Using customer segmentation to direct key marketing and product information to the right audience is not new; it’s been around since the 1950s. But the wealth of data that feed today’s segmentation models makes it possible to build effective and profitable models that can increase the customer experience and help your business grow.

The overriding goal of segmentation is a noble one: to improve customer-centricity and service. The idea is that by grouping customers by common attributes – such as usage behaviour, tastes and demographics – it is possible to better understand and serve customers in a cost-effective way. The two drivers behind this approach – customer experience and operational efficiency – are, however, diametrically opposed. After all, an ideal customer approach would necessitate understanding each and every customer on an individual basis and customising their experience accordingly. This ‘segment of one’ approach is so specific and so tailored to an individual’s needs that it has the potential to become increasingly complex and costly for a business to execute. An approach focused on driving operational efficiency works by treating all customers the same, thus enhancing the business’s ability to deliver cost-effectively and increase profitability. But, of course, human beings are not all the same.

“But, of course, human beings
are not all the same”

In practice, this means that a business may prefer to create different divisions and systems that suit the organisational structure, but these may prove inconvenient for the customer. Certainly you can’t set up a production line to produce an automobile designed specifically for each individual buyer, but you also can’t run the risk of dealing with a high-spending Lamborghini aficionado in the same way you do a consumer in the market for an everyday runaround. Somewhere in between these two extremes lies the ideal balance for each business, determined by taking into account issues of profitability and delivery, market forces and competition, and juxtaposing them against customer needs and the ability to adapt to the changing needs of the consumer.

Each business needs to carefully weigh up its organisational preferences with the consumer value it hopes to deliver. And this means finding the right place on the scale below

There is a tension between a fully organisational lens concerned only with optimisation, and a full customer lens concerned only with experience. Remember that an overweighted organisational lens can lead to a situation where consumers are regarded as a homogenous population. Alternatively, an overweighted customer lens might overcomplicate the delivery model by asking too much from the organisation and its people. How do you solve that tension? You do so by reaching an appropriate level of granular customisation which incorporates consumer understanding while bearing in mind production and cost efficiencies. Audio streaming service Spotify, for example, should be chasing a segment of one, because their model – or at least their algorithm – requires them to know each customer intimately. The customer lens makes sense for Spotify, but a segment of one is not for everyone. After all, a large financial services organisation should not be chasing a segment of one, as this would be both costly and unworkable – instead, they are best to categorise their customers according to appropriate attributes like affordability, lifestyle, life stage and interaction preferences. Once you have slotted your business into the right place and approach, there is one more pitfall to watch out for: The failure to recognise that consumer needs and perceptions change rapidly, so segments should never be set in stone. Bearing this in mind, segmentation approaches need to adapt in line with consumer needs. And, to achieve that, data needs to be regularly gathered and updated, in order to keep insights fresh.

There are a number of well-known segmentation models that facilitate the point of tension between maximised benefit for both the organisation and its customers. Central to the success of any of these models is the ability to consistently entrench the framework across all divisions in the business in order to unlock growth opportunities. Some segmentation models have a number of shortcomings in terms of the quality of insights and the inability to implement and adapt throughout an organisation. They often lack adaptability, which is vital to any nimble business. The design of a segmentation model needs a hybrid lens – weighing up the needs of the customer with the ability of the organisation. Fortunately, by designing better hybrid models it is possible to address these flaws and ensure more effective implementation. Making use of an enhanced segmentation model enables companies to differentiate between seemingly similar customers in order to design and implement tailored and targeted propositions, resulting in a more satisfied customer and a more profitable business.