What’s Wrong With Segmentation?

Joris Zwegers and Dmitri Seredenko
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Key Takeaways

What? Market segmentation may seem outdated in a world of personalization and segments of one.

So what? Market segmentation must be considered a platform for driving cross-functional strategy, not just another tool in an increasingly cluttered marketing toolbox.

Now what? Create cross-functional alignment by setting the vision for success and developing a blueprint for how segmentation results will be implemented across the organization.

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Brought to you by: Kantar Consulting

Leveraging findings from a survey of AMA marketers about segmentation and their respective organizations, the authors argue that segmentation can be used to much greater effect in many organizations as a platform for customer-centric growth by bridging commercial and customer value, reaching the organization and linking to marketing tools. Market segmentation is the process of dividing potential customers into discrete groups with similar characteristics to guide the development of strategy. Since its inception in the mid-1950s, segmentation has been proliferated among academic and business circles as the foundation for effective marketing.

Segmentation has become a polarizing topic for marketers. For some, the rise of Big Data and the quest for personalized, one-to-one marketing has rendered classical segmentation irrelevant. For others, the rapid pace of disruption and the need for real-time customer insight has made any point-in-time, survey-based segmentation seem like an artifact of the predigital world.

When Wendell R. Smith introduced the notion of segmentation in 1956, he envisioned segmentation as the foundation for a new type of marketing strategy. Whereas most marketers of the time focused on capturing a horizontal layer of the “cake” (the market) by differentiating their product or service from that of competitors, Wendell argued that marketers could instead choose to cut themselves a full slice of cake by developing a deeper market position with specific customer segments.

Since Smith’s seminal paper, segmentation has evolved from an alternative approach to strategy to the core tool for marketing strategy and, more recently, to a commonly used tool for any type of strategy. Organizations commonly apply some form of segmentation to support decision-making in areas as diverse as corporate strategy and innovation, brand positioning and media planning.

Segmentation has morphed into a more complex topic than its core definition would suggest. On a philosophical level, segmentation has shifted away from a simple focus on understanding customers’ needs to an intricate exploration of customer lifestyles, values, jobs to be done, need states and occasions. On a practical level, the influx of real-time, digital data about customers has unlocked entirely new ways of understanding them. Taken together, the complexity of modern-day customer segmentation has made it a sensitive topic, particularly for marketers. Where markets can be finely sliced in real-time and customers can be targeted live, classic segmentation can seem obsolete and irrelevant.

Much of the debate about segmentation is misguided. Fundamentally, market segmentation must be considered a platform for driving cross-functional strategy, not just another tool in an increasingly cluttered marketing toolbox. When done correctly, market segmentation provides a complete and intimate view of customers, which serves as a North Star that aligns an organization around the premier stakeholder: the customer. This outcome requires a delicate balance of understanding what customers want and aligning business functions around customer segments it can and should focus on. 

Research has shown that the organizations that are the best at putting customer needs at the heart of everything they do, (i.e., they are customer-centric) are able to more effectively identify and execute strategies that drive growth. Therefore, we find a close relationship between the quality of a segmentation program and an organization’s level of customer centricity (Exhibit 1). 

When employed effectively, modern-day segmentations drive both short- and long-term strategy. In the short term, actionable segments can guide customer acquisition teams and aid in targeted marketing efforts to ensure that brands reach the right customers with the right messages. Furthermore, when integrated with customer behavioral data, segmentation can help customer relationship management teams fortify existing relationships with meaningful rewards and loyalty programs. In the long term, clearly differentiated and economically substantial segments can guide decision-making on expanding the business into adjacent categories or segments. Segmentation can inform the organization’s blueprint for long-term growth, guiding decisions on which products to launch, which go-to-market strategy to employ and which brands to reposition or acquire.

Despite its importance, segmentation is significantly underutilized by marketers. Nearly 40% of marketers surveyed indicate that they do not have or don’t know if their organization has segmentation in place. Another 32% of marketers surveyed indicate that their segmentation is at least three years old (Exhibit 2). Less than half of marketers surveyed indicate that they are very satisfied with the segmentation in place at their organization (Exhibit 3).

What’s Needed for World-class Segmentation

There is extensive literature on the requirements of effective market segmentation. However, most efforts tend to focus on either the technical aspects or philosophical underpinnings. Based on our own experience and the data analyzed here, we assert that the type of segmentation is not a critical factor so long as it is aligned with the key business objectives. However, to truly serve as the platform for developing a unified, customer-centric business strategy, segmentation needs to do much more.

Segmentation should bridge customer and commercial value, providing organizations with a clear understanding of how they can simultaneously create value for their customers and their business. It should connect and rally historically siloed functions around the most important voice in the business: the customer. And segmentation should orchestrate the delivery of strategy by linking together key marketing tools. Marketers surveyed were asked how strongly they agree that their organization’s segmentation delivers on key aspects of these three overarching objectives (Exhibit 4).

