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Digital Slices: Atomizing the Business of Segmentation

Segmentation has always been a key part of marketing. Sorting customers into appropriate segments allows business and marketing types to filter ideas, glean intelligence, set prices, and decide what to offer and what to toss.

Segmentation also allows successful companies to produce just the right thing to address the needs of different slices of the market.
Nike is a master of segmentation, producing just the footwear / apparel / equipment / accessories for a host of consumer segments. Nordstrom segments with Nordstrom and Nordstrom Rack stores, GM segments the market with their various nameplates: Cadillac serves a very different market from Chevrolet. Chrysler used to do it until the Plymouth Prowler offered definitive proof they did not understand segmentation.

Segmentation is often limited by what the company can act against. This is less a shortcoming of the company’s marketing than it is a reflection of reality. Customers are highly diverse and yet we’ve not had the capability to fully understand or act on that diversity. The result is market segmentation that crudely divides the market into four or five rough buckets based on broad similarities such as: age, occupation, family status, or a defined interest.

As technology advanced, some companies gained the ability to “micro-segment” their markets. The best example is radio and TV. Where we once had only a few choices that were broadcast one-to-a-great-many, today we have “narrow-casting” which transmits programming one-to-not-nearly-so-many. Nothing is really new, as all that has happened is a few big buckets are replaced by many smaller buckets.
The Internet, however, is giving rise to a new phenomenon: the ability to truly atomize the market, knowing and serving an infinite range of interests. A customer you sell to can be interested in many things all at once: vintage bear collections, security / blog spam concerns, and an affiliation with boy scouts. No “simple” segmentation can capture that nuance, but the ability to understand this nuance offers marketers tremendous power.

Traditional segmentation does broad well
In 1964, Daniel Yankelovich introduced the concept of “non-demographic” segmentation in the Harvard Business Review. Before that, the common classification of consumers was by rough cuts of attributes like age, home ownership, income levels, and others that could generally be found in census-type information. By moving past demographics, Yankelovich’s goal was to look at things that mattered more–usage, interests, and priorities.
Segmentation evolved from a demographic profile to a profile that often looks like this:

  • Usage–users who select and use devices for particular purposes, for example: information gathering vs. entertainment.
  • Interests–women 20-40 interested in recording family events and creating movies to share online.
  • Priorities–which non-profit (Social Justice non-profit vs. Clean Water non-profit) receives the greatest amount of funds.
  • Purchase Drivers–ease of purchase (read: online shopping, simple return policy, purchase guarantee) may trump many other product attributes (price, quality, brand) for time-starved consumers.

After doing good research and finding some natural groupings of interests, usages, priorities and/or purchase drivers, you typically end up with three to five segments for any particular product, service or solution area. If you had the money and the time, you might even be able to do some “psychographic” profiling and in-home research that allows you to add a few more details, but in the end most firms catering to consumers end up with three to five segments. For most consumer computer or electronics, the segments typically look something like this:

  • Technology Enthusiasts. Typically male, 30-45.
  • Families. Price sensitive, focused on protection, children’s issues, and safety.
  • Boomer Group. They may tend to be price insensitive but need guidance on what to purchase and how to use/service it. They are also into things related to creating meaning.
  • Entertainment Addicts. Age 15-25, these folks have a low threshold for boredom, they’re on the go, want the latest technology, for free, and are willing to consume ads to “pay for that experience.”

With this kind of model, you typically do a reasonable job of targeting about 60-80% of the market it is both broad and deep enough to warrant mass-market programs.

Web 2.0 enables atomization
It’s good but not great to have four to five buckets. I’ve worked with a lot, and I do mean a lot, of high tech firms and what I see is that most segmentation, while extremely focused compared to demographics, still results in big buckets reflecting highly aggregated customers. The interests are refined enough to get to a “wants entertainment and ease of purchase” type profile, but not refined enough to identify entertainment favorites as both heavy metal and female country rock, and that most of the customer’s purchasing is done online.

Web 2.0 brings a set of technologies and expectations that totally change the way customers are served. Previously, customers were seen as flat and one-dimensional. Companies were selling to a soccer mom, a surgeon or a bicyclist.

Customers, however, are more complicated that that. That surgeon? Let’s call him Brad. He’s a dad, a Boy Scout leader, a neophyte novelist and a fly fisherman. Oh, he also barbeques and is taking a class in making fine chocolate because he appreciates the exacting processes it requires.

