Customer Segmentation: The Importance Of A Foolproof Formula

How looking at customer segments as different audiences will change the way you market and drive strong business growth.

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 Table of Contents

1. From funnel to life-cycle
2. Segmentation basics
3. Data
4. Context is everything...
5. Selling the benefit
6. Segmentation with cross-functional teams
7. Relentless Production
8. The loyalty loop
9. The importance of segmentation

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From funnel to life-cycle.

The age-old sales funnel is a good starting point in marketing. I remember my early years as a marketer with a certain fondness. There are those pieces of the puzzle you learn in university, or by watching those who are winning. One of the ideas that stood out most to me, before my introduction to customer segmentation, was the notion of the marketing funnel.

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The idea that you could measure the progress of a customer and begin to quantify the effectiveness of your efforts or the efficiency of your ecosystem; all based on progress gave me a huge sense of control and a tactic I could retrofit to the sales process.

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The marketing funnel was highly effective for me for a long time, until one day the notion of the funnel stopped working.

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I found myself saying: “I’m in their funnel now, let’s see what happens” – like it was some sort of cat-and-mouse game of salesmanship as I tried to get the most I could without handing over a dime. Customers and clients started to treat me the same way: as though they didn’t need to pay for my services.

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Don’t get me wrong, the funnel can still work even today, and does in many areas, especially when you're selling a SaaS product. There’s a certain control to it: you push audience members through, whether they know it or not, and give them reasons and opportunities to continue or leave.

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However, as people get closer and closer to a decision to purchase the funnel is becoming increasingly less effective. Businesses are starting to focus on volumes pushing traffic to their websites and are considering a 3-5% conversion rate a success. It seems we’re stepping away from transactional marketing strategies, where we offer convenient ways for people to step through our funnel and instead we’re beginning to focus on the driving forces behind the transaction in the first place.

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Cut-through has become a large part of a marketer's job in driving awareness in a very noisy marketplace, preference plays an important role in a sales funnel and the post-purchase experience has become a pivotal part of driving social proof for others in their active evaluation of a business, product or service.  

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This is largely what Google calls the Zero moment of Truth (ZMOT) – something they published about back in 2011; way ahead of their time, as always, the buyer’s decision was largely centred around the internet and focused on gathering information to help them make their decision.  

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Fig.1. The Zero Moment of Truth – Adapted from Google’s book

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This philosophy attacks any kind of sales process head-on by asking us to consider the pre-purchase and post-purchase experience as elements that are just as important as the funnel themselves. Bringing the focus to a customer's experience with a brand.

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This is important in the context of customer segmentation because we’re zooming out. With that comes more audience segments, more opportunities to influence buying decisions and more opportunities to market products and services to journeys, not just demographics.

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Based on McKinsey’s research, the journey is a circular one with four phases:

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Fig.2 The Customer Decision Journey – McKinsey.com

1. initial consideration;
2. active evaluation, or the process of researching potential purchases;
3. closure, when consumers buy brands;
4. postpurchase, when consumers experience them.

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It’s clear to see that the ‘active evaluation’ phase is something that the traditional funnel misses out on. Largely because the evaluation is out of the hands of the marketer. But the combination of insights from both Google and McKinsey give us a great deal of context into how marketing has evolved to focus increasingly on customer segmentation during this current decade.

It also gives an indication of what we should be addressing in the coming years to stay ahead of the trend and ensure we’re feeding customers’ journeys with the right information for their own evaluation.

Segmentation basics

Let’s run through some of the basic advantages of market segmentation analysis and the opportunities it affords marketers today.

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Audience segmentation is a way to categorise and divide up your customers into smaller "audiences" based on your marketing need. This has become increasingly important in recent years as advertising platforms such as Facebook have become so accessible with such sophisticated segmentation options.

