Real Results Marketing: Segmenting Your Customers

Market segmentation is the process of grouping customers based on behavior and perception variables, such as their needs, benefits sought, and satisfaction. Ideally, a company would conduct a needs/benefits analysis with the methodology described above for every individual customer and prospect and then build capabilities and processes to satisfy every need.

Since that is not economically feasible, companies try to identify the most important customer needs, in the most crucial customer segments (from a financial perspective) and then figure out where they can add value better than competitors.

Benefits of Effective Marketing Segmentation

Effective marketing segmentation results in customers being group by implied needs. Since, as we mentioned, it is not possible to define or identify needs perfectly, we instead find "market factors" (like size, SIC code, purchase process, etc.) among customers and use these market factors as proxies for needs. The intuition in this step is that customers with similar characteristics have similar needs — this is especially useful if you find multiple common characteristics among different customers. It also enables the company to evaluate its capabilities vs. competitors (SWOT that is not just a brainstorm list but an analytically-driven exercise).

Good segmentation also allows for effective messaging and targeting to crucial segments, and prioritization of customers by sales potential and ease of penetration. It can also help identify resource requirements necessary to increase market share by segment, target capabilities needed to improve sales and marketing results, or allow the company to communicate to customers in language that makes sense to them (different industries often use different terminology).

Criteria for Valid Segmentation

Many companies invent segmentation approaches without data and this almost always results in "invalid segments" — i.e., customers aren't really grouped by need. Experts agree that valid segments share these characteristics:

They are internally homogeneous. Each customer in a distinct segment must be more similar with respect to needs and purchase motivations to others in that same segment than to customers in other segments.
Externally distinct. Each group must represent a set of customers whose needs and purchase motivations are truly different from customers in other segments.
Actionable. The company must be able to tie a differentiating characteristic of each group to internally or externally available customer information so that it may effectively target segments. For example, a company may determine that it wants to target companies that use a certain software program. However, if you cannot identify the companies using that software, this information is not actionable and thus the segmentation is invalid.
Measurable. The customer count, current sales, potential and purchase motivations of each customer group must be identifiable. If you cannot measure the size or behavior of the segment, you cannot act on this information.
Significant. Each group must represent a meaningful percentage of the current or potential business to the company. While we concur with marketing experts who proclaim that there are "riches in niches," there is no point in pursuing a segment too small to help you make material progress in reaching your goals.

The advent of the World Wide Web and searching engine marketing are redefining market segmentation. In all other forms of marketing, the marketer pursues target customers hoping they will be interested in its products or services. Search engine marketing turns this idea around — customers searching for products or services via Google or Yahoo are — by definition — qualified prospects. For this reason and others, Real Results Marketing has developed deep expertise in helping clients use search engine marketing processes and resources to find new customers.