Divide and conquer
In the second of our skills sharing Pragmatists, we look at customer segmentation and how this tool can be utilised to position your business strategy and effectively target your consumers when normality returns.
Customer segmentation is the division of customers into discrete target groups. To be effective, these divisions need to be meaningful and coherent, with customer groups based on either common characteristics or behaviour, and the segments clearly distinguishable from one another.
Historically segmentation has typically been derived from demographic information: age, lifestage, socio economic group etc., and whilst these groupings are still relevant, the increasing availability of data means this information can now be combined with lifestyle and behavioural data to provide detailed insight into the characteristics of people.
A number of customer segmentation products are now available such as MOSAIC and ACORN which provide cross-channel consumer classification systems. Segmentation is also widespread in popular media –"Baby Boomers", "Millennials", "Generation Z" - whereby characteristics and traits are associated and prescribed to different generations.
Pragma’s top tips on how to approach customer segmentation:
1. Be specific - what are you trying to find out?
This is the research question. This underpins how you set up your segmentation, the data you will need and the hypotheses you need to investigate. The crux of segmentation from a B2C perspective is to add value to your business, by identifying the consumers which are the most commercially valuable. Some examples of the areas we have come across in our research include:
Marketing – enabling companies to target each segment effectively and appropriately. This can be used to drive new shopper visits from underperforming areas of your catchment or drive additional spend from existing shoppers
Retail proposition – Enabling shopping centres and airports to cultivate a brand mix which best serves their shoppers or passengers
Product proposition – Enabling retailers or F&B operators to refine their proposition and stock to best serve existing or new potential customers
2. Identify your addressable market. This could be a retail catchment area, passenger flows, an existing customer base (e.g. database) or a competitor's customer base.
3. Identify and collect the data you need. Typically, this comprises a combination of demographic and behavioural or attitudinal data – it is helpful to understand not only who your customer is, but how they behave. Good sources of data include purchasing information, customer databases, interviews (telephone or face-to-face), surveys and focus groups.
4. Analyse the data. Customer segmentation is informed by both qualitative insights (from surveys and interviews) and quantitative behavioural and predictive insights. Cluster analysis, regression and classifications can all be used.
5. Identify your target groups and implement
Where the implementation of your marketing campaigns and strategic initiatives begins.
Some key things to bear in mind when developing customer segmentation are making sure your customer segments are appropriately sized – otherwise you run the risk of over or under-representing a segment; and making sure your segments are MECI – "mutually exclusive collectively exhaustive" – to ensure that no customer group is overlooked or double counted.
With an informed understanding of who your customers are and how they behave, segmentation can drive growth in your business. It can be used to target specific segments effectively and drive sales by facilitating accurate communication with your market, increase spend conversion from existing customers, gain new customers, generate new business, allow resources to be deployed effectively and increase satisfaction and performance versus competition through product improvements.
Olivia Gannon