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Is your customer segmentation missing the point?

By Pritesh Mistry, PA Strategy Expert

Customer segmentation has been in the marketer’s toolbox since the 1950s. And recently we’ve seen huge leaps in the amount of data and range of techniques available to deliver ever richer insights.

But fresh evidence from the UK Ombudsman Services suggests that current segmentation approaches, and the propositions they lead organisations to build, may not be working so well. Why? I think it’s because organisations are failing to get to the heart of what the customer is looking for: a means to achieve their goal. Lack of clarity about their goals means any proposition designed around existing approaches to audience segmentation will never truly deliver against expectations.

Fortunately, there’s a better way. And that starts with organisations using outcome-based segmentation to develop their customer offer.

What makes your customers truly different?

As customers, we all have what Clay Christensen once described in his seminal Harvard Business Review paper as ‘jobs to be done’. Christensen says we select a product or service that allows us to achieve the outcome we’re looking for. It’s this outcome that defines how we measure success of the product or service we choose to use. For example, most people take an annual vacation but each person is looking for a different outcome: to explore, to relax, to learn and so on. It’s the outcome they’re looking for that makes one customer truly different from another, not primarily their demographics or firmographics.

Although not a new concept, too few organisations are applying outcome-based segmentation. Like traditional segmentation, outcome-based segmentation involves applying clustering techniques to group customers by the level of importance they place on certain attributes. But it differs in two important ways:

  • It factors in the level of satisfaction with each attribute. The combination of importance and satisfaction creates the opportunity variable. Read this article on turning customer input into innovation to find out more.
  • It looks for outcomes that are important and unsatisfied for some customers but not all, to create truly differentiated segments. For example, if all holidaymakers place great importance on high-quality catering, this doesn’t help to explain the differences in choosing a particular holiday location. However, if what defines high quality catering differs across holiday makers, this indicates different segments within the population.

It’s only at this point, once you have segmented by outcome, that you should apply classic profiling data – demographics, firmographics, psychographics and so on – to each segment to understand the makeup of the group.

The customer-led revolution

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Take the guesswork out of designing your propositions

Knowing what outcomes your customers are looking for takes the guesswork out of developing your customer proposition. It becomes easier to identify a product or service platform once you know what attributes all customers value. That allows you to tailor the platform to add specific elements that each segment seeks. And that means you can offer a high value proposition that satisfies the specific outcomes of each segment.

Continuing with the quality of catering example, if all your customers value high quality food, then you would offer great food across all your hotels as a core part of your proposition. You would then add specific features such as leisure facilities and excursions to enable the outcomes of each segment. This approach can reduce time to market, allow keener pricing as you don’t include superfluous features, and can lead to higher levels of customer advocacy.

Using the outcome-based view of the customer can also help organisations to think more widely about how they design their business and interact with other players in the customer’s universe. For example, if a traveller’s desired outcome is to learn a new language, a travel company might offer courses at a local language school. Or they might present the opportunity to stay in a local’s home, immersing oneself in the language.

Find opportunities for innovation

Organisations have always had to evolve their offer to be successful.  But the pace at which you can become irrelevant today is frighteningly fast. It’s becoming increasingly hard to know where to innovate with so many new technologies and disruptors coming into the marketplace.

Traditional methods of identifying and assessing opportunities look at market sizes and trends. But it’s hard to size the revenue potential of a market that isn’t there. Outcome-based segmentation offers a new way to decide which direction to take your business by identifying high potential growth spaces to innovate in. Instead of focusing on existing revenues, it looks for areas of ‘important but unsatisfied’ outcomes.

You can gauge the size of the opportunity by looking at the number of customers who fit into this category. Take Deliveroo, the food delivery company. They wouldn’t have been able to put a monetary figure on their market easily, but by looking at the number of customers who valued high-quality food from their favourite restaurants –but were dissatisfied with the current home delivery offerings – they identified a very sizeable opportunity.

This outcome-based segmentation approach is the foundation to tackling the customer-led revolution we call Customer 4.0. You can read more about it here.

Find out more about our work in business design.

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