The upshot is that the old style of top-down segmentation is no longer adequate for Web 2.0. The old four-part segmentation that might have been focused on usage, profiles, buying behavior, and adoption rate isn’t going to get you very close to Brad.

Companies that understand the many dimensions of Brad are going to run circles around those that try to communicate by dumping him into one of four broad buckets. The effect of these over-broad segments in a world increasingly tuned to Web 2.0 is that the messages and the content produced to raise awareness, provide consideration tools, or create preference end up sounding very similar. They are a little bland and too predictable. When we understand natural segments, we can use our marketing vehicles and language to create extremely relevant communication. Not only that, but we now have the ability to create a new kind of consumer communication–the two way kind.

Because we’re not all alike
The evolving idea of segmentation is that there are as many markets as there are people. Let’s suppose that our broader world is changing so that users can be a market of one. Not a part of some bigger bucket of users, but a singular person unique and appealing to market to in and of herself. Rather than knowing she is interested in photography, you might also know that this person cares about many things at once, for example:

  • Cleaning products that are non-chemical
  • Furless dogs to avoid allergic reactions
  • Fonts that are sans-serif
  • High quality paper and ink
  • Fountain pens that don’t dry out while you’re waiting for inspiration
  • Shoes in patent, peep toe styles
  • Email access 24×7 from anywhere

Do you see where I’m going? This list may seem unrelated to a marketer of any one product, but this is what people are really like. Understanding this is vitally important to marketing effectiveness.

Think about that. Think about the amount of insights that could form. And instead of me pushing out a lot of “mass” market advertising, PR, and trial software, I might instead sponsor passionate advocate-driven websites, or encourage user debate on topics relevant to them on my site, or “pull” the kinds of content and ideas they seek from me via tags of data rather than a highly structured web site.

And later, we’ll get to custom identification
If we are able to understand the customer in this kind of detail and depth, the marketer can focus more effort on highly efficient customer segmentation rather than depending mainly on product differentiation. This is a radical shift in how we create viable business and market strategies. Amazon gets it. The more products they offer, the more they learn about me and my interests that cut across a variety of products.

Right now, many of us reveal a lot online. But no one vendor knows it. For example: when I “Digg” an article, I tell you my ideas of interest; on eBay, I discuss things I’m keen on; on Amazon I share with you my product purchases and what I thought of them via my reviews, while on wikis, I share my expertise, on MySpace I share with you my social relationships and on LinkedIn my professional ones. What would you know about me if you could benefit from that combined set of knowledge? What would you know after I gave you permission to know more about my total world, not just the part that relates to your product? You would likely be able to serve me offers containing more innate value–and do it at lower total cost–because it is more targeted and highly personalized. I believe that customer value will increasingly be about deeply understanding someone’s needs and desires.

This will become a key source of power in the market, but you will only get it by listening to your customers: who they are, what features they want, what products they need, and how we can best be of service? It doesn’t mean they get everything they want, but it does mean you can serve them better.

And what are we to do?
As more and more of a consumer’s interests, desires, past purchasing patterns and even unstated passions are identified, then they can uniquely drive their own segmentation. The question is whether consumers themselves or any single company sets the rules of engagement.
I believe that in the next 10 years, getting users to tell you what matters to them will be the key source of marketing power.
We won’t be doing surveys to develop broad-brushed segmentation. Instead, our marketing job will be to create a dialogue. Successful companies will engage users in a dialogue each time they visit their web site. The ultimate goal is to encourage consumers to share their needs, preferences and interests are so we can provide them with a context so we can anticipate their needs with targeted information, search, products and communities.
Is your company changing its interactions with your customers so the conversation gets richer and more engaged?

Some things to do differently
Change communications and your web platform to be INTERACTIVE. From a business and innovation angle, I encourage companies to co-create with their customers. This is going to become a powerful way of both designing and creating offers that will form strong bonds of affinity and brand association. Tapping into the collective experiences, skills and ingenuity of hundreds of millions of consumers around the world is a complete departure from the producer-versus-consumer innovation model that dominates today.

Enable a CONVERSATION by moving away from one-to-many communications. The Web has to become interactive. Customers have a lot on the ball, a lot of feedback to give you. And with the advent of really easy to use development and communications tools, it is both relevant and interesting to talk with customers.

ALLOW CONTEXT TO DRIVE EXPERIENCE. A web page that doesn’t recognize who the person