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Some examples of ideal segmentation could be:

• Age segmentation ahead of a school-leavers period
• Demographic segmentation combined with geographic segmentation to market luxury goods to the right class of person in the most appropriate suburb
• Touchpoint segmentation based on how recently a person has made contact with the product or business.
• Lifestyle segmentation ahead of popular holidays

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The list could go on…

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Segmentation allows marketers to have more than one big list of contacts that they blast information with like a monkey with a flamethrower. It's more surgical, smaller numbers with much more nuance to the communication. Sure, it's a little more work, but as the conversion rates climb and the opt-outs decline it can become quickly apparent how customer segmentation could help you keep a rich and diverse customer database for both traditional and digital marketing.

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On the buyer's journey it’s important to gather these audience segmentations, and revisit and revise them as often as possible. In order to achieve this customer segmentation in the first place, we’re reliant on one thing more than anything else: data.

Data

I remember my first ever job as a marketer. I was in my early 20’s, I was naïve and hungry, and willing to take anything anyone threw at me. The position was as a coordinator for a printing and stationery company. The business ran in the dark ages. Orders were faxed, hundreds of them every week, one page at a time. The systems were disparate and the fulfilment system was run by punching in a combination of F-keys to get through each transaction.

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Despite this, the business was booming. Pushing $30 million a year with a very small team. Why? Because it had the address, phone number and brand awareness of every single pharmacy in the entire country. And it was marketing to them and only them. Providing the whole suite of stationery and printed goods to them. It was here I learned that a marketer was only as powerful as his database. Even for a company living in the dark ages of marketing, the importance of market segmentation analysis was clear.

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Today, we’ve got infinitely scalable databases that are deep in complexity, which means we’ve got the ability to draw insight about customer context, abandonment, purchasing behaviours, geography and demographics at a fraction of the costs of those who have come before us.

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Fig.3 – Adapted from Science Daily – Big Data: for better or worse

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At the centre of our new-found opportunities in segmentation is the scale and breadth of data that’s being made available to us. From user meta-data, to lead-scoring on websites, to macroeconomic data and analytics we've been given a smorgasbord of data to help use meet our goals in marketing.

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If a marketer is only as powerful as his database and data is expanding exponentially, then the opportunities afforded by this data are doing the same.

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Context is everything….

It’s funny to think that an article about the importance of data-driven customer segmentation can be so right-hemisphere: empathetic/touchy-feely. The reality is that it’s the crossover that works. Gaining a proper understanding of where people are at in their journey as a customer can provide significant segmentation opportunities to marketers. What happens next that makes or breaks the success.

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The context provides you with drivers to help them along the lifecycle. Through evaluation, through moments of truth, through purchasing experiences and loyalty loops, we gain the opportunity to be contextual in the way we market and position ourselves to our clients.

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It’s not just a positional context either. Emotions run high on a buyer's journey and whether it's a new car, a mortgage or a pregnancy test, there are opportunities to meet customers at their emotional need, not just the stage of the sales lifecycle.

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Fig. 4 – An example of a customer’s emotional journey

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As you can see above, it's would be easy to market to the funnel. From "Visitor" to "Shopper" to "Transaction" to "Delivery". Owning the Zero Moment of Truth and being aware of emotional context can add so much more to your marketing personalisation.

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Knowing that specific segments of customers are highly emotional at the beginning of their journey, and highly rational later on can help you to personalise what you market.

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Understanding context can be everything to a marketer at this point. A real estate agent with customers who have attended large numbers of inspections are qualified buyers, in geographic context for a (hopefully) short period of time. Marketing to a segment that's increasingly emotional with every lost auction offers real-estate agents and their partners new communication avenues to increase the chance of closure within their network.

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Harvard Business Review states that it’s possible to rigorously measure and strategically target the feelings that drive customers’ behaviour. Defining them as  “emotional motivators”.

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We can use simple experiments to learn our customer’s emotional motivators and we can use data points to cleverly capture emotional motivators as part of a customer journey.

