Volume 18 Newsletter 10

How Are You Segmenting Your Market?

How do you segment your market place;  by customer size, maybe by industry type or perhaps geographically?     At a recent talk, Wharton Professor David Reibstein suggested that if you aren’t segmenting by customer needs you’re making a big mistake.    Here’s why ….

A large computer hardware supplier was struggling to connect with their market.   Sales were tanking and the executive team thought they should re-examine their market segmentation to see if there were any clues as to why their business was going off the rails.    Using a Conjoint Study to determine the customers’ needs, 439 potential purchasers from various size firms and from various industries were contacted.  

When the data was all crunched it was determined there were 14 distinct customer needs when it came to buying business computers.  With this in mind they considered the idea that there might be groups of customers (segments) in the data that value similar attributes.    If they could find them, they would have market segments they could confidently invest in.    Running a cluster analysis on the data revealed three distinct customer segments: 1)Brand buyers, 2) Judicious buyers and 3) Price shoppers.   

It turned out this computer manufacturer wasn’t segmenting by customer needs but rather by industry type.    Now it's important that you now look at the graphic below.   The big circles show the three segments (Brand buyers / Judicious buyers / Price shoppers) and the coloured dots show the industry type of each customer.  Notice how random the “industry type” coloured dots are.   Clearly there is no clustering by industry type – only by needs!  

Next, the customer needs were averaged by Industry code.   The square boxes represent where one would position a product for each industry if we averaged the customers needs by industry type.      Notice where the squares land.   Right in the middle of nowhere, which is exactly where this company’s products were positioned and the reason they were losing sales fast.

What can we learn from the poorly performing computer manufacturer?

  1. Segment on Customer Needs:  Segmenting the market any other way might be convenient but it’s a trap!
  2. Do the Conjoint Study: You can save a little money by not doing one and waste a lot of time, money, R&D and Sales effort because you didn’t!
  3. Position your products on needs:   Once you’ve found your segments, position your products accordingly.

The computer company chose to segment by industry type because it was convenient for assigning their sales teams.   However this segmentation failed to address the customer needs with unfortunate results.   How are you doing your segmentation?   If it's based on anything but customer needs it's time to re-think your segmentation!