On Customer Segmentation

Are you a devoted fan of Greek style Yogurt?  You know, the one with tangy taste and texture of sour cream? If you answered no, think back on the TV ads for the unusual brand, “Chobani”.
If you answered yes, then some industry analysts believe they can answer the following questions about you

  1. Your education level
  2. Your income level
  3. The  part of the country you live
  4. Whether or not you frequent Starbucks
  5. Your gender

What do these data points have to do with segmentation? David Palmer, an analyst with UBS, has this to say about those rabid fans of Greek yogurt:

You know, sort of what I would envision to be the Starbucks crowd. It’s a higher-educated, higher-income user that resides in the Northeast. More often than not, the Greek yogurt consumer is a female.

As you can see from Palmer’s quote, he very succinctly captures the five attributes  listed above  in his description. What he is describing is a a type of segmentation  based on fixed and observable characteristics of the customers. Due to the fixed (or fixed over longer periods) nature of the attributes (gender, geo, education) this is also known as Static Segmentation.

You can see the fallacy in Palmer’s argument. He is basing his segmentation by observing the current customers and listing out their common traits he can easily distinguish. This does not mean anyone with these traits are the target segment  or vice versa.

Marketers practice Static Segmentation because it is easy. You see this in consumer products and in B2B as well. In B2B, it is even worse, most Product Managers really have no clue what their segments are and simply opt for the industry classification.

It is easy and observable but  it is not correct. Before I explain what is wrong, let us see what a Greek  yogurt fan has to say about Palmer’s segment description,

I love Greek yogurt. I’m highly educated, and I live in the Deep South. Can that be right? In case Mr. Palmer forgot, Starbucks began in Seattle, about as far from the Northeast as you can get, not to mention that there are higher-educated, higher-income users all across this country. I could have done without the jab about the education and income level of consumers across America.

Static segmentation, while easy for anyone to practice, does not answer the product strategy questions (and if you state your segmentation in public your customers won’t like it either).

What are the product strategy questions? Here is a list of Top-10 product strategy questions for starters:

  1. What is our competition? There may not be another product from a competing brand but there are many alternatives.
  2. How much do these alternatives pull down the reference price?
  3. What are the obstacles for product adoption? Are there reasons for customers not to buy the product?
  4. What is the opportunity size? Most usually answer this question by answering a different easy question. For example, there are 40 million customers in certain income bracket that spend a total of $50 billion. If we capture just 2% of this spend, that is a $1 billion business.
  5. Which segment should we go after first and with what version?
  6. What are the different product versions we should offer and at what prices?
  7. From what budget (real or mental account) will the customers be paying for the product?
  8. How will we reach these customers?
  9. What is our messaging?
  10. Should we be investing in this product line over other competing opportunities?
Knowing the education level or that the customer lives in North-East does not help and are non-starters.
Answering the product strategy questions require a different type of segmentation called – Needs Based Segmentation which starts with the compelling needs of the customers vs. observable traits of the customers. It cuts across the Static Segmentation boundaries.  For instance, there are purchasing occasions where  considerable number of people from low-income bracket may buy your product.  (see Tiffany Sterling silver case study in my Groupon book)
Needs based segmentation is not easy, it is expensive (time and cost it would take you to hire me), and non-reusable (from one product to another).  But the value it deliver is the difference between a successful product strategy and a spectacular failure.
Greek yogurt or a webapp, if you are not practicing needs based segmentation you are swimming in shark infested waters with anchor chained to your legs.