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For example, we can segment digital sales through the successful conversion rate on specific products to measure the effect on impulse purchasing, we can capture these buyers as an “impulse buyer” segment, and also categorise the product and it’s previous customers as an impulse product. Where we can cross-promote other related impulse products. Again, testing behaviours to discover deeper more emotional motivators.

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Audience segmentation arms a marketer with context and allows for that clear understanding that gives them tools to market quickly and clearly to the right people in the right ways. This is where the left and right hemispheres of our marketing disciplines collide in extraordinary fashion in a way that will ultimately define the leaders of the next generation of enterprise marketers. Using rational, calculated and sometimes deeply complex customer segmentation to achieve insight, only to then switch sides and dream up an approach that reaches out to the customer within that context and presents them with something inspiring, engaging or emotionally motivating.

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Selling the benefit

Customer segmentation is important for a variety of reasons, but the most important one is, of course, the new-found ability to meet people where they’re at and offer something that’s tailored to their needs. Ted Levitt’s famous comment about selling ¼ inch holes rather than ¼ inch electric drills, advocates a shift in mindset away from selling products to “doing jobs” that solve customers’ problems. By actively segmenting your customer as different audiences, you can begin to sell the benefits that audience is after, rather than the features of the product.

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If the customer is emotionally motivated to visit a website but approaches the sales experience or shopping cart as a rational buyer, it's probably a pricing and convenience issue. Continuing this habit of experimentation in an environment where you have the numbers to show a trend can be incredibly helpful. A/B Testing could mean the difference in a completed shopping cart by simply shifting the way information is presented once a user in on your website. Selling one benefit over another. Or trying to capture user data to continue investing in their own. Perhaps the solution isn't a price-drop at all, but payment plans, interest-free and a delivery option. Further extending the customer convenience into added benefit.

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The best approach comes from understanding your customer. It’s listening and learning about them in ways marketers traditionally haven’t. “What will benefit them”, “what can make it more convenient”, “how can this be a more positive experience” This allows us to begin to personalise marketing and begin to drive experiments towards customers that are for their benefit, not just ours.

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The important thing is to start now. The scalability of data and bespoke customisations in manufacturing might yet see micro-customer segmentation and even personalisation based on the workflows we’re learning today. Businesses, most importantly enterprise, must develop a capability that is empathetic, contextually aware, able to experiment and ready to produce relentlessly.

Segmentation with cross-functional teams

I was recently a witness to a large enterprise transformation to a segment-oriented, cross-functional marketing team – running their own version of Agile. Something I can see is about to sweep enterprise marketing by storm if it hasn't already. And while it’s going to take some time to iron out the kinks, the possibilities are just staggering.

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Imagine, if you will, that your product suited a variety of customers. Your online products, your physical product, your wholesale products, all of them managed to meet different needs across different segments.

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The first step in market segmentation analysis is to understand who wants what from which product. Segmentation provides a way to market those products to those people in natural, contextual ways. But up until now, this has been largely led by a product team of generalist marketers.

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What if this move to Agile put all sorts of different professionals, contractors and agencies in the same room to obsess over “the voice of the customer”. Organising teams around market segmentation who grew to know their customers incredibly well, who knew the segmentation within the nuances of their own customers, the personas and drivers, the emotional hooks that help prospects become buyers.

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Fig. 5 – A segment-driven approach to marketing.

Putting multi-disciplined professionals in a room together to essentially problem solve for the sole benefit of the customer segment means that innovations occur in marketing production at a really micro level.

Relentless production

Moving to agile, cross-functional teams in marketing, whether you’re a team of 3 or 300, gives rise to a scale of production we’ve rarely seen in business. Just try to imagine a marketing team that rarely spins their wheels on ‘creative’ or ‘stakeholders’ or ‘legal’ but instead focuses on the task at hand and pushes.

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What if segment-oriented marketing moved from big-bang campaign driven marketing to a focused group of like-minded professionals who relentlessly released incremental progress against large, more macro campaigns (epics, for those in agile). Where every week, month and quarter core market segments saw nuanced but real change in language, content, and delivery in order to motivate their buying behaviour.

