Segmentation

Below is an edited transcript of an interview that I did with Douglas Nichol of Mongrel Marketing. To listen to the interview please visit www.mongrelmarketing.com.au/podcasts.asp


Q: How have you used customer/prospect segmentation in your marketing programs in the past? Have they worked well?

Many marketers tend to think of segmentation as a tool to assist in more targeted communications but this is just scratching the surface.

The most far reaching segmentation project that I undertook was whilst working with Telstra BigPond.

In the years since it had launched, the number of BigPond packages had slowly increased to meet various market needs and opportunities ultimately growing to an unwieldy and confusing 13 plans. This resulted in significant customer frustration and confusion as they tried to determine which plan was right for them.

By segmenting the market based on both volume and sophistication of usage and profiling our existing base we were able to identify distinct clusters.
This, in turn, facilitated the simplification of the offering to just 4 plans.
Each plan was associated with a simple customer statement to assist prospective customers in identifying the plan that best met their needs (eg “I don’t know how much the family use, I just want a plan that gives me a flat price and the family what they need”).

By tailoring the offering to better meet the needs of consumers we were able to achieve three things:
- Increase yield
- Improved acquisition and
- Retention maintenance.

More than simply targeting consumers better, segmentation became a tool for driving business planning and pricing.

Moreover, a subsequent global benchmark survey found 89% of prospective customers were able to easily identify the appropriate plan, understand pricing and sign-up online. This highest score of any ISP worldwide.


Q: What bits of advice can you give our listeners on how to get it right?

I don’t believe that there is one right way to segment your audience. I have found, however, three key considerations when commencing a segmentation project to ensure that the outcome is useful.

Firstly, be conscious of why you are segmenting. It sounds obvious but a useful outcome will look different based on your purpose. For example, are you looking for a deeper understanding of your audience (ie a true customer segmentation) or simply a method for grouping customers for internal purposes (ie product groups or value groupings).

Will you use your segmentation to target communications channels (in which case demographics will be important) or to look for business opportunities though a deeper understanding of consumer mindsets and behaviours (in which case your focus will be more on psychographics).
None of these are right or wrong – it’s horses for courses.

Secondly, consider your product category. Is it high involvement or low involvement? Do customers transact regularly or infrequently? Are transactions high or low value?
Simple transactional data such as this can be useful in understanding customer behaviour and assist in your segmentation.

Just be sure that the data that you are basing this on provides a complete picture of the customer behaviour and not just their interactions with your company.

Finally, and most importantly, consider how your target audience view themselves. Put them in a box that they resist you may find that segmentation actually hinders your customer interactions.
A classic example of this is Marketers targeting the so-called “Small and Medium Enterprise” or SME segment.

SME is a convenient grouping for large business to describe small and medium businesses and can be relevant internally, however, the target audience do not think of themselves in this way and often view the terms “SME” and “Small Business” as descriptors used by large businesses that don’t understand them.

This audience tends to view themselves as “IN Business” rather than “small business” and group themselves by industry rather than number of employees, phone lines, newspaper subscriptions or computer screens.

For this audience in particular, I have found that targeting by industry is most effective, however, this requires very specific groupings. A broad industry grouping such as “Property and Business Services” may include anyone from Real Estate Agents to Consultants to Janitorial Staff.

I may sound like a Marketing heretic but sometimes it may also be appropriate to choose not to segment at all. For example, in the case of SMEs, if you are not able to effectively target by industry, you may find that simply proposing business solutions that your products and services can deliver and allowing the audience to self select and effectively self segment can be an effective approach.

Q: Where do people get it wrong?

There are probably a million ways to get it wrong, though equally a million ways to get it right! There are some common pitfalls, however.

1. Segmenting based on your current customer value without taking into consideration potential value.
For example, consider a Telco that segments based on number of phone lines. They may believe that a particular company has 5 phone lines and is a small business. What they may not know is that this company has another 200 lines with one of their competitors.

2. Over complicating segments – you should only have as many segments as you can actively manage from a customer communications and service perspective,

3. Not integrating customer segments into every aspect of the business. All too often segmentation is purely used by marketers when- in reality - their true value lies in helping front line staff engage with customers in a more meaningful and relevant way.

Finally, never lose sight of the fact that segments are not homogeneous but simply approximate groupings.

At the end of the day you are interacting with individuals each with their own experiences, needs and wants. By all means present what you believe will meet their needs but don’t tell them – allow them to decide.

The Other P

In Marketing 101 we are taught about the 4 P’s – Price, Product Place (Distribution) and Promotion. In more advanced courses we are taught of the additional P’s that apply to Services Marketing, namely – People, Process and Physical Evidence (of the service delivery).

In my experience there is another “P” that can be applied to assist in achieving marketing objectives – Partnerships. Creating and leveraging relationships with other organisations can provide a myriad of opportunities for driving your business.

Suitable Partners

There is no point partnering with a company whose customers are completely different to yours – even if you are mates with the Marketing Director. Think about companies that your customers do business with and there is a fair chance that they will have other customers who are not currently buying from you.

It sounds obvious but make sure that companies you plan to partner with do not compete with you. Even if you are not in the same line of business, are they competing for the same consumer dollar or do they appear to have aspirations to get into you market?

Finally, make sure there is a relevant brand fit. If you are a premium brand like Cunard, a challenger brand like Jetstar may not be the ideal partner.


Leveraging Partnerships

So now that you have identified suitable partners and assuming they want to work with you, how do you leverage your new relationship? The possibilities are endless and often as you start to work with a partner and learn more about their business you will both discover new and different ways to build on the initial relationship.

Some thought starters are below:

Special offers to each others base. This is the simplest form of partnership and may consist of a flyer or coupon in each others regular mailers (see my blog on Leveraging Every Touch Point) or shopping bags. Be careful to avoid third line forcing (see below) and don’t simply exchange contact details of your customers or your risk contravening the Privacy Act.

Shared links. Recommend each other on your respective websites.

Bundled offers. Think mobile phone handsets bundled with phone plans. This can be quite effective if your products are complimentary but again, be aware of third line forcing.

Channel Support. Are your trucks delivering to the same areas as your partner? Can you co-ordinate complementary territories?


Legal Traps

Privacy: For an overview of Federal Privacy Law I refer you to the Office of the Privacy Commissioner. See http://www.privacy.gov.au/act/

Third line forcing: The Australian Competition and Consumer Commission (ACCC) explains third line forcing as follows – “Third line forcing is a specific form of exclusive dealing prohibited outright by the Trade Practices Act. It involves the supply of goods or services on condition that the purchaser buys goods or services from a particular third party, or a refusal to supply because the purchaser will not agree to that condition. (See http://www.accc.gov.au/content/index.phtml/itemId/816377 ). This prevents a company from only offering a product or service if the customer does business with a third party.