The problem with segmentation

Every person is different, every company or organisation is different, and so by definition every customer is different. As a company, how do you face this challenging reality? How do you find a balance between meeting every customers specific needs and your own profitability and efficiency? Unless you deliver bespoke product or services, like tailor-made suits, segmenting your potential market(s) seems to be the logical solution. Companies using this approach try to simplify the complex variety of customers by defining their target markets and dividing their (potential) customers into just a few segments, based on a limited number of indicators, leaving aside other characteristics that distinguish one customer from another.

Needs based segmentation

The most obvious form of customer segmentation is based on customer needs. For example, if you’re in the toilet-business, you will have to understand that disabled people have other needs then others. You will have to understand that Japanese people have other expectations about how a toilet should look like then Europeans do. If you run a restaurant and want to attract families, it’s wise to have a specific children’s menu and provide toys, crayons or even a playground. But this of course could again push off business people looking for a place to eat and meet with colleagues, suppliers or customers.

The key to this kind of needs-based segmentation is first of all clearly defining what markets you want or need to be in. Just like every strategic decision, it ’s about making choices. From an internal view, it’s about knowing what your key assets and differentiators are and what type of customers you could serve the best based on those assets. Outward looking, it’s about having a good understanding of the marketplace regarding your products and services and defining which type of customers are the most interesting to you. Once you have made this choice, you can then start to develop products, services and customer experiences, based on a good understanding of the real needs of your target groups.

An often overlooked complexity to this kind of needs based segmentation is the fact that their often is a difference between the person who will use your product or service and the person that buys your products or services or influences the buyer or user. Buying a car for instance rarely is a decision taken by just one person. Every member of the family is involved in such a big decision. You have to take into account the needs of all  the different members in this decision making process. If you sell children’s toys, they have of course to appeal to children, but parents or grandparents who buy toys will consider other criteria like durability, safety and educational value. But it’s not that straightforward. If you’re a parent or grandparent, you surely recognize the situation where you set all those criteria aside, because in the end, you want to make your child happy.

If you deliver products or services to companies, different people and departments have a say in the buying process, looking with different perspectives and needs to your offering. This not only counts for the buying journey, but also during the entire customer relationship. The users of your software will value usability, whilst the financial or procurement department will be more likely to look at the cost. Members from the legal or audit department will pay more attention to security and compliance.

Needs based segmentation makes sense, but it requires a deep understanding of how your customers and their influencers think, feel and act. There is a lot of evidence that people make their decisions mainly based on emotional arguments, regardless if they’re in the B2C or B2B business. In the end, it’s always about human to human.

Discovering the real needs of your potential customers is harder then it looks. But even if you are successful at this, the next challenge is to identify and attract customers that have these needs. Most companies try to determine simple indicators like gender, race or age to segment their market. Unfortunately, targeting people based on such indicators can turn out to be unsuccessful.

Not every Arabic person is Muslim. Not all Muslim women wear scarves. Not all boys like to play with cars and not all girls like to play with dolls. Personalizing your communication means you have to know and understand every individual customer in order to address him or her in a compelling way. Simple segmentations never reflect the reality. The simple differentiation between men and women for instance is under pressure as the definition of gender has changed. Gender is no longer (or has never been) unambiguously defined. Some people will even consider them as primarily human, not wanting to be addressed as male or female. Gender has become a choice, and countries like India, Bangladesh and Nepal already officially recognized a third gender. Sending out a segmented newsletter based on simple criteria like gender might be very offensive if you don’t take into account this reality.

Is a man entering a lingerie store by definition looking for a present for his female partner? Will an Arabic looking women by definition look for halal products in your store? Using these simple assumptions might turn out to be completely wrong. This might look obvious, but prejudices are stubborn. 

If gender is not easy to define, is this still a relevant indicator? Why should clothing or perfume depend on gender? Retailers like Selfridges are adapting to this evolution by opening gender-neutral stores like Agender, and more and more unisex products are put on the market. You can clearly see this in the perfume industry, where lots of niche brands don’t label their perfumes as male or female anymore. If you like the smell, you just buy it, whatever your gender. Personally I only wear this kind of fragrances, because I don’t want to be forced into a decision made by a company on what kind of smell I should like or not, what kind of fragrance works well on me or not.

Understanding your customers and providing them with different offerings based on different needs is useful, but unless you understand how every individual customer thinks, forcing customers into a ‘segment’ can be a dangerous pursuit. Easy to collect data like gender might not be the correct criteria to segment your market or reach potential customers in a way that will appeal to them.

Value based segmentation

One of the easiest ways to segment your customer base is by revenue or value to your company. Organisations using this type of segmentation deliver premium services and experiences to those customers that bring in the most money. Is this a good idea? Using this kind of segmentation means you don’t consider the reality of a person or organisation, but only look at the limited reality of that person or organisation in relation to your company. A customer that only spends little money on rare moments with your company is then considered as ‘non-premium’. But do you really know if this customer is not of interest to you? Do you know the exact reasons why this customer doesn’t engage with you more often, or if this customer possibly has a lot of potential to your business?

