How to drive profits with customer segmentation. A beginner s guide to breaking down your market into targetable groups

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1 How to drive profits with customer segmentation A beginner s guide to breaking down your market into targetable groups

2 Table of contents 3 5 Introduction Why segmentation? steps to build your business segments Conduct preliminary research Define how you want to segment your market Design and field your study Find useful customer segments Test and iterate 23 Conclusion 2

3 Introduction Every product needs a target audience. Market segmentation identifies subsets of a market based on demographics, needs, priorities, common interests, or other psychographic or behavioral criteria to better understand and communicate with that audience. Segmentation can be as simple as splitting your potential market into age ranges or as complex as dividing your audience based on subtle behaviors, values, or beliefs. To be truly useful, segmentation should enable you to target core groups of your potential customers with precision. Practically speaking, segmentation enables you to: Boost demand with messaging that resonates more with your market Grow your customer base by understanding what drives purchase behavior Increase revenue and profitability by discovering which customers will pay a premium for your product 3

4 So how do you get started? In this e-book, we ll show you how to design a useful segmentation study in five steps: 1. Conduct preliminary research 2. Craft segments 4. Analyze results 5. Test your results 3. Design and field your study Divide your market into meaningful segments. See at a glance key characteristics for each segment to make your marketing more impactful. Segment Membership 42 COUPONERS Driven by sales and events. Are driven by value and are most likely to wait for big event to spend. 70 ENVIRONMENTALISTS Driven by products and solutions that have minimal impact on the environment. Are willing to pay a premium for these services. 104 FREE SPIRITS Most likely to make impulse buys based on great displays. 4

5 Why segmentation?

6 Why segmentation? Segmentation is crucial for success. Organizations that understand their customer segments had 10% higher profit than organizations whose segmentation missed the mark over a 5-year period, according to Bain & Company. In the same study, 81% of executives say market segmentation is a critical element for increasing profits, yet only 25% believe their companies use it effectively. 81% OF EXECUTIVES SAY MARKET SEGMENTATION IS CRITICAL 25% FEEL THEIR ORGANIZATIONS DO IT WELL 6

7 Better segmentation is better business Here s what great segmentation looks like: Electronics retailer Best Buy remodeled a group of its stores and trained store clerks to focus on its five customer segments. Stores that implemented those changes reported sales growth above 9%, more than double the growth rate of stores that didn t remodel and train. Automaker Mercedes Benz used market segmentation to target a younger buying group with a more affordable model, advertising during the Super Bowl and other prime-time ad slots. The result? The company s campaign captured a younger demographic (an 11-year drop compared to previous campaigns), had more than 300,000 models of the car built in the online portal, and garnered record web traffic. Credit card giant American Express created additional card options for their rewards pointsdriven segment. These cards have become some of American Express s most popular and profitable products. 7

8 5 steps to build your business segments

9 5 steps to build your business segments You don t need a complicated segmentation study to get useful results. We ll walk you through the steps to build your first study: from learning more about your customers, to fielding a segmentation study, to solidifying useful segments. STEP 1 CONDUCT PRELIMINARY RESEARCH Before starting your segmentation study, you ll want to get to know your customers more in depth. The easiest way to learn about your customers? Talk to them. In addition to some casual conversations, we recommend sending a survey that asks open-ended questions to a small group of customers. If your organization is a medium-sized retail company with several locations, your survey might look something like this: 9

10 These questions let your customers speak for themselves about what they value rather than you making an educated guess about what drives them. This initial survey usually reveals details about your customers that you may not have considered. For example, they may be environmentally conscious, or maybe many of them drive long distances specifically to shop at your store. This initial discovery step is important, so if you can offer gift cards or store discounts as incentives to respond, it will help you get better data back more quickly. We recommend you send your survey to a representative sample. If your target market is large, you may want responses from 300 or more respondents. If your market is smaller, you may want to send it to a group of your customers. You ll gain a much better idea of the questions you want to ask for your broader segmentation study. Many marketers and researchers will read each smallsample response individually for context, but text analysis software tools can also help you analyze feedback more rigorously. LEARN MORE ABOUT QUALTRICS TEXT IQ 10

