3 Ways to Segment Customers

Navigating customer segmentation is like reading those Choose Your Own Adventure books written in the 80s/90s. There are many different paths to explore and they may/may not lead to the best use of time, money, or resources for your company. How should we segment our customers? Which method makes the most sense for our business and how can we tell? Well, there isn’t a one-size-fits-all approach, but we wanted to provide a quick snapshot of some of the different segmentation methodologies we’ve seen members use, the benefits/challenges inherent with each, and leave you with a couple of tools that may be helpful in your journey. To that end, we’ve boiled down three basic methodologies (that seem to be the most widely used and also the most actionable):

Industry/Firmographic
Customer Tiering
Needs-Based Segmentation

Let’s dive in to each starting with industry/firmographic.

Simply put, industry/firmographic segmentation is to business-to-business, what demographic segmentation is to business-to-consumer.

If we think of demographic segmentation as helping organizations group consumers by shared characteristics (like age, gender, ethnicity, income level and zip code), then we can picture industry and firmographic segmentation as helping organizations characterize customers by industry attributes (such as its competitive environment and fixed costs, or simply its size and geography).

Now, there are some nice benefits here: industry/firmographic segmentation is relatively low cost, it’s easy to measure, and easy to communicate to our team, but it can be difficult to scale since customer needs vary within a segment. To overcome this, many of our members have used industry/firmographic segmentation in conjunction with other methods to get to a much richer understanding of the customer. One such example is customer tiering.

Customer tiering incorporates two key factors into its definition that we didn’t see in the industry/firmographic model: potential fit (or, customer alignment to an organization’s strategy) and opportunity (or, long-term revenue potential). These two factors give us new benefits by particularly incorporating more of a forward look since it captures growth-related information that is often overlooked in other methodologies. However, we still run into the hurdle that tiering does not guarantee a homogenous set of needs within customer tiers. We also find that this approach requires a significant amount of time from management to get it up and running.

Needs-based segmentation, on the other hand, is often seen as the most predictive method because it focuses on the problem our customers are trying to solve and thus often replaces a behavioral-focused or transactional-focused view in many organizations. Members that use needs-based segmentation have found it to resonate with customers and be very scalable since it limits the number of segments to a manageable set. Unfortunately, because it’s tough to just look at a customer and know their needs, it’s very difficult for the sales force to apply a needs-based segmentation when they are out with a prospect.

So, the high-level conclusions. As we move from industry/firmographic to customer tiering to needs-based segmentation there’s an implicit increase in complexity and resources needed (whether that’s staff, skill set, money, or data). The benefit as we move through that same progression of methodologies is an increasing level of insight these models give us.

Want to learn more about how to make the most of your segmentation choices?

Take a look at how Air Products and Chemicals prevented their reps from over-investing time and resources into low-opportunity customers by creating Segment-Level Rules of Engagement.

You may also want to look at how Square D helped their reps assess individual account potential by creating an Opportunity Fit Matrix that helped to map the account’s long-term revenue and strategic fit.

While there may not be any magic bullets for your organization’s segmentation path, these insights and tools may allow you to see several pages ahead in that Choose Your Own Adventure Book on your nightstand…

Related Blog Posts:

When Segmentation Goes Awry
How NOT to Under- or Over-Serve Customers

Related CEB Sales Resources:

Optimize Your Go-to-Market Strategy
Peer Discussion: Re-segmenting the Customer Base