Segment your way to profits

Quick post tonight, as a follow-up to the "Why you need advanced analytics" post and triggered by an article on the HBR blog called "What you need to know about segmentation".

At its core, segmentation is just a way for the company to identify and target a specific group of prospects or customers in a profitable way. Here is Kotler's definition (one of the godfathers of marketing, someone who has taught generations of business graduates either directly at Kellogg or indirectly via his "Principles of Marketing" and "Marketing Management" books): "Market segments can be identified by examining demographic, psychographic, and behavioral differences among buyers. The marketer then decides which segments present the greatest opportunity - which are its target markets. For each chosen target market, the firm develops a market offering. The offering is positioned in the minds of the target buyers as delivering some central benefit(s)"
So - how to get started?

You need to find a segmentation that will make sense (and that you can act on), but also that will prove relatively stable over time (cf. causation vs. correlation; segments must be bound by more than just luck).
Drawing from the HBR blog, we find 6 main characteristics in a good segmentation (comments are mine):

1. Identifiable. Segments are of no use if you can't put customers in them
2. Substantial. A segment of one will probably not be very profitable (or useful)
3. Accessible. To be useful, the segment needs to be accessible --> even if you don't know how to reach out to these customers today, you need to have some concept of how to do it later; otherwise, this segment is of little use to you
4. Stable. As suggested above, the segment must be stable / durable enough that you have time to launch a marketing campaign to target the customers & somehow benefit from it
5. Differentiable. Clearly, segments must correspond to different types of customers & needs, necessitating slightly different marketing communication, pricing, products...
6. Actionable. Putting it all together, a segment is only useful if you can act on it, to target the customers in a profitable way

As we saw in the "Why you need advanced analytics" blog post, leveraging Big Data will be key in uncovering customer segments. While more companies are learning to do this, I find that many multi-$billion corporations still rely too much on old heuristics; advanced analytics will help you outperform the competition, don't ignore this tool!

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Sources:
(1) Marketing Management, Philip Kotler (11th edition)
(2) HBR Blog Network, "What you need to know about segmentation" (July 9, 2014; free registration may be required)

Additional reading:
(3) Kaylan-city Blogpost, "Understanding meaning of market segmentation"; this blog post goes into more details into the intricacies of market segmentation, and reminded me to go back to Kotler's definition for segments
(4) Differencemakers Blog, "Patterns in randomness"; the drawings are a vivid example of how the right segmentation will highlight how a seemingly random group of customers can be profitable segmented once we understand the underlying 'formula'

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I am a recovering management consultant (@BCG) with 15 years of hands-on experience in business development, product marketing, loyalty & retention, business planning, customer experience and strategy.

My kind of 'fun' is doing GORUCK events - think long distance, team-based activities (12+ hours, 13+ mile), though you will also occasionally catch me 'running' an ultra-marathon or at the gym. Big goal for 2016 is to finish a 100 miler -> take you bets!

Additional writings at www.ponderingmarketing.com. If you like what you read, please leave comments, like this post or share it - thank you!