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Fig. 6 – The agile marketing process

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This is an approach to marketing that openly states:

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“Our highest priority is to satisfy the customer through early and continuous delivery of marketing that solves problems and creates value” – AgileMarketing.net

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One capable of providing nimbleness for smaller teams, and for enterprise the faculties and ‘ceremonies' for managing risk, legal, stakeholder signoff, product management and brand input all while being laser-focused on customer segmentation.

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This approach gives businesses the ability to achieve are what can be described as ‘Growth Teams’ a cross-functional group of experts who work together collaboratively on a shared, growth targeted, goal. Having worked in small private companies, including startups as well as enterprise, this approach solves difference issues for both.

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At small, growth stage businesses the focus is on pure growth and the agile marketing approach gives small cadres of marketers the frameworks they require to, simply put, get more done. Building experiments and tracking the effectiveness, relentlessly producing content and to addressing capacity issues quickly and easily.

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​ Click here to learn more about this case study.

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In an enterprise, you're the pit crew at the Formula 1, fine-tuning a finely tuned machine that looking for those extra gains. Taking advantage of the environment, the seasons, the scale (and the budgets) to produce remarkable marketing. Agile marketing allows multiple teams to focus on their own effectiveness and deliver wider, broader value to campaigns and media planning by being contextually capable, able to experiment and driving home the emotional benefit to every single customer segment.

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Add to this the Kaizen approach something like agile provides and your production isn’t just a machine that produces regular content or marketing that, to target each market segment. But each audience segment is actively listened to so that marketers can learn more about themselves and the segment for which they’re responsible.

If you’re everything to everyone, you’ll be nothing to no-one. The rallying and production of these outcomes, delivered relentlessly from small growth teams, and collectively, collaboratively, in parallel to each other at scale, focuses solely on customer segmentation and makes sure that your customer isn’t ‘everyone’.

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The loyalty loop

The last and arguably most important part of customer segmentation in marketing is the opportunity to invest in the loyalty loop. Because the focus has moved from ‘conversion’ to a ‘conversation’, the onus is on the marketer to ensure their segment is engaged with and looked after both during and after fulfilment.

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By owning this entire customer lifecycle, by managing segmentation, the true value is noticed in the details. The micro-segmentation and even personalisation that can occur can begin to scale and the ability to build loyalty, even before the prospect is a customer, is a very real possibility.

This is additional scope for most marketers, whose job is to bring revenue through the door. But it’s the long-tail effect of efficient and engaging customer service that will bring people back again and again, all while making them advocates at the same time sending more and more people into that Zero Moment of Truth in their own market segment.

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The importance of segmentation

Segmentation is more than just a way to categorise customers. It allows businesses to be more targeted and economic in their advertising, more deliberate in the product suite and far more efficient in their marketing teams.

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From customer journey mapping, emotional segmentation, through to large-scale personalisation – customer segmentation give businesses a way to innovate in their relationships with their customers, not just on their production line.

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Audience segmentation today is important not just for the opportunity to segment marketing across customer demographics. While those basic benefits can give marketing teams a huge lift, it’s the next wave that fascinates me, while also causing deep concern for businesses who aren’t scaling their marketing infrastructure into an intelligent, segmented customer database.

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By looking at our customers as audiences, we can begin to understand that they each have different drivers and desires at different stages of the customer lifecycle. Much like that moment where you argue of the quality of a movie with a friend, what might appeal to one, may repulse another. Segmentation deals with this through personas who can carry audience traits in packaged ways that make it easy for marketers.

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The opportunities afforded by segmentation are commercial, but the organisational impacts of segmentation and the opportunities to build more agile, productive marketing teams are one of the key reasons I see segmentation as a critical step in the math to marketing maturity in 2017.

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Make sure you share your thoughts on this piece in the comments below.