3 common types of segmentation (pros and cons)

Segmentation is one of the most powerful yet most misunderstood customer analytics techniques in marketing. Segmentation can create significant value for firms, especially those which possess transaction level data on their customers. The benefits of segmentation include:

  • Improve marketing ROI (through enhanced targeting and value proposition positioning)

  • Reduce internal “competition” for customers and prospects (through a clear set of strategies and priorities grounded in customer needs and wants rather than the product or category manager’s business objectives)

  • Increased responsiveness to marketing messages (through a clear understanding of customer preferences and needs)

  • Reduction in customer “fatigue” (from over-promoting with non-relevant messages)

Segmentation is simply the process of dividing customer and/or prospects into different groups, each of which share characteristics and behave similarly within the segment, but which look and behave differently across segments. Three of the most common types of segmentation include:

 

Attitudinal

Transactional

Comprehensive

Definition

Based on primary research into customer attitudes

Based on purchase patterns. Example includes New, Growing, Stable, Declining, and Lapsed segments

Based on a combination of current and potential purchase patterns, demographic, psychographic, behavioral and geo-spatial data

Pros

Insights cut across customers and prospects

Grounded in revenue metrics. Moderately easy to measure impact

Combines all approaches. Allows for investment based on revenue upside. Relatively stable. Easy to measure impact

Cons

“Soft” segmentation, useful for positioning. Hard to measure impact. Near impossible to score a customer database. Results based on samples

Relatively unstable—customers can shift between segments frequently. Very different customers can have the same value

Expensive, but provides high ROI. Requires external data and predictive modeling capability.

Selecting the approach that’s right for your business and your customers depends on your objectives (new customer acquisition, rebranding, foot traffic growth, transaction size increase, etc.), your current marketing mix (mass versus direct, seasonal versus frequent promotions, etc.), the level of sophistication of your marketing team, and your payback horizon for the investment in the segmentation project. Bottom line: decide what success looks like, what you want to be able to do differently as a result of the segmentation, consult an expert experienced in a variety of approaches, and the one that’s best for your organization will become clear.

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