Behavioral Segmentation: The key to develop customer-centric value propositions.

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1.???? Introduction

Imagine a scenario where you can predict exactly what a customer will do during a Point-of-Purchase (PoP) decision and influence that specific moment in time so that customers chose your company instead of a competitor.

Everything that you need to achieve this, is within your grasp. You just need to know how to use it.

In this article we will explore:

• How to identify the most important drivers that influence a customer’s PoP decision.
• How to use behavioral segmentation to develop value propositions that aligns with consumers’ needs and preferences.
• How to use behavioral economic principles to design marketing campaigns that resonate with consumers’ beliefs and values.

2.???? Current situation

?We are living in a business world where competition has become more prevalent and less predictable. What makes the competitive landscape even more challenging, is the fact that many competitors are not from traditional markets, industries or value chains, but from an increasingly wide range of non-traditional areas.?

?The PROBLEM that gives executives sleepless nights, is that shareholders require of them to continuously innovate within an ever-increasing complex market, while still offering customers simple solutions that attract, satisfy, and entrench.?

Traditionally, organizations have used many different ways to create a competitive advantage, ranging from internal business optimization and the subsequent cost reductions to creating new products for new markets.?

Due to the current economic climate and competitive landscape, these traditional methods of differentiation have lost their ability to sustain this competitive advantage over an extended period of time. This forces executives to increase the pace at which they innovate or reduce their costs significantly to stay ahead of the competition.

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3.???? Point-of-Purchase (PoP)

?To come up with a better and more sustainable solution, we must firstly define what a “competitive advantage” means.? A competitive advantage refers to the condition where one company has a favorable or superior position compared to its competitors. Nowhere is this “superior position” more important than at the PoP decision. The company that understands this moment in time the best and use this insight to influence the consumer’s decision, creates an unrivaled competitive advantage.

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The THREE QUESTIONS that every C-suite Executive wants answered is:

1.?How much does each of these influencers impact the PoP decision?

2.?How do I design value propositions that will meet the needs of specific customers?

3.?How do I deliver these value offerings to the right customers in an effective and profitable way?

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To better understand this PoP scenario, we have to take a closer look at the three main participants during the PoP interaction:

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?Consumers

While designing products to fulfil customer needs might be somewhat daunting, even more difficult is selling these products to consumers. One would expect consumers to choose products based on logical, objective evaluation, and “know what is best for them”. However, behavioral economics show us that customers do not evaluate alternatives in a universal, objective and rational way.? On the contrary, decisions are based on limited information and wrong assumptions while using biases and mental short cuts.? This biased, subjective, and irrational decision-making process make it very difficult to develop products that will satisfy the needs of all customers and improve their quality of life.

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Your offer

To attract more customers and add more value, products have become more and more complex. This complexity in product design and innovation makes it more difficult for customers to compare and decide which offering is the best. The CHALLENGE: How do you present increasingly complex products in a simplified way that will aid and guide consumers in their decisions?

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Your competitors

To differentiate your value proposition you must understand how successful your competitors’ offering addresses the needs of consumers. To have a sustainable competitive advantage you have to differentiate yourself on the things that are most important to consumers. That means, meeting the needs of consumers better than your competitors do.

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1. The Solution

While every business wants to be customer centric and fulfil the adage of treating each customer as a segment of one, most executives know that this is an extremely complex business model and almost impossible to fulfil and sustain.

To get closer to a sustainable and profitable solution, executives are turning to Technology, Big Data, Machine Leaning (ML), Artificial Intelligence (AI) and??????????? Advanced Analytics.??

The solution is to develop a behavioral segmentation model that allows you to deliver very specific value offerings that is aligned to the needs of specific??????????? customer groups. This process typically consists of 6 Phases:

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?4.1? Understanding consumer decision-making

The journey starts with investigating and better understanding the consumer in the moment they make a purchase decision.?During this stage, explorative primary research is conducted (focus groups or in-depth interviews) to explore the entire landscape of decision making and unpack the decision-making criteria that all consumers use when making a decision.?