The important message here is that it's not up to you to decide whether a customer is ‘premium’ or not. You have to leave that option open to the customer, not relying on your limited view on the customer. Airline companies provide economy and business class, and more and more companies provide even more segments, like economy privilege or superior business. But it’s the customer who decides for every individual flight the price he wants to pay and the service and comfort he expects. And these choices may vary on every occasion. A typical economy class flyer could opt for a business flight at a specific occasion, and people flying in business class most of the time might consider economy when going on holiday with their children. People want to be able to make their own choices, with the knowledge of the kind of quality and experience they can expect when making that choice. They have to clearly understand the value that comes with the price. When you ignore the fact that customers are in the lead and make their own decisions, and you ‘segment’ them based on revenue, you show you’re not customer centered.

This said, of course you have to be thankful to every customer that engages with you, and be extremely thankful to those customers that are loyal and spend a lot of money with you. Giving loyal customers access to premium content, informing them and involving them in your product development, giving them first access to better deals is a good idea, and it’s also good to be open about that to your entire market. This shows you value your loyal customers and that loyalty will bring value to the customer. Far too often you see companies rewarding new entrants with cheaper deals, ignoring their loyal customers. But it’s a thin line. If a customer that starts to engage with you in a modest way doesn’t feel he’s valued and appreciated, he might defect and see no use in spending more money because the added value of doing so is not proven in his first experiences.

Personality based segmentation

I’m particular careful with a third, widely spread way of segmentation. A segmentation based on personality. I’ve coached lots of customer service employees, and I’ve noticed that people tend to adapt their communication immediately based on limited information and prejudgment. People tend to adapt themselves instantly to how a customer interacts and communicates. If a customer is quite formal and short in his communication, people have a tendency to believe they have to act in the same way. If a customer expresses his dissatisfaction in a very explicit way, they tend to take it more seriously than when a customer who is just as dissatisfied expresses his or her dissatisfaction in a more polite way. People judge quickly, and contested concepts like MBTI have enforced this way of thinking. Let me tell you this: people aren’t that different after all, and every concept of segmenting people based on personality is dangerous. Dissatisfied customers might interact with you in a totally different way, or even decide not to tell you and just defect, but in the end, they are dissatisfied. Adapting your response to this dissatisfaction based on your presumptions could turn out to be completely wrong.

In 1936 Dale Carnagie wrote a book called ‘how to win friends and influence people’. This revolutionary book still is of great significance today. It’s mainly saying that, no matter how a person expresses himself, the fundamental emotions and drivers are the same. It all depends on how you react to a person that will make him feel trusted, recognized or valued.

I often use the metaphor of squares and circles to explain this. When dealing with customers, specifically in long term relationships, people tend to categorize their customers into two categories: the ones they like and have a good, open relationship with, which I call the ‘round’ customers, and the customers that are more closed, neutral, distant and formal, which I call the ‘square’ customers. I’ve observed that customer service agents adapt their behaviour very quickly once they have made their decision on what type of customer they face. If they conclude they are dealing with a ‘round’ customer, they too will be warm, open and empathic. They become ‘round’ themselves. If they are confronted with what they consider a ‘square’ customer, immediately they change their attitude and start behaving in a ‘squared’ way. But if this customer service agent has the ability to change his attitude so quickly, changing from round to square in just a second, why do we believe customers have to be segmented in circles and squares? Don’t customers, who are humans like us, just have the same ability to change shape? Next time you are confronted with a ‘square’ customer, try not to change your behaviour and address him in a ‘round’ way. I assure you that you will notice this customer isn’t square be default, but, when feeling valued and appreciated, has emotions too and can and will change shape. Because, let’s face it: what do you know about the person you’re dealing with? His or her history, challenges, situation, set backs and fears? Before making a judgment, if you’re able to really listen to and be interested in your customer, you will experience all customers are interesting and emotional human beings. They might interact with you in a rude or distant way, but do you really know what’s the story behind it? If you can change from square to circle, why do you believe other people can’t?

Take aways

Segmentation makes sense, but be aware of these pitfalls:

• Reality is complex, and segmentation is by default a simplification of that reality. Segmenting your offering based on different needs is useful, but be aware of targetting your market using simple indicators like demographics. If you don’t understand and know every individual customer, your efforts might miss their target.
• Using internal criteria to define your segmentation and communication might prove wrong, because they don’t take into account the whole story behind every (potential) customer. If you want to be customer centered, you have to look for what value you can bring to your customer, not what value a customer can bring to your company.
• People want to be valued for what they are: complex human beings with emotional and rational drivers. They want to make their own decisions, not being forced into some form of segmentation by any company. Let your customers decide for themselves how they want to engage with your company by making clear your different propositions and benefits.
• Prejudgments are harsh and no human being can be defined in a simple way. How you interact with your customers will have a major impact on how they will engage and interact with you.

If this article triggered you and you would like to get more customer centered insights and inspiration, please reach out to me. I’m a seasoned customer experience professional and speaker, determined to help companies become customer centered.