Market Segmentation Based on “Why”
Following my post on evaluating Fitness for Purpose using Fitness Box Score, I thought I’d explain how we use these results to segment a market and provide insights into features, functions and service delivery levels expected by each segment. This isn’t your father’s market segmentation based on demographics, it is segmentation based on the consumer’s purpose — segmentation based on “Why!”
How do we know whether a change is an improvement? If we invest in improving service delivery capability is it actually working? Is the service fitter for purpose as a consequence? Do consumers value it more? If we invest in service features, functions or capabilities, are these valued by consumers? Are we over-serving a market with too much and too many, perhaps too soon?
These are fair and reasonable questions. They should drive our decision making about our portfolio of services, how we manage them, how we make decisions, and where we choose to invest, consolidate and amplify.
In evolutionary theory, a mutation survives and thrives if it is “fitter” for its environment [this is actually a gross simplification but it will do for introductory piece on marketing and strategy.] So how do we know whether or not a change to our service delivery capability makes it fitter for its environment? What do we mean by “environment” in this context?
“Environment” is the market that we deliver into. So “fitness” is determined by whether the market feels our product or service and the way we deliver it, is “fit for purpose.” So to understand “fitness” to enable and drive evolutionary improvements, we first need to understand our market and what defines “fitness for purpose.” To do this we segment the market by customer purpose and the criteria with which they evaluate our “fitness for [that] purpose.” …
At Lean Kanban Inc we create our market segmentation by clustering narratives about our customers. We do this by telling stories about them. The technique is a direct application of Dave Snowden’s technique from his Cynefin Framework. To explain this, I tell the tale of Neeta, a fictional project manager and mother of 4. Neeta is based on a real woman who works in the Canadian public sector and has considerable expertise improving service delivery with an agency of the Province of Ontario. Neeta needs to order pizza for delivery to her office to feed her team who are working late against a deadline. On another evening the same week, she needs to order pizza for delivery to her home to feed her children who are hungry because she came home late. Neeta doesn’t represent one market segment, she represents two! The reason for this is that the purpose, context and fitness selection criteria are different in each of the two contexts.
When Neeta orders pizza for her children she needs: fast delivery — ideally within 20 minutes; she needs order accuracy — the kids only like plain cheese pizza; the non-functional quality doesn’t matter too much, the kids will eat cold pizza so long as it is cheese pizza; she needs a simple menu and predictable service; she wants delivery when promised because the kids need their expectations set and they are unforgiving; she also cares that the restaurant is clean and can be trusted to follow health and safety regulations; she may care whether or not they use organic ingredients because she is feeding her family.
When Neeta orders pizza for her office her needs are similar but some of the criteria vary and the threshold values are different: she needs delivery in up to 90 minutes; order accuracy is important but if one or two mistakes are made it won’t make a big difference, so long as some vegetarian pizzas are part of the delivery; however, the non-functional quality matters, hot, tasty, pizza with gourmet flavors and exotic ingredients are required for these discerning geeks; it doesn’t matter if delivery isn’t as predictable as it might be, so long as they show up eventually — the team are busy; and yes, she still cares whether the restaurant meets health and safety legislation standards but organic ingredients probably isn’t so much of a concern.
In other words, Neeta decides whether she likes the pizza service and whether she will use it again, based on two different sets of criteria, depending on her context. This may lead her to use different service providers for each purpose, if one provider can’t meet both sets of her needs. As a result Neeta represents two segments, not one.
How would you know that Neeta represents two segments and not just one? Traditional demographic profiling wouldn’t give you this insight! Well perhaps she uses different credit cards or payment mechanisms depending on context? And the delivery address is different. So there are some obvious clues. However, the people in the business who know Neeta’s story are the person who took her telephone order, and the delivery boy who delivered the pizzas. It is these frontline staff who understand consumers best.
If you are to cluster customer narratives to determine segmentation, you need to bring frontline staff into the story telling sessions. You need to listen for context, purpose and selection criteria and create segments based on affinity of these aspects of the market. Give each cluster a nickname. Recognize that an individual customer can appear in multiple segments depending on their context on a specific day and time.
This picture shows the results of a market segmentation exercise from a 2012 strategic planning session for Lean Kanban Inc and specifically the Lean Kanban University licensed certified training business. Six segments were identified through telling stories of actual customers and clustering the narratives by affinity then labeling them with memorable names — GRQ stands for “get rich quick”. We retired this segment in 2016 having successfully altered market perception to avoid customers with such expectations.
The challenge here for many companies is that the people who best understand the customer’s context, purpose and selection criteria are often the lowest paid, shortest tenured, highest turnover staff in the business. Foolishly, many companies under value, the value of customer facing staff. Traditional 20th Century service delivery businesses take a transactional view of customer interaction rather than a relationship view. If you value repeat business and you value the insights that will enable your business to evolve and survive in a rapidly changing market then you need to value customer facing people and involve them in your strategic planning.
Once you have the clustered narratives defining your segment, now select the segments you want to serve. This is a key piece of strategic planning. Which businesses do you want to be in? Which don’t you care about? Which do you want to actively discourage? Based on this you will develop the Fitness Criteria Metrics* to drive your management decision making and evolutionary improvement.
Now design your services tailored to the needs of each segment. For example, imagine we designed a premium pizza delivery service for the mother with hungry children to feed? We guarantee 20 minute delivery within a radius from our restaurant between 4pm and 7pm each evening. We need to reserve oven capacity. We need a simple menu and pizzas prepared and ready to bake. We may need delivery personnel on standby to meet the SLA. How much might this be worth? Sampling an audience of project managers at a conference in Stockholm, Sweden in 2014, the answer was 60 SEK (or about $6 US Dollars). Now, you get to decide whether you want that premium higher margin business? Can you build the capability? Can you successfully communicate it to the target audience? This is what really effective strategic planning is all about!
[* Designing Fitness Criteria Metrics, choosing their threshold values, and making them your KPIs (Key Performance Indicators) will be the subject of my next post.]
The book, Fit For Purpose — How modern businesses find, satisfy & keep customers, is now available from Amazon and other online retailers.
