Customer segmentation by needs, not just firm data

Meaningful segmentation groups together customers who have similarities relevant to the specific way the market is served. The IKS approach considers expectations regarding product and portfolio, time, quality, price, service, relationship and brand.

Market segments classify a business by region, product, company size, industry or age. A common mistake is to use the same criteria for customer segmentation. Not all mid-sized companies are the same, nor are all companies in a region or all end consumers aged 20 to 30. Needs-based segmentation therefore does not distinguish between large and small customers. It distinguishes, for example, between innovative, price-sensitive, time-critical, conservative or security-oriented customers, regardless of size or region.

A segment is useful if it differs clearly from the others in benefit expectations and characteristics and is largely homogeneous within itself.

For a long time, the goal of strategy was considered to be gaining an advantage over competitors in one's own industry. In many cases this led companies to copy the competition and lose sight of the customer. The result was the opposite of what was intended: little distinctiveness and fiercer competition.

A strong product orientation reinforces this development. Arnoldo Hax put it pointedly: a product can be a commodity, a business never, because customers have different needs, behaviours and bottlenecks. Segmentation therefore begins with a change of perspective from the product view to the customer view.

Internal teams have valuable experience. Initially, however, this remains assumptions about customers. A survey can show which expectations actually exist and where the internal assessment differs from them.

It starts with the decision as to which criteria are used to characterise customers. This frame of observation determines which customers will later end up in a segment. If the usual criteria from one's own product structure and market definition prevail here, the result remains in the old pattern. In practice, five to ten behaviour- and needs-based distinguishing criteria are sufficient.

The customers are then described using these criteria and bundled into segments. The concept of the customer should not be defined too narrowly. The business is often influenced by groups in the value chain with which there is no direct business relationship at all. A customer survey then determines minimum expectations and potential for differentiation for each segment and shows where the internal and external views differ. Only on this basis is the decision made on target segments.

Certain expectations must be met for a supplier to be considered at all. Other services can establish a preference. If these levels are confused, a company may invest in features that create hardly any additional benefit.

The segmentation is used for selecting target customers, value propositions and the allocation of resources. What matters is whether sales and service delivery can take the differences into account in their everyday work. A segment name alone does not change how the market is served.

A manufacturer of filtration systems wanted to expand its service business in a foreign market. Only a small proportion of customers bought services in addition to the plants. The market segments were organised by customer industry, for example refineries, fertilisers or wastewater. A survey of the most important customers brought other differences to the fore: need for advice, contractual service or ad hoc service, expected response time in the event of breakdowns, interest in flat-rate prices, importance of a local presence and preferred sales channel.

Clearly different groups emerged within the same industries. One expected tailor-made service packages, preventive maintenance and a long-term contractual relationship. Another wanted no advice, but help in individual cases on a small budget. Such segments need different service offerings.

Three mistakes are common. First, size, turnover, earnings and region prevail in the frame of observation after all. Second, segments are forced where they do not exist. Sometimes the analysis shows no groups, only important individual customers. Third, no choice is made. Segmentation requires a conscious decision for, and thus also against, serving individual segments and agreeing clear rules of priority for operational business. If a company does not choose its customers itself, the customers choose, and the company relinquishes control.

Innovative Customer Segmentation (IKS) puts the outside perspective at the centre. Internal customer groups by industry, turnover or region can be useful for reports, but the same company data does not mean the same expectations. A frame of observation captures needs, behaviour and bottlenecks. Customers with similar benefit expectations can then be bundled into segments.

The real strategic work begins afterwards: which segments fit the company's core competences, and for which can it deliver a distinctive value proposition? Leadership and sales must agree on priorities so that not every enquiry ties up the same resources. The segment-based view is later checked against customer reactions. It is a hypothesis about the market, not an unchangeable characteristic of individual customers.