4 Challenges in Customer Segmentation

Customer segmentation is probably the most important concept in marketing. But it is also one the most difficult to do well. In this post, I reflect on four key issues that marketers must address in their segmentation work:

1. Scope of segmentation – What is the appropriate scope at which segmentation studies should be conducted? Specifically, how do we reconcile the level of depth required by engineering with the breadth required by cross-business alignment?
2. Inbound versus Outbound Use of Segmentation – How do we reconcile segmentation variables that are useful for inbound product development decisions versus segmentation variables that are useful for outbound product marketing decisions?
3. Refresh Cycle and Stability of segmentation – How we ensure that segmentation remains relevant between the time the product is initially conceptualized, through development and into go-to-market? How often should we “refresh” segmentation studies to ensure that they are tracking changes in the market structure or demand?
4. Segmentation for Multiple audiences – how we approach segmentation and targeting for products that cater to multiple audiences?

1: Segmentation Scope:

The broader the scope of segmentation research, the less actionable the results are for specific business groups and products. On the other hand, the more focused the segmentation research, the less the “interoperability” and reusability of the research for other business/product contexts. If the scope is defined too broadly, you can end up with a very generic segmentation approach. At the other extreme, segmentation of a very narrowly defined audience will lead to very precise segments, but it would be of no relevance for other products/markets.

Specific questions that you need to think about related to scope:

• What are the different levels of scope at which segmentation is currently done?
• How “interoperable” are the segments/segmentation variables in segmentation studies done for different products/business groups?
• How feasible is it to “standardize” segmentation across business groups/products?
•  What is the “sweet spot” in scope between too broad and too narrow?
•  What can we learn from other companies or other industries in terms of best practices?

2: Inbound vs. Outbound Segmentation

When segmentation is done at the inbound stage to guide engineering decisions, it will emphasize variables such as:

• End-user behaviors
• End-user needs
• Usage scenarios
• Technological environment
• Desired features
• Depth and breadth of product use
• Skill level

On the other hand, when segmentation is done at the outbound stage to guide marketing decisions, it will emphasize variables such as:

• Audience
• Attitudes
• Demographics/Corpographics
• Psychographics
•  Life stage
• Media habits
• Price sensitivity
• Channel preference
• Goals and outcomes

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My thoughts flit around

Like butterflies

On gossamer wings

Soaring on currents

Of glorious memories

Only to descend steeply

Into melancholy valleys

Pausing on a flower of love

To drink your heady nectar

Till it is time to move on

To lands unknown

And gardens unseen

To fly is to keep living

For thoughts want to be free

Like butterflies

On gossamer wings.

For students of marketing, Barack Obama’s campaign is an excellent marketing case study on positioning and messaging. Here are some lessons I take away from his campaign:

Focus on pain points: Successful marketers are very clear about the customer pain points that their products or services address. Apple improved the lousy experience of buying and listening to digital music with the iPod. And then it improved the lousy experience of web browsing and gaming on mobile devices with the iPhone. So did the Obama campaign. When you sort through all the campaign pronouncements, plans and promises, Obama focused on two main pain points – people are sick of the war in Iraq and ordinary Americans are worried sick about their personal finances. At the outset, Obama defined his campaign around his opposition to the Iraq war. Then, as the financial and housing market crisis deepened, he dialed up his focus on middle-class tax relief. Those are the only two issues he focused on. These pain points were real and they were both areas where his competitor was weak.

Craft a simple message: If you ask any Obama supporter to define what Obama stands for, you will get a three word answer – “hope and change”. This is not an accident. Obama has been hammering away at this message for two years. He has had variants of this message in his stump speech for a long time. At one point, he used to say that “doing the same thing over and over again in Washington and expecting different results is the definition of insanity”. His message of hope goes back to his defining speech at the 2004 Democratic Convention, where he uttered the famous line – “there are no Red States and no Blue States – there are only the United States of America”. Even his message on tax relief was defined in terms of one simple number – “not a penny more in taxes for anyone who makes less than $250,000 a year”. Change plays well to voters who are sick of the way things are going. And hope complements change because it shows voters a vision of a better tomorrow. These were the twin pillars of Obama’s positioning. Hope and Change. Simple to understand and simple to rally around.

