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An Introduction to Market and Customer Segmentation

Editor's Note: If you are interested in becoming an expert on Strategy Development, take a look at Flevy's Strategy Development Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

Featured Best Practice on Market Segmentation

Excel workbook
From a high-level, the goal of a marketing strategy is to identify a target market and develop a marketing mix that will appeal to those potential customers. Decisions regarding the ideal marketing mix can be organized in terms of Price, Promotion, Product, and Price. However, the goal is not to [read more]

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legosSegmentation.  Everyone’s doing it, but are you doing it right?  

Although segmentation should help target the right customers, it does not always bring the intended value. Inappropriately or incorrectly defined segments may lead management to make bad strategic decisions.

Market and Customer Segmentation defines a number of different groups of people or organizations, which our company aims to reach and serve.  The intent of the segmentation exercise is to two-fold:

  1. Create the foundation for a relevant Value Proposition…
    • With products matching customers needs;
    • With adjusting pricing and discount schemes; and
    • With service offerings attracting and keeping the relevant customers loyal.
  1. Adjust the Go-to-Market Strategy (GTM) in order to…
    • Utilize the best use of a multi-channel approach;
    • Optimize sales efforts across the full Customer Experience journey; and
    • Align marketing and messaging toward our target customers.

There are many obstacles to conducting a segmentation exercise properly and effectively. Here are just some such obstacles:

  • Companies try to use just one segmentation model for all/different purposes.
  • Companies have multiple segmentation models without a clear and consistent linkage among them.
  • Companies base the model on data at hand vs. data needed to make the insights relevant.
  • Management is not aligned on what drives and what describes the market.
  • Companies allow complexity of a few key customers interfere wit ha simple market view.
  • The purpose of the segmentation is “lost in translation” when executed on an operational level.

There are 3 distinct types of segmentation levels–Strategic Segmentation, Tactical Segmentation, and Operational Segmentation.

Strategic Segmentation

Otherwise known as Market Segmentation, Strategic Segmentation seeks to:

  • Understand the market landscape of our business.
  • Evaluate where we are doing business.
  • Identify and prioritize attractive market segments.

Strategic Segmentation seeks to answer the questions:

  • Where do we grow?
  • What industries and verticals? What geographies?
  • Who are our primary market segments?

Tactical Segmentation

Otherwise known as Customer Segmentation, the common objectives of this segmentation include:

  • Determine the needs and drivers for our customers.
  • Understand the characteristics of the valuable segments.
  • Define the criteria customer groups make their purchases by.
  • Determine their average transaction and annual spend.

customer_segmentation

Customer Segmentation seeks to address questions, such as:

  • How do we differentiate within the prioritized market segments?
  • What do we offer our customer segments?
  • What are our customer demographics?
Are you a management consultant?  You can download this and hundreds of other consulting frameworks and consulting training guides from the FlevyPro library.

Operational Segmentation

The basis of Operational Segmentation is prioritizing market segments based on Time, Resources, and Value. It seeks to understand these business decisions:

  • Determine which customers are most attractive to our business model.
  • Know the size/value of our customer segments.
  • Understand how we service different customer groups.
  • Determine how we differentiate our products and services.

Questions that can be answered from Operational Segmentation include:

  • Who are our most loyal customers?
  • Who do we call and visit?
  • Who do we provide discounts and benefits to?

You can download an editable PowerPoint about conducting Market and Customer Segmentation here on the Flevy documents marketplace.

47-slide PowerPoint presentation
Customer segmentation is an important tool for customer analysis. - To identify cost reduction opportunities - To identify revenue and profit maximizing strategies - To achieve differentiation and to preempt competitors' moves - To determine the strategies that fit best with a company's core [read more]

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Readers of This Article Are Interested in These Resources


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This presentation will focus on the second phase of the Customer Analysis process: Segment Customers and Derive Insight. Customers segment their customer base to better understand their customers. The overall objective of customer segmentation is to analyze customers, find niche opportunities, [read more]


 
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About David Tang

David Tang is an entrepreneur and management consultant. His current focus is Flevy, the marketplace for business best practices (e.g. frameworks & methodologies, presentation templates, financial models). Prior to Flevy, David worked as a management consultant for 8 years. His consulting experience spans corporate strategy, marketing, operations, change management, and IT; both domestic and international (EMEA + APAC). Industries served include Media & Entertainment, Telecommunications, Consumer Products/Retail, High-Tech, Life Sciences, and Business Services. You can connect with David here on LinkedIn.

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