I often advise clients to incorporate segmentation strategies to identify their target customers. An essential technique we employ is market segmentation, which typically leverages survey data to group customers based on their needs, attitudes, and behaviors. Businesses see greater returns on their marketing investments by tailoring products and messaging to segments rather than a one-size-fits-all approach.
In this article, I will provide an overview of market segmentation, segmentation strategies, and how advanced analytics take it to the next level. With insightful examples of real-world segmentation projects, you'll learn actionable tips on using data to refine your targeting.
I'll cover:
The Basics of Market Segmentation
Market segmentation involves the act of categorizing customers based on specific criteria, dividing them into distinct groups that share common characteristics relevant to marketing strategy. The goal is to identify clusters of people that are similar to each other but distinctly different from other segments. An effective segmentation strategy uncovers specific needs, values, behaviors, and preferences that set groups apart.
For instance, let's look at a tech startup developing a new smart kitchen appliance with sustainability features. They could segment the market based on the following:
• Demographics – Age, gender, region
• Psychographics – Attitudes, values, lifestyles
• Behaviors – Usage, purchasing, and recycling habits
• Needs – Desired benefits and features
Each segmentation lens provides a different view of potential target groups. Demographic divides may be too broad, while self-reported attitudes and behaviors can be aspirational rather than actual. Advanced analytics helps make sense of these complex data inputs to find actionable segments.
How Advanced Analytics Elevates Segmentation Strategies
While traditional segmentation relies upon basic groupings, advanced analytics methods employ sophisticated statistical techniques to achieve greater precision. One such method is cluster analysis, an unsupervised machine learning algorithm that can process multitudes of data to uncover hidden customer segments.
Here's a simple explanation of how it works:
The algorithm analyzes all data points, calculating the similarities and differences between each one. It then starts placing data points with high similarity into clusters while maximizing the dissimilarity between groups. The output maps the landscape of distinct customer segments along with the key characteristics of each.
Unlike having a human manually sort data, cluster analysis rapidly cycles through solutions to determine the optimal segmentation. It removes bias and leads to segments with strong statistical validity.
An additional advantage to advanced analytical methods of clustering is the ability to cluster across complex datasets for a holistic view of customers. For example, inputs could include contextual behavioral data from website analytics, survey data, purchase history records, and more. A segmentation expert will know the many advanced analytics techniques that can handle these various inputs to find the best solution.
Real-World Segmentation in Action
Let's revisit the tech startup developing a new smart kitchen appliance with sustainability features. Suppose they wanted to size the market opportunity for their product and define target customer profiles to optimize their offering.
An initial survey could collect demographics, attitudes towards sustainability and tech, and perhaps even include a discrete choice experiment to help assesses interest in various product features and pricing. After data collection, an analyst could run a cluster analysis based on these inputs, presenting several different segment solutions (we'll cover the different clustering algorithms in a future post). In addition to evaluating the solutions on statistical measures, we'll also evaluate them based on strategic value – hopeful that there is a segment (or two) that offers significant growth potential and for whom the product team should consider tailoring their minimal viable product (MVP) product to.
Now, let's say the analysis reveals five distinct customer groups:
• Eco-Focus: Motivated by sustainability impact
• Design-Centric: Attracted to stylish kitchenware
• Early Adopters: Drawn to the latest innovations
• Budget-Conscious: Sensitive to pricing
• Waste-Averse: Dislike food scraps and smelly trash
Based on the startup's mission, the Eco-Focus segment may be the ideal initial target. Perhaps looking at their discrete choice data, we also uncover that this group favors composting efficiency and environmental friendliness over sleek aesthetics.
These insights can directly inform prototyping decisions on features and industrial design. From there, messaging can be crafted centering on sustainability benefits rather than tech novelty when launching the minimal viable product (MVP).
Advanced analytics can empower data-driven decisions for strategic marketing and product development and can continue to guide tailored messaging and innovation pipelines for secondary customer targets over time.
Actionable Tips for Market Segmentation Strategies
Through years of hands-on experience with advanced analytics, I've compiled key learnings for effective segmentation:
Integrate Qualitative Perspectives into Segmentation Strategies
The best segments derive from both art and science. The human lens helps guide which data inputs have strategic relevance for an organization. Qualitative perspectives prevent over-indexing on purely statistical measures.
Monitor Segments Over Time
As customer needs and behaviors evolve, businesses should revisit segmentation. Track target segments to assess contraction and/or growth and conduct ongoing research to make sure new segments are captured as the market changes. Be proactive in capturing these changes through timely market research.
Uncover True Needs and Values
Avoid scale rating questions that surface aspirational attitudes or don't force discrimination. Use discrete choice trade-offs like MaxDiff and conjoint to reveal what people truly value. Advanced algorithms are well equipped to handle complex preferences.
Consolidate Disparate Data
Integrate behavioral analytics from sales/website data with survey feedback. Machine learning handles large, varied inputs to find cohesive segments versus disjointed analysis in silos.
Identify the Most Relevant Segments
Resist the temptation to target everyone. Focus energy on segments demonstrating both the ability to tailor offerings and sufficient revenue potential. Advanced analytics empower this strategic orientation.
Combining human strategic perspective, machine intelligence, and meaningful data is essential for impactful segmentation. Avoid over-reliance on any one facet. With the right balance, advanced analytics takes targeting to the next level.
The Future of Segmentation
Where is market segmentation heading next? We've already seen significant progress in tapping advanced analytics, but there remains untapped potential, especially in incorporating more varied data streams.
The increased use of artificial intelligence and machine learning for pattern recognition can help process exponentially bigger datasets, enabling a more interconnected flow between sales intelligence tools, web analytics, CRM systems, and primary consumer research surveys.
Rather than periodic segmentation projects, organizations can have access to dynamic customer intelligence dashboards that centralize target profile data and update based on continuous analytics monitoring key segments.
The future could bring a video game-like interface where marketing leaders can access integrated segmentation insights on demand and simulate the outcomes of tailored strategies. The core advanced analytics will handle complexity behind the scenes while presenting clear strategic options.
While machines can process enormous volumes of data, humans still reign supreme in vision and strategic orientation. Advanced analytics provides heavy number crunching so leaders can spend more time on high-level target segment planning.
I'm eager to see market segmentation evolve to bring even greater business returns through the power of data. Our team employs leading tools today, but we're always investigating what's next on the horizon. The possibilities to revolutionize targeting through analytics are boundless in years to come!