Stay the Course: Too often, I see politicians behave like candles in the wind, buffeted by what the focus groups and pollsters are telling them from day to day. I believe that pollsters, led by Mark Penn, were the undoing of Hillary Clinton’s campaign. She let pollsters define her in terms of what they thought voters wanted, as opposed to who she really was. The result was a lack of clarity and consistency in her positions. This in turn led to the perception that she was an opportunist who would do anything and say anything to get elected. This is a pity, because Hillary would arguably have been the best president among all the candidates. Later on in the campaign, John MCain shot himself in the foot with his ill-conceived “Maverick” move to “suspend” his campaign and parachute himself into Washington to help solve the financial markets crisis. In retrospect, this will rank as one of the “100 Dumbest Political Moves of All Time”. It made McCain look like an impulsive hothead. It was terribly presumptuous of him to believe that he could be the catalyst to seal the bailout deal. People including myself, were left wondering what McCain would do if, say, North Korea decided to launch a nuclear missile or conduct a nuclear explosion. My take – he would “Bomb, Bomb, Bomb” first and ask questions later. I think we have had one too many gun-slinging cowboys in the White House! Crisis calls for calm. That’s what we saw in Obama. As McCain was rushing off to Washington, Obama didn’t bat an eyelid. He stuck to his message and continued with his campaign as if it was business as usual. To me, this was an important turning point in the campaign because it told voters a lot about his temperament and how he would respond to a “3 A.M.” crisis.

Speak to the heart: Ultimately, I believe no election is about the issues. It is about the person. And no election is about the head. It is about the heart. That’s why Al Gore lost his bid to be president, despite being orders of magnitude more knowledgeable and intelligent than George W. Bush. And that’s why Bill Clinton and Ronald Reagan won their bids. People want to be inspired. They want to believe, even if they don’t know what exactly they are being asked to believe in! One of my cousins, who voted for McCain, was incredulous that “no Obama supporter can speak for more than 5 minutes on WHAT Obama would do as President and what this change that he talks about is really about”. But this, I pointed out to him, was exactly the point! People believed in Obama as a person. They were inspired his fresh face and his passion. Did they read his tax plan or his health care plan? How many of us can quote chapter and verse from any candidate’s plans or positions on issues? That’s politics of the head. It will always lose to the politics of the heart. Just as brands that focus on emotional value (think Mini Cooper, Apple, BlackBerry, Singapore Airlines) will always trump brands that focus on functional or economic value.

Target non-consumption: Brilliant marketers don’t just fight for a bigger share of the pie. They expand the pie by bringing new consumers into the market. When Southwest Airlines got started in the early 1970s, it did not compete against airlines. Instead, it took people out of cars and put them on planes by offering dramatically lower prices and point-to-point short haul service. Obama did something similar. While most politicians worry about “energizing the base” (remember the angst that McCain felt at not being able to energize his conservative base). Obama went beyond this and successfully expanded his base. In particular, he focused on two segments who were less engaged with the political process – young voters and African American voters. By inspiring these two segments through the message of hope and change, Obama brought millions of new voters into the political process. And these new voters supported him overwhelmingly. Just look at the candidates’ share of voters by age in Florida, and you can see how Obama won the elusive state.

In summary, most people believe that Obama is a brilliant politician. But to me, Barack Obama is a brilliant marketer. His historic campaign embodied many best practices in marketing. Of course, now we will find out if he can really deliver the goods!

A new day dawns today in America as Barack Obama becomes the first African American president of the United States. This is a time for us to look ahead. But it is also a time for me to look back and to marvel at how far this man and this country have come in four short years. I distinctly remember the phone call in the spring of 2004 from my friend David Jacobson, who is very active in Democratic political circles and has been deeply involved in Obama’s Senate and Presidential campaigns. David told me that he was supporting “this promising young guy who was running for the Senate seat in Illinois”. The candidate’s name was Barack Obama, and David urged me to support him and raise money for his campaign. I was skeptical – what chances did this young, skinny, African American with a funny name have? And he was running third in his Democratic Senate primary at the time. But I was intrigued.

I first met Barack Obama at a small lunch organized by an Indian friend Balvinder Singh, a political organizer in the Asian Indian community. I was impressed. He was intense. He was charismatic. He listened. He spoke softly, but with passion and conviction. I immediately wrote a check for his primary, and we organized a fundraiser for him in our Evanston home. He connected instantly with the small crowd at our home, and we all were left with the feeling that this guy was going to go places. If only we knew how far! I joke with my friends that that fundraiser was the best pre-IPO investment I ever made – it was like making an angel investment in Google! Now that Barack Obama is on the national stage and will soon be in the White House, I watch and admire him at a distance. And I am proud to have played an infinitesimally small part in his incredible journey.