Monday, October 26, 2009

Segmenting Segmentation

The problem with the word "segmentation" is that it has lost its meaning. Like "analytics", a marketer saying "segmentation" can mean virtually anything. This isn't necessarily a problem, if we are simply using "segmentation" to mean "the parsing of customers in some way", but often people mean something very specific when they say the word, while the people listening interpret something very specific as well, but something specifically totally different.

I've often tried to come up with ways to segment the word segmentation. And yes, I am guilty of the same sin the "Two Bobs" made in Office Space when they wrote "plan to plan" on the whiteboard, but I'm still going down this tautological road.

"He's a real straight shooter, that Andy Hasselwander. He segments his segmentations"

So, here we go. In my view, any segmentation starts out with business goals. What is the company itself trying to do with its customers? Are we trying to grow profit? Grow revenue? Are we trying to do it in a specific area? Do we have multiple goals? What are their priorities? Ignoring these questions and just going down the path of segmentation without context is a big problem. So start by understanding business goals. The two Bobs would be proud of you, even just doing this.
Then, we get to the actual source insight. This is before we do any segmentation. What I mean by insight is pulling all of the stuff we do and can know about customers that would make meeting the business goals defined above easier, and putting them in a giant bin. This can mean old and new market research, qualitative or quantitative, data mining, management hypotheses... it's everything.

Only then do we get to segmentation. Now here I think there's an important thing to consider, which is that "value" segmentation kind of supercedes all the others. The reason is that if we want to do anything to customers, we first need to understand how valuable these customers are. So, I'd argue that segmenting customers first by value--whether customer lifetime value or something less sophisticated--has to happen first before you do anything else. This is probably somewhat controversial, among the 150 people who regularly read this blog. So, I encourage people to engage in a heated, uncivil debate on the topic.

Then, I'll put forth four key "types" of segmentation, in addition to value-based:
  • Product. What customers want and need from a product or service. Sometimes called "needs-based segmentation"
  • Creative. How customers respond to different visuals, animation, etc. Some of the cool things going on in biometric research are very useful here.

  • Promotion. How customers respond to different types of incentives... price, points, free shipping, etc.

  • Channel. Which customers use which channels, and which they prefer.

  • Targeting / Finding. Where to actually find customers wherever they are

This is represented in my little "segmentation tree" as a continuum, and that's deliberate. This is because the left side of the tree--needs-based segmentation--is really hard to combine with the right side of the tree. Also, making a segmentation scheme do all five things at once is almost impossible. There are two reasons for this:

  1. A statistical problem called "assignment" which means that you can't make one segmentation based on needs, generated from a survey, fully predict or "find" individual customers

  2. A scope problem that in any one study, you can't possibly combine all elements of "segmentation" into one uber-model. It's just impossible.

One way around this is with behavioral segmentation, or "deterministic" segmentation. This means you just start out segmenting your customers into groups 100% defined by their behavior, and then define the six attributes in the tree post-facto. This way, you're always certain you can target a customer. It might not be perfectively descriptive, but it's guaranteed to be perfectly actionable.

Later everyone.

1 comment:

Andrew McFarland said...

Thanks for a way to conceptualize segmentation. Always helps to have a framework before randomly acting. At its root, segmentation is about profitable discrimination. For more: