The Importance of Your Customer Segmentation Approach

By Charlie Pope and Steve Strelsin

A disciplined approach to customer segmentation and engagement is a key performance lever in any macroeconomic climate. In times of disruption and uncertainty, businesses must be especially thoughtful about how they determine the optimal customer segments and create differentiated engagement approaches based on those segmentations. The universal truth that “one size does not fit all” is especially relevant when considered in the context of major market shifts, such as the one we are currently experiencing.

In our experience serving companies with a variety of business models across myriad industries, we typically see that organizations already engage in some form of customer segmentation exercises. However, companies vary widely in terms of the level of sophistication they bring to the practice, as well as how effectively they translate customer intelligence into value-add activities. This is an excellent time to revisit the topic of customer segmentation and explore routes to significantly improve your approach and execution.

It would be impossible to fully address the breadth of this important topic in one article. Rather, our goal here is to provide a high-level overview of customer segmentation with the intention of diving more deeply into specifics in future articles to answer the following:

• How can I leverage analytics and clustering techniques to define the optimal customer segments?
• How should I decide which criteria are best to use as the segmenting dimensions?
• What should I do when it no longer makes sense to serve a particular segment?
• How do I embody the approach to each segment across the customer lifecycle?
• What is the optimal level of sophistication for my company (i.e., is there a point where additional investment in customer segmentation capabilities has a negative return)?
• How does the approach to customer segmentation differ between B2B and B2C organizations?

Customer Segmentation: Why Bother?

There is often a natural appeal to pursuing all possible customers with equal zeal hoping to increase topline growth and market share. However, we believe there are two universal truths that face any business, regardless of model or industry:

1. You can’t win over your entire addressable market with one approach to marketing or customer acquisition
2. Not every customer is of equal value to your organization (and some may have negative value!)

Taken together, these truths point to the value of customer segmentation as a means to conserve resources, enable greater penetration of important “right-to-win” segments of the market, and ensure that revenue growth is profitable and sustainable. To realize these benefits, companies must A) identify the optimal dimensions along which to segment customers, and B) translate their findings into differentiated customer engagement approaches.

Approaches to Customer Segmentation

Organizations’ practices on customer segmentation tend to fall along a spectrum, with varying degrees of success.

Degree of sophistication of customer segmentation

Many organizations combine elements of Basic and Intermediate approaches across two dimensions. Some recent client examples include:

• A managed security services provider relied on customer security maturity and revenue size
• An enterprise finance software company used revenue and customer ERP approach to segment: single platform ERP vs multi-platform, component-based ERP
• A user-based software company used organization headcount and customer product categories to identify targets for their land-and-expand model

Not all organizations should strive for the greatest degree of sophistication. Where any organization should optimally fall on this spectrum is a function of a few key factors:

• Nature and degree of differentiation of buying practices/preferences
• Number of distinct customers/prospects
• Degree to which buying preferences correlate with geography, industry, channel, etc.
• Diversity of your own products/services and pricing

A strong understanding of your addressable market will enable you to identify the optimal level of sophistication you should bring to the practice of customer segmentation. For some markets, heavy investment in advanced segmentation capabilities may actually be value-destroying!

Best Practices

The act of customer segmentation itself is not sufficient to drive value. In our experience implementing customer segmentation strategies with clients, we have found the following best practices to be critical to value creation:

• Periodically re-validate and curate the segments and the allocation of the customers and prospects to each segment. Your customers are constantly changing; so should your methodology for analyzing them. Consider deploying regular voice-of-the-customer surveys to provide the data to test anecdotal and qualitative observations about buying preferences. And design opportunities to not only identify a behavioral change, but to understand why it changed.

• Apply the approach to each segment across the entire customer lifecycle. All functions of your business should ideally be engaging with customers according to their segment, including marketing, sales, customer success, customer service, accounts receivable, and, for churned customers, remarketing.
• Focus your marketing, selling, and service efforts on high-value customers. Identifying those customers will require you to: consider the size and growth potential of each segment; match each segment’s buying criteria/needs to your organization’s strengths to identify high-conversion opportunities; and deploy account-based and tailored marketing and sales blitzes to secure and expand high-value targets in each segment.

• • Train all those in your organization and your channel partners who face customers (directly or indirectly). A consistent training approach will ensure coherent and effective marketing, selling, and service execution for a customer base that increasingly expects seamless experiences.

Conclusion

Akin to individual personalities, customer segments have unique preferences, communication styles, and values. To engage a diverse customer base with a homogenous approach would be to ignore these idiosyncrasies, inevitably leaving value on the table. In a time when many customers may be reassessing which vendors are truly a necessity, it’s critical that you fine-tune and enhance your current approach to customer segmentation.

Stay tuned for future, deeper dives and insights into customer segmentation from Axiom Consulting Partners.

Ready to discuss your approach to customer segmentation? We’d love to hear from you.

Additional perspectives for sales leaders:

The Power of Sales Operations

Unlocking Future Growth Through Sales Channels

Navigating Troubled Sales Waters