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4.2? Choice-based trade-off analysis (conjoint)

The qualitative insights gained in phase 1 become the input for designing a quantitative conjoint trade-off analysis study. The methodology replicates a real-world buying scenario and forces consumers to make difficult trade-off decisions. Through this methodology we start to understand? what are the most? important drivers that influences a consumers purchase decisions.

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4.3? Behavioral segmentation model

The trade-off analysis data is used to develop the segmentation model by grouping consumers together based on how they make their decisions. In behavioral economic terms, we are attempting to understand the mental shortcuts (or heuristics) that customers use when making their biased, subjective and irrational decisions. Typically, we find that customers are biased towards things like; Brand, Price, Features and Benefits, Service, Rewards or Added Value.

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4.4? Design and simulate value propositions

Using these behavioral classifications as a guideline we can now develop value propositions that align with the needs and preferences of each consumer segment. By using Artificial Intelligence and Advanced Statistical Modelling we can simulate the uptake of hundreds of value propositions in the market and the subsequent change in market share and profit. You also have the ability to simulate the impact of competitor countermeasures.

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4.5? Linking research results with internal customer data

?While the research results on their own can be used to develop enhanced offerings and marketing messages, the real value lies in linking the results to your internal customer data and analytical environment. This is a complex iterative process of building and testing Machine Learning models and then allowing them time to improve their predictability. The aim is to classify each customer into one of the behavioral segments using various data points and modelling techniques.

4.6? Classify and target

Each customer in your database can now be profiled and targeted based on their preferences and most important behavioral and decision-making criteria. This allows you to present each customer with a value offering crafted specifically for them. Marketing campaigns and marketing messages are also refined to resonate with the preferences, values and motivations of customers.

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5.???? Levels of advantage

Segmenting customers on how they make their purchase decision has long been viewed as the pinnacle of segmentation models. Imagine giving your customers a product/service value proposition exactly the way they would have designed it if they had the chance. Not only will that be very difficult for customers to refuse but even more difficult for your competitors to replicate.

Experience has however shown that varying levels of success, and associated benefits, can be achieved when developing and implementing behavioral segmentation models. The success is mainly influenced by the type of organization and their Maturity; i.e. technology, processes and operations, client data management, omni-channel capabilities and internal analytical environment.

There are typically three main levels of Maturity/Benefits; Basic, Intermediate and Advanced. Most organizations can be plotted somewhere on this continuum.

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5.1? Basic

On the most basic level a behavioral segmentation model empowers you to develop product and service value propositions aligned with consumer needs and preferences. This will immediately start creating a sustainable competitive advantage when taken to the market.? The model also simulates the potential market take-up, market share and profit.???

5.2? Intermediate

The second level of benefit is the extrapolation of the segmentation model into your current customer data and analytics environment.? This allows for much more targeted campaigns sending specific value propositions to specific customers.

5.3? Advanced

The third level of benefit entails delivering specific value propositions to specific ? customers using an omni-channel approach.? At this level behavioral triggers are identified that will inform the content and timing of marketing messages that will resonate and persuade.?

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6.???? Behavioral Economics

Behavioral Economics (BE) combines insights from psychology and economics to understand and explain how people make economic decisions. Behavioral economics makes use of psychological factors, cognitive biases, heuristics and social context to influence consumers’ decisions. Below are four examples of Behavioral Economic principles that are often used to develop marketing messages that convince and persuade consumers.

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?7.???? In closing

Behavioral segmentation can be seen as the ultimate way of being customer centric. It gives you the ability to develop value propositions that aligns with the needs of customers and provide you with a mechanism to design and deliver those value offerings to specific customers. This has significant benefits for the organization and the customer.

Behavioral segmentation is a journey and should be seen as something that will evolve and improve over time as the customer, organization and environment changes.

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Dr. Andries Noeth is a Director at Newway Insight and holds a Ph.D. in Research Psychology. He specializes in understanding consumer needs and developing customer-centric experiences and value offerings.