Bridging Customer and Commercial Value

World-class segmentations delicately balance in-depth customer understanding, commercial relevance and future orientation. Despite the importance of this balance, just one-fifth of marketers (20%) agree that their segmentation delivers on all three key aspects. In practice, segmentations are often limited by a narrow focus on either the needs of the business or the needs of the customer. On one end of the spectrum, segmentations that focus on driving short-term strategy can miss the rich customer understanding required to build truly forward-facing strategy. On the other end, segmentations that focus on painting a vivid picture of customers without reflecting business realities and elucidating concrete commercial opportunities fail to gain traction in organizations. Achieving this balance of rich customer insight and robust commercial opportunity requires shifting the role of segmentation from research exercise to strategic endeavor.

Designing, executing and implementing world-class segmentation requires bringing together perspectives from across the organization to ensure that outcomes link closely to desired objectives. Ultimately, segmentation can serve as a powerful first step toward customer centricity but only if it establishes a common understanding of the customer and a clear path forward for commercializing opportunities.

Connecting the Organization

Segmentations have the greatest impact when they are understood and used by all relevant functions in the organization. In practice, segmentations are often owned by the insights department, rather than led by it. As a result, they fail to reach all relevant functions of the business and are not incorporated into annual strategic planning cycles or day-to-day decision-making. If not actively engaged before and throughout a segmentation initiative, critical business functions can easily dismiss the outcomes of segmentation as irrelevant.

Achieving maximum impact requires the endorsement of senior stakeholders and input from key functions at the start of a segmentation program. Early and ongoing engagement ensures stakeholder alignment and builds the shared sense of ownership essential to shaping customer-centric strategies. Upon completion of a segmentation program, it is critical that all end users are provided the appropriate level of training and equipped with tools to apply customer insights to day-to-day decisions. Ultimately, a vivid and intimate understanding of customer segments can serve as a galvanizing North Star across functions, but only if appropriately embedded into the organization and in an inspirational way.

Linking to Marketing Tools

Segmentation can only serve as a platform for growth when it is connected to key marketing tools and integrated into marketing processes. Segmentations are often developed without consideration of how they will be linked to commonly used marketing tools and processes. Instead of serving as the foundation for a customer-centric marketing ecosystem, segmentation can ultimately become a stand-alone research report. In this case, customer insights that drive marketing strategy begin to emerge from various, disconnected research projects, which usually results in multiple incompatible, and sometimes conflicting, views of the customer.

To link segmentation to marketing tools and processes requires careful consideration of tools, data sources and processes at the outset. Effective connections between segmentation and databases add to the understanding of current and potential customers and can greatly expand the actionability of the program, making it easier to execute on strategy.

For example, connecting with the organization’s CRM database—and any existing micro segmentations—allows for immediate translation of marketing strategy to execution, measurement and optimization. Syncing to the proprietary audience information database allows teams to quickly focus on core segments with more targeted media buys. And connecting to proprietary data management platforms provides the opportunity for accurate digital/programmatic media buying.

How to Get Started

For segmentation to fully effect change, organizations should first create cross-functional alignment by setting the vision for success and developing a blueprint for how segmentation results will be implemented across the organization. Assigning responsibilities to key stakeholders before beginning a segmentation program ensures that all relevant functions are involved and committed to using segmentation as a platform for growth, rather than a research tool.

Maintain consistent internal communication and stakeholder management across all levels of the organization so that all teams are aligned with key decisions and engaged on the implications of those decisions on segmentation outcomes. Support from senior stakeholders is a critical enabler for setting the foundation for effective segmentation, and ongoing support from cross-functional segmentation champions can help ensure that key outcomes are applied at all levels of the organization.

Finally, design an embedding and socialization program that equips employees at all levels of the organization. End users of the segmentation need to be provided with tools to guide them through interpretation of results and help them translate insights into action. It is imperative that socialization is not a one-and-done process, but an ongoing initiative to infuse customer-centric capabilities and a customer-centric mindset into the organization.

Peter Drucker once famously noted, “Culture eats strategy for breakfast.” Although segmentation provides the groundwork for sound strategy, to truly unlock customer-centric growth, segmentation must galvanize organizations around their priority customers and serve as a spark plug for igniting a customer-centric culture.

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Author Bio:

Joris Zwegers and Dmitri Seredenko
Joris Zwegers is vice president of global research at Kantar Consulting. Dmitri Seredenko is a senior director at Kantar Consulting.Kantar Consulting is a specialist growth consultancy. With more than 1,000 analysts, thought leaders, software developers and expert consultants, Kantar Consulting helps clients develop and execute brand, marketing, retail, sales and shopper strategies to deliver growth. Kantar Consulting owns market-leading assets including PoweRanking, GrowthFinder, Global Monitor, RetaiI IQ, RichMix, XTEL and Marketing, Insights and Purpose 2020. It tracks 1,200 retailers globally; has purchase data on more than 200 million shoppers; and forecasts social, cultural and consumer trends across the world. Kantar Consulting is part of Kantar, the data investment management division of WPP.
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