Needs-Based Segmentation

grunge-girl.jpgIn many markets, adding value to the product might be the most consistent way to differentiate from the competition and therefore, maintain or even gain market share. But as companies focus on solutions selling and the provision of value-added services, they often experience an increase in their average cost-to serve.

Some advantages of needs based segmentation are:

  • Many traditional segmentation schemes are unable to predict the best fit product or service offering for a given customer, as clients in the same industry might have different need, while needs-based segmentation focuses on purchase motivating needs.

  • Traditional Segmentation may lead to an unmanageable number of segments, while companies employing needs-based segmentation often prove successful in grouping customers into a more actionable number of segments.

  • Competitors may easily replicate traditional segmentation schemes, while the needs-based segmentation might be difficult to repeat, presenting a company with a source of differentiation.

Marketers may utilise the next process to conduct an effective needs-based segmentation study:

  • Establish organisational priorities and stakeholders.
  • Determine customer value drivers
  • Rationalise customer attributes to unique needs
  • Create needs-based segments
  • Define segment characteristics
  • Identify relative segment opportunity

1. Establish Organisational Priorities and stakeholders.

By utilising stated business objectives first, to define the study’s objectives, firms may prove able to more effectively gain insight into the types of information needed to design and complete a segmentation study. A table below illustrates possible objectives:

Larger Business Objectives: Potential Business Impact Areas:

  • Profitability
  • Margins
  • Cross-sales
  • Revenue growth
  • Operational Costs
  • Customer Acquisition

Segmentation study objectives: Potential marketing impact areas:

  • Market expansion
  • Pricing strategy
  • Distribution
  • Cross-platform integration
  • Brand portfolio expansion

Segmentation study design: information needed for the study:

  • Price sensitivity
  • Product and service needs
  • Importance of competitive positioning

Segmentation studies may require cooperation from many functional areas of the organisation to succeed, such as marketing, finance or research and development. Sales represents the functional area most impacted by segmentation studies.

Sales staff maintain regular interactions and develop relationships with customers that enable them to offer input needs that drive purchases and offerings that may prove resonant. It is recommended to utilize the sales staff to confirm initial hypotheses during the segmentation process.

Responsibility for the implementation of the new segmentation ultimately lies with sales, so it is crucial to achieve an early buy-in from the sales organisation regarding how the study’s output and the new segmentation may beneficiate the sales process.

It is recommended also to create systematic procedures for collecting input from impacted functional areas, especially sales.

2. Determine Customer Value Drivers

After establishing a clear vision for the study’s business objectives and ensuring organisational buy-in, companies may begin the segmentation analysis by determining specific variables that create customer value.

There are at least 4 types of information needed to determine value drivers:

  1. Unaddressed product needs.

Companies may examine factors such as purchase motivations, perceived offer benefits, buying practices, usage habits, customer “pain points”, and interests in future offer concepts.

They should utilise available information such as customer pain points studies or voice of the customer examinations.
By interviewing customers, firms may deliver deeper insights into previously unrevealed product or service preferences.

  1. Decision making process.

Firms must ascertain who within the customer account owns decision responsibility. By utilising customer interactions an interviews, the companies may determine customer decision makers.

  1. Corporate culture.

Organisations may examine how a customer’s corporate culture may impact attribute preferences. By asking questions to determine a customer’s corporate culture, firms may gain insight into latent customer needs.

  1. Past purchase behavior.

Companies must have an examination of each customer’s purchase behavior that may reveal trends or reactions to various product offerings.

By evaluating past purchase behavior to determine customer product and service priorities, companies may gain insight into the true drivers of sales successes and failures. Also, by utilizing focus groups’ interactions to inquire about customer feelings towards previous offerings and value propositions. Firms may determine potential reactions to marketing mix changes.

3. Rationalise Customer Attributes to Unique Needs

In order to ensure a holistic perspective of customer needs, companies might include a large number of questions within a survey, interview or focus group. One need may cause a customer to answer multiple questions similarly, that’s why marketers should look for similar needs and may group responses that result from a common need.

When utilising a non-standardised approach to surface customer needs, such as pain-point analysis or a Voice of Customers exercise, and customer responses prove non-uniform, marketers may utilize an intuitive approach to group responses or pain points that result from the same underlying need.

In summary, companies may group attributes and common factors into broader categories that describe needs for a larger subset of customers, producing a more manageable set of information from which to create segments [i.e. a customer who places high importance on a particular value-added service, may place high importance on all questions related to various aspects of value-added services].

4. Create needs-based segments

The next step is to engage in an analysis of aggregated data to identify the appropriate number of unique segments that collectively possess several qualities including:

  • Uniqueness; each individual segment must remain different from all other segments but homogeneous within.
  • Reliable: segments that appear as a result of one segmentation study must appear in repeated, similar segmentation studies.
  • Relevant: companies may create segments that prove relevant to their marketing objectives and programs.
  • Reachable: segments must prove attracted to the company’s brand or product positioning.

While there may exist a large number of possible needs patterns [as a result of a high number of unique needs], research suggests that it remains unlikely that every possible pattern will exist within the market, limiting the complexity of the analysis.

Suggestion is that marketers may also reduce the number of clusters by eliminating combinations that present themselves very infrequently, as such clusters wouldn’t represent a significant market opportunity.

If two clusters maintain almost identical needs patterns, the marketer may combine those 2 groups into a single cluster. Such an approach mirrors the process undertaken in hierarchical clustering, in which the software in charge of data analysis progressively relaxes the parameters that define a cluster in order to combine groups that prove similar, but not identical.

The optimal number of segment will represent a balance between the relative homogeneity of needs clusters and the number of segments a company considers manageable.

5. Define Segment Characteristics

Companies able to assign relative degrees of attribute preferences for customers and able to conduct a factor analysis, may utilize the identified factors to gain complete perspective of segment characteristics. Also, they may employ discriminant analysis to determine the relative importance of each factor for each respective segment [i.e. segment A values factor X as significantly more important than other segments; segment A values factor Y with no difference from other segments…].

To illustrate, here is an example of a segment’s characteristics:

  • Descriptor: a detailed description of the stereotypical shop in the segment.
  • Business demographics: Typical information on the segment, such as customer profile.
  • Owner personality profile : psychographic detail on the typical owner or manager from the segment.
  • Must haves : requirement to deal with segment members, such as problem solving assistance or inventory management assistance.
  • Key differentiators : unique elements that suggest possible new value propositions or differentiated offerings.
  • Typical customer types : examples of shops, business and strategic arrangements that may exist in the segment.
  • Typical resonant messages : Examples of messages that are typically significant within the segment members.

The optimal selection of these characteristics will enable the market to determine into which segment a particular customer or prospect falls, based on that company’s characteristics.

6. Identify relative Segment Opportunity

Once the segments have been determined, companies may create tailored offerings that result in higher revenue, and reduce per sale time and costs.

By providing a tool for the sales force to identify segment characteristics during a sales call or visit, companies prove able to classify prospects in real time and provide full insight into the process for customers and aiding the company in creating highly resonant product or service offerings.

Highly progressive companies develop interactive tools that enable in-the-moment identification of customer segments based on a set number of inputs.

At this point, segmentation may prove essential to achieve revenue growth and cost reduction by increasing sales force productivity, create tailored high value offerings that result in higher revenue or margin, and deliver products and services to specific segments at a lower average cost-per-sale.



Global Survey of Business Executives” The McKinsey Quarterly [December 2005]