11 STEP 2 DEFINE HOW YOU WANT TO SEGMENT YOUR MARKET Based on your preliminary research, next determine how you want to segment your market. Segmentation falls within four primary categories including: demographic, psychographic, firmographic, and behavioral. There isn t one perfect approach to segmenting your market. Demographic and firmographic segmentation are typically the easiest, while psychographic and behavioral tend to yield the deepest and richest insights. So segmentation is as much an art as it is a science. We recommend that you base your segmentation strategy on your preliminary research as well as your instincts. DEMOGRAPHIC (B2C) FIRMOGRAPHIC (B2B) PSYCHOGRAPHIC (B2B / B2C) BEHAVIORAL (B2B / B2C) Definition Classification based on individual attributes Classification based on company or organization attributes Classification based on attitudes, aspirations, values, and other criteria Classification based on behaviors like product usage, technology laggards, etc. Examples Geography Gender Education Level Income Level Industry Location Number of Employees Revenue Lifestyle Personality Traits Values Opinions Usage Rate Benefit Types Occasion Purchase Decision Decision Criteria You are a smaller business or you are running your first project You are a smaller business or you are running your first project You want to target customers based on values or lifestyle You want to target customers based on purchase behaviors Difficulty Simpler Simpler More Advanced More Advanced 11

12 Common segmentation strategies Select one category as a basis for your segmentation (i.e. demographic / firmographic) and use your other categories to describe your segments (behavioral and psychographic). Geographic segmentation While geography is technically a subset of demographics, many organizations segment based on geographic location. In our retail example, we may choose to use geographic segmentation to better understand how to target potential customers based on whether they live in certain postal codes, or in rural or urban areas. Demographic / Firmographic This is one of the simplest ways to segment your market, because consumers often buy products and services based on demographic factors like income level, location, and more. In our retail example, we may want to segment our customers based on gender, age, or income level. Psychographic segmentation This type of segmentation takes into consideration a consumer s values, opinions, and similar factors. With our retail example, we may consider how our customers lifestyles impact their shopping habits. Behavioral segmentation A customer s behavior can yield rich insights about how or why they purchase goods and services. With retail, we may segment based on a shopper s willingness to spend more during a sale. For retail, you could segment based off of purchase behavior and then use demographic factors such as age, location, and income, as well as psychographic factors like values, lifestyle, and personality, to describe your segments. 12

13 STEP 3 DESIGN AND FIELD YOUR STUDY For a segmentation study, make sure all your answers are quantifiable. This means that you can easily understand the value of a specific variable. Demographic and firmographic questions To keep your survey short and measurable, we recommend asking 5-10 multiple choice demographic or firmographic questions. With our retail example, some of our questions may include the following: Gender Age Household income Geographic location (postal code) 13

14 Example demographic questions 14

15 Psychographic and behavioral questions Ask a mix of psychographic and behavioral questions. We recommend no more than 15 questions for this portion of the survey. The easiest way to quantify these types of responses is by using a matrix. Psychographic questions In our retail example, one of your questions may look like this: 15

16 Behavioral questions Your behavioral questions may look like this: For statistical significance, we recommend capturing at least 1,200 responses. This will enable you to have confidence in your results and further explore the nuances in each of your segments. 16

17 STEP 4 FIND USEFUL CUSTOMER SEGMENTS After you ve gotten your responses, analyze your data to create useful segments. Use these rules of thumb: Aim for four or less. One of the primary goals of a segmentation study is to make your market manageable. We ve found that when you have more than four segments, they become hard to analyze and manage. Be creative. Segmentation is both an art and a science. This means you should try different combinations of your data to see if they yield interesting results. Take your time. This is the most time-intensive step, but it s important to invest your time on this step since this will yield the most valuable results. While it s tempting to just go with your initial result, taking the time to truly evaluate your segments will pay off in the long run. So how do you go about segmenting your data? There are a number of methods that you can use. Manual analysis If you lack statistical software and the know-how to build statistical models, the easiest way to segment will be to manually go through your data. Since behavioral and psychographic segmentation tend to require more sophisticated tools, this method is the easiest when evaluating demographic, geographic, or firmographic segmentation. 17

