just because a segmentation study showed that moms were more likely to buy a lemonade-like drink that was sweet and tangy did not mean that we would have a neighborhood mom eagerly waiting to buy such a drink. Rather, there is often a job that they are trying to get done.
What job does mom need done? Simple. Keep their kids hydrated, healthy, and happy. What product can we produce that can do all of that?
Therefore, the question is this: What is the job that these target segments want to get done that will be possible with such a drink? Perhaps having a certain sweet and tangy lemonade is what they need to get that job done more easily.
To finalize our understanding of the job that mom needs done, we conducted yet another, very targeted, customer needs analysis. The result of our final study was a healthy coconut-mango lassi shake.
After some field-testing at the neighborhood Lassi & Lemonade stands, the boys took their product upmarket — to the local Farmer’s Market, where their iced mango-coconut shake sold out almost every single time!
Case Study: Hypothesis-Driven Approach for Customer Needs Analysis
The iPhone Gamble
Some theorize that if Apple had followed the customer-focused prescription of discovery, innovations like the iPhone never would have come about. Basically, a wives tale theory holds that Steve Jobs created something new (the iPhone) out of the blue, and that suddenly everybody had to have one.
While it’s definitely true that Jobs changed the world, the iPhone hardly came out of nowhere.
- Customers were already addicted to phones.
- Camera phones readily existed and were gaining popularity.
- Texting and email by phone were already runaway hits.
- Small music/entertainment devices like the iPod were very popular.
- Tablet computers had already proven that people like to swipe and touch a screen intuitively with their fingers, and that these actions felt natural.
- Voice input had recently made amazing strides.
Had others put all of this together into a hypothesis, it would have been possible to see where an iPhone-like device was not that big of a gamble after all. (In fact, Google was already working on its Glass at the time.) The elements were there to prove the innovative concept long before the first iPhone went into production and was launched into the marketplace.
The genius was engineering all the pieces together into one small device and making it all work on to the delight of customers.
- Build Your Own PX-Market Opportunity Survey. First, define a product, identify your market, and build your own survey to assess the market opportunities.
- To view a sample marketing assessment survey, click here. Feel free to copy it and tweak it for your purpose.
- If you need help learning Qualtrics, and have not already done so, complete XM Essentials 1-10 that accompany this text. Here you can learn the skills to pull off this final project.
- Instructor’s Guide
Part III | Discussion Questions
- What are the pros and cons of targeting specific segments or types of buyers and designing marketing strategies especially for them, rather than developing a single strategy for the entire market?
- How do you know who your potential future customers are? What are some ways to eliminate the guesswork from discovering who your customers will be?
- What are some of the shortcomings of creating a product before you identify potential customers for it?
Part III | Additional Resources
Learn more about:
- Market Segmentation: Get an additional overview of what market segmentation is, the different types of segmentation, and some best practices by reviewing “What is Market Segmentation? Different Types Explained”.
- If you want even more information, you can also download a free ebookcalled “How to Drive Profits with Customer Segmentation.”
- Getting Started with Segmentation: Need a step-by-step guide on how to get started segmenting a market, complete with helpful visuals? Check out “The Market Segmentation Study Guide”.
- Identifying a Target Market:If you don’t know who your customers will be, how will you be able to assess what their needs are and whether your product will be able to meet them? Take a few minutes to read “How to Identify a Target Market and Prepare a Customer Profile” and learn how to identify specific target markets within your industry and create customer profiles that will help you focus your research and marketing efforts.
Part III | Related Student Activities
- Exercise 1: Read through the “How to Segment a Market” activity to learn more about this exercise, get suggestions about delivery and format, determine time estimates, access additional resources, and see possible discussion questions that students can use to reflect on the exercise or to guide groups as they report out on their experience with this activity to the rest of the class.
- Exercise 2:Read through the “Developing a Segment Profile” activity to learn more about this exercise, get suggestions about delivery and format, determine time estimates, access additional resources, and see possible discussion questions that students can use to reflect on the exercise or to guide groups as they report out on their experience with this activity to the rest of the class.
- Exercise 3: Use the Market Segmentation Game, created by Ian McVitty and found on the Open Educational Resources (OER) Commons website, or adapt it to create a customized version for your class. Have students run through this activity 1-3 times and assign them different types of segmentation variables to give them practice targeting different segments and designing products to meet those segments’ needs and wants.