The seven perils of segmentation

Segmentation has been on the scene for some time - yet it is still easy to fall foul of its challenges. If you want to have successful segmentation, then you will need to avoid the following pitfalls...

By Neil Davey, editor

There’s nothing new about segmentation – indeed, as a practice it has been utilised by firms for decades. But this familiarity doesn’t necessarily mean that businesses have been getting it right. Indeed, despite its long history, only a limited number of organisations are actually using segmentation to its strategic potential. The reasons for this are numerous. Certainly some confusion surrounds certain aspects of it, and for this reason it’s worth a brief recap.

Segmentation is a tool for dividing markets and customers into groups whose needs differ enough that profitable opportunities can be found and managed. By understanding the value of – and fulfilling the different requirements of – these different segments, customer relationship can be planned and managed more profitably. New businesses can even be founded on the discovery of hidden or emerging segments.

Whilst similar to personalisation, or targeting – and indeed it is sometimes confused with these - it is in fact far more strategic in nature, and is usually applied when working at a planning level, such as deciding what approach to take to market, what offers to make to particular groups and so on.

"The first place it can go wrong is when firms fail to sufficiently think through the kind of segmentation the business needs and how it intends to use the segmentation." Barry Leventhal, director of advanced analytics, Teradata (UK)

“The targeting model, where a bank would for instance identify the best prospects for a personal loan, produces good short-term ROI from each marketing campaign, but segmentation is really a strategic tool where there could be greater long-term benefits,” explains Barry Leventhal, director of advanced analytics for Teradata (UK). “Understanding your customer base and what types of people you have and forming a strategy for each segment can be critical to the long-term health of the business.”

“If you do it properly and you actually get the segmentation that describes the market from your businesses’ perspective then you can use the same segmentation in all sorts of nodes,” adds Julian Berry, managing director of Berry Consulting and director of The Customer Partnership. “The brand managers can use it to decide what to offer the different groups; you can look at it from a spend perspective and give the segment that is worth the most money to your business the biggest budget; you can see what channels the particular segments like; and it can inform product development. So it can be fundamental.”

But despite this, Leventhal concedes that the success rate of segmentation projects can be hit and miss. “Many firms are attempting to do segmentation,” he suggests. “But they don’t all get it right. Some struggle.” So where are these firms going wrong?

Mistake #1: overcomplicating the process. “Segmentation is regularly overcomplicated in the first instance. I’ve very often seen databases segmented into nine of more different groups without defined demographic boundaries, identifying ‘attitudes’ and ‘behaviours’ rather than what customers look like or where they are. This results in two problems. Firstly, just because we identify what behavioural types on our own database it doesn’t always mean we can find similar attitudinal types out there in the big wide world. And also, complex segmentations can lead to huge expense in terms of message testing and/or research.” Ian French, planner at strategic, creative direct marketing agency TDA.

Mistake #2: drawing up segments of very different sizes. “The size of segments is important. When you have your data in and you are working out what segments exist you should avoid creating one very big one and ten very small ones, for instance. This wouldn’t be very helpful. It is useful to have your segments or roughly comparable size because if you end up with many very small ones it will make planning very difficult, whilst if there is one very dominant one then the others run the risk of being overlooked.” Julian Berry, managing director of Berry Consulting and director of The Customer Partnership.

Mistake #3: using segments that aren't sufficiently refined. “A store may say that Customer A has spent X in the past year and is therefore its best customer. But without looking at frequency or regularity of spending this could be misleading. Customer A may have only spent with the store in the run-up to Christmas. Customer B, on the other hand, has spent half the amount of Customer A but has made a purchase in each quarter of the year. Here, segmentation analysis on a more refined level would show that Customer B is a more loyal customer but of low value (ie spends frequently but does not spend much in terms of value), suggesting that targeting him or her with personalised, relevant offers could lead to and increase in the amount spent while maintaining loyalty.” Andy Wood, managing director of GI Insight.

"I worked for a precursor to one of the big mobile phone companies, and it designed products around segments based on market research but then couldn’t decide what sort of real people to offer them to." Julian Berry, managing director of Berry Consulting and director of The Customer Partnership

Mistake #4: over-prescriptive segmentation. “Whilst the main customer segmentation for a strategy will be a segmentation of customer value based on factors such as behaviour, other segments such as attitude will be needed for different purposes, eg communication, product development. Critically, however, segments are flexible and evolve with changes in the environment. As such, segmentation as a business tool is both an art and a science, and should not be overly definitive or prescriptive or else its creative power will be thwarted.” Jennifer Kirkby, Mutual Marketing.

Mistake #5: basing segmentation on market research not reality. “Some companies employ a market research company to provide data on a sample of people – 20,000 people or so – do segmentation on this data and then think 'right, for our market we have these six different groups.' However, because they have built it on this particular set of data they then find it very difficult to attribute it onto the wider population. I remember working for a precursor to one of the big mobile phone companies that had just this problem – it designed products around segments based on market research but then couldn’t decide what sort of real people to offer them to.” Julian Berry, managing director of Berry Consulting and director of The Customer Partnership.

Mistake #6: failing to get to grips with needs-based segmentation. “There are different approaches to segmentation, and needs-based segmentation is one that is prone to the risk of not being able to assign each customer sufficiently accurately. This is normally because the needs-based segments have probably been created using survey data to identify customers’ needs, so the data that has been sued to identify the segments is probably not the same data that is available in the customer database in order to assign them to their segments. This is the place where the wheels can come off the wagon!” Barry Leventhal, director of advanced analytics for Teradata (UK).

Mistake #7: not having a plan for the segmented data. “The first place it can go wrong is when firms fail to sufficiently think through the kind of segmentation the business needs and how it intends to use the segmentation. Therefore, even though they may have done a good job in identifying groups, they are not well placed to be able to assign each customer to a segment in the database, which is ultimately what a company would want to do in order to manage the different customer segments and treat them differently.” Barry Leventhal, director of advanced analytics for Teradata (UK). “I’ve often seen situations where firms end up with customers neatly grouped into segments... and then the marketers ask 'now what???'” Ian French, planner at strategic, creative direct marketing agency TDA.

Read more features, practical case studies and white papers about customer strategies.