18 Based on this data, one possible segment is those with income over $50,000. A more specific segment would be men with income between $50,000 and $75,000. INCOME Less than $20,000 $20,000 - $49,999 Male Female $50,000 - $75,000 More than $75, NUMBER OF RESPONSES 18

19 Statistical analysis The most effective way to segment your market for any category is using cluster analysis a statistical analysis tool to group your data into groups, or clusters. You can use traditional statistical modeling solutions like R, Python, or SPSS to tease out your segments. These types of solutions often require extensive data expertise, so if you don t have this expertise yourself, you may need to bribe your favorite analyst to help. However, statistical analysis is more approachable than ever. Software solutions like Stats iq from Qualtrics make complex cluster analysis approachable, even if you don t have technical or statistical skills. Look for a solution that can handle a wide range of variables, rank the importance of each variable, and present your results in easy-to-understand language. SEE HOW IT WORKS WITH IQ 19

20 Example cluster analysis results with Stats IQ. Variable Importance SATISFACTION ENGAGEMENT CHILDREN IMPORTANCE: MUSIC IMPORTANCE: WEATHER AGE IMPORTANCE: SHOPPING IMPORTANCE: NEWS REGION IMPORTANCE: INFORMATION IMPORTANCE: COOKING Cluster Summary CLUSTER 1 Respondents are mostly high Satisfaction. CLUSTER 2 Respondents are mostly high Engagement and low Satisfaction. They also tend to be Children in home. CLUSTER 3 Respondents are mostly high Satisfaction and high Importance: Music. 20

21 STEP 5 TEST AND ITERATE Your segments are only valuable if they can drive actions that lead to positive outcomes. Use the following tests to gauge the effectiveness of your segments. Measurable Measurable means that your segmentation variables are directly related to purchasing a product. You should be able to calculate or estimate how much your segment will spend on your product. For example, one of your segments may be a couponer, who is more likely to shop during a promotion or sale. Accessible Understanding your customers and being able to reach them are two different things. Your segment s characteristics and behavior should help you identify the best way to meet them. For example, you may find that a key segment is resistant to technology and rely on newspaper or radio ads to hear about store promotions, while another segment is best reached on your mobile app. One of your segments might be a male retiree who is less likely to use a mobile app or read , but responds well to printed ads. Substantial The market segment must have the ability to purchase. For example, if you are a high-end retailer, your store visitors may want to purchase your goods but realistically can t afford them. Make sure an identified segment is not just interested in you, but can be expected to purchase from you. In this instance, your market might include environmental enthusiasts who are willing to pay a premium for eco-friendly products, leisurely retirees who have can afford your goods, or successful entrepreneurs who want to show off their wealth. 21

22 Actionable The market segment must produce the differential response when exposed to the market offering. This means that each of your segments must be different and unique from each other. Let s say that your segmentation reveals people who love their pets and people who care about the environment have the same purchasing habits. Rather than have two separate segments, you should consider grouping both together in a single segment. Market segmentation is not an exact science, it takes multiple iterations to get it right. For example, you may find that segmentening off of psychographics isn t giving you useful results and that segmenting off of behaviors produces outcomes that are both useful and pass each test. 22

23 Conclusion

24 Conclusion Great market segmentation gives you the insights you need to understand your market more effectively and craft compelling sales and marketing strategies for each of your segments. While deep segmentation analysis has seemed out of reach for many organizations, software solutions and tools make these rich insights available to anyone. GET IN TOUCH Want to see how it works? BOOK A DEMO Want more information on how to get started? CONTACT SALES@QUALTRICS.COM 24