Why Customer Segmentation is the key to Business Strategy?
05 Aug 2015
During my earlier career in Marketing, a book that captured my imagination and reinforced my personal pride in my chosen function was ‘Marketing as Strategy: Understanding the CEO Agenda for Driving Growth and Innovation’ by Nirmalya Kumar. His book of 2004 took Strategic Marketing to the top of the CEO list of priorities, in order to drive a business to understand the customer and market needs, so that plans could be shaped and agreed to deliver on such ‘outside-in’ opportunities.
The book covered ‘7 Marketing initiatives to Drive Growth and Innovation’ (see Appendix 1), the first of which references the need to take a strategic customer segment approach:
“1. From Market Segments to Strategic Segments: Who are our valued customers?; Which customers are unhappy with current offerings in the industry?; Is the target large enough to meet our sales objectives?; What is our value proposition?; Does it fit the needs of customers we are trying to serve?; What benefits are we delivering?; Can we deliver and earn a profit?”
There is an illustration from the book called The Complex Corporate Marketing logic that details how Brands, Products, Channels, Markets and Customer Segments are inextricably linked when planning the Marketing Strategy.
Today, the importance for a business to shape plans around customer segments has become stronger. We have increased customer choice, budgets have to balance for careful expenditure and the diffusion of Mobile, Social Media and personalized CRM experiences adds further layers.
In order to help shape plans, and business priorities, it is important that Marketing fundamentals are pervasive during the planning process. Segmenting, Targeting and Positioning of Solutions, and ultimately Propositions, is a key way to deliver against identified Market and Customer opportunities. The investment in Segmentation is the first important step for a business.
A model which looks at Segmentation needs to be built based on a number of Market and Customer Insights, such as Firmographics (Company size, location, vertical industry…), Propensity Modelling (how likely is the customer to purchase), Trending (e.g. of related purchases over time) and other Analytics. When constructed methodically using fact-based references, the Segmentation work can act as a cohesive catalyst and competitive advantage for an organization. Indeed it can act as a beacon for prioritizing expenditure and decisions for future Solutions and Proposition development, and the right balance of operational and capital investments for an organization with strategic and tactical dexterity.
Clusters of attractive Customers can be identified within the Segmentation work, to which Solutions and Propositions may be targeted and positioned, using an appropriate mix of media and channels. Relevancy and receptiveness for target customers should be higher, and there will be a correlation with increased lead-generation, subsequent pipeline build and ultimately won revenue.
This is why you would do it and the investment in this type of work has to deliver to support business goals.
Any integrated Marketing Strategy, with a well-prepared “one size does not fit all” view can provide significant clarity across the organization, and increased ROI across the pipeline. As Marketers we are well aware of this through shaping campaigns to meet the needs of markets and client needs. For this reason this is a robust technique to invest in to support organisations paths for driving strategy and growth plans.
Nirmalya Kumar detailed a menu of seven marketing initiatives that will drive growth and innovation in all organizations.
1. From Market Segments to Strategic Segments: Who are our valued customers?; Which customers are unhappy with current offerings in the industry?; Is the target large enough to meet our sales objectives?; What is our value proposition?; Does it fit the needs of customers we are trying to serve?; What benefits are we delivering?; Can we deliver and earn a profit?
2. From Selling Products to Providing Solutions: Do we guarantee customers outcomes and benefits instead of product performance?; Have our sales people developed consulting skills and deep industry knowledge?; Have we developed effective processes to allocate resources to solution projects?
3. From Declining to Growing Distribution Channels: What service outputs will the new channel provide?; How will the relative importance and power of existing channels change?; Which competitors will enter the new channel?; What changes in channel incentives to existing members will competitors try? What new competences do we need to enter the new channel?
4. From Branded Bulldozers to Global Distribution Partners: Have we identified our most valuable clients on a worldwide basis?; Are there single points of contact for global customers?; Have we optimized our supply chain for global efficiency?; Have we harmonized pricing structures?
5. From Brand Acquisitions to Brand Rationalization: Which brands are contributing to our profits?; What needs-based segments exist in each category?; How much sales revenue would we risk by deleting non-core brands?; What is the role of the corporate brand?; How will we articulate our program to stakeholders?
6. From Market-Driven to Market-Driving: Are new ideas routinely imported from the outside?; Do we tolerate failures and have processes in place to learn from failures?; Do we mix people on teams to generate new ideas?; Do we ensure that radical ideas do not lose resources to incremental ideas?
7. From Strategic Business Unit Marketing to Corporate Marketing: How does the organization rate on customer focus in processes, including new product development, order fulfillment, customer relationship management?; Is the organization organized around customers?; Are metrics and rewards related to impact on customers?; Does the organization systematically learn about customers?