Take a walk in your customers’ shoes
Let’s sell some toothpaste!
How would you do it?
You may start off by thinking well it’s toothpaste and everybody needs toothpaste; so let’s figure out how to make it as cheap as possible and underprice the market.
…or you may start off by thinking about why does everybody buy toothpaste to figure out how you could sell it (for example):
What you’ve just gone through is splitting up “everybody buys toothpaste” into smaller potential markets who will be sold different products in different ways so as to meet their dental/sensory requirements.
To segment or not to segment…is that even a question?
The brands that are winning are the ones that understand what makes their customers really tick and are able to give them more personalised experiences. Great experiences drive loyalty and in turn drive better revenues and profits for the business.
In the year since Safaricom began focusing on segmentation, its net profit rose 19.5% for the year ending March 2016 to 38.1 billion Kenyan shillings ($375 million).
Brands that can further identify underserved segments can then outperform their competition through products and services that truly appeal to these customers. This better understanding of the customer has helped some companies truly disrupt their markets — from shaving blades to tuxedos. Disruption isn’t really about technology!
Segmenting involves bundling customers with a similar set of characteristics. This way you’re able to better understand their needs, give them products and services that really suit those needs, communicate in their preferred way and generally be more efficient at serving them well. This is applicable if you’re B2C, B2B or even B2B2C (as at the end of the day you’re really B2H: Business2Human).
If you’re a business with a small customer population that you know intimately well, then congratulations — you’ve already micro-segmented to such a detail that you’re able to serve each individual customer well.
Where do we start?
Initially, businesses started off by segmenting their customers along product lines. However, this had its limitations especially when customers bought multiple product lines and organisations couldn’t (still can’t) build a consolidated picture of their customers.
If you’re an insurance customer in Kenya with a life policy, a property policy and an investment with the same insurance brand; you’ll likely have three different customer identifiers, three different call centre numbers to call and unfortunately won’t be able to discuss one policy with the ‘other company’.
This quickly evolved to segmenting customers by their value to the business to ensure that most of the companies efforts went into servicing customers with the highest spends/highest profitability. The big problem with this approach is that it dehumanised the relationship with the customer!
There are 3 basic lenses you can use to segment your customers:
1. Demographics: This is the “who” is my customer and includes details such as geographic location, age, gender, size of the business, turnover, number of employees, sector it’s operating in, etc.
Age: early 40s
Lives in: Kilimani
Household: Married, 2 kids
Income: Senior Manager, MNC
2. Psychographics: This is the “why” does my customer want to buy from a brand. This will include a customer’s aspirations, needs, values system, etc.
Aspirations: Healthy and active children
Needs: Time and convenience
Values: Family time
3. Behavioural patterns: This is the “how” does my customer buy. This can include a customer’s spending patterns — frequency, cart size, product preferences, channels used, etc.
Shopping behaviour: Convenience shopper
Product preferences: Low sugar, organic, locally sourced
Cart value: Monthly bulk, high value
Demographics is usually a good starting lens for most businesses as data is usually available and a lot of public research does exist around generational segments — think Gen X (Baby Boomers), Gen Y (Millenials) and Gen Z.
Businesses, however, need to be careful with these broad buckets as customers have evolved (and continue to) since this research was done: Most baby boomers are now tech-savvy and probably spend more time on social media than the younger segments. Sidebar: Read why Facebook is becoming an older person’s social playground. The oldest millennial will be in their 40's in a few years and may even hold senior management posts dismissing notions about their lack of work focus and lack of loyalty to organisations.
Psychographic data is much harder to gather as it must be sought from the customers themselves (source from interviews, focus groups, surveys, even social media analytics) and as a result, carries a high risk of inaccuracy, depending on how you go about collecting that data. When asked, humans are fundamentally bad at explaining why they do what they do! The other risk around gathering this data is distortion from focus groups and the popular answers — read about the yellow Walkman experiment carried out by Sony in the 90's.
Behavioural data is getting easier to collect as more customer journeys are digitised and tech is getting smarter at deriving meaning from this data. It’s also very useful as it provides you with the actual facts about the customer. For example, if you’re a supermarket you may be able to tell which of your customers are regular but small basket purchasers vs. ad-hoc but large basket purchasers. In both of these scenarios, the customers may share similar demographics and psychographics; however, their spending patterns become more useful in terms of how you target and treat the customer.
You may also want to consider how you can refine your segments by blending these different lenses. As an example, if you’re a bank you may want to think about segmenting your customers by their financial savviness vs. their digital savviness. Read how Safaricom created its customer segments here by blending demographic and psychographic data.
I’ve segmented my customers…now what?
Now that you have drafted your segments, you need to think about your brand’s value proposition for each segment. This essentially defines how are you going to make that segment feel valued (and in turn how you profit from the segment).
Some of the things you’ll need to consider are:
- How are you going to acquire customers within this segment?
- How will you serve them?
- How will you retain them?
- How are you going to deal with their issues and queries?
- How are you going to communicate with them?
- What products will they pull/do you push and how do you price?
- How do you make this all work with your current organisation structure?
Once you have your customer value propositions, you need to validate and refine! This isn’t a one-off exercise and needs to be done on a regular basis to ensure you’re continuously testing your assumptions and hypotheses to ensure your segments remain relevant (so that you remain relevant to them).
We recently helped a brand to define its customer segments and value propositions. If you need some help in this space, please get in touch with us, we love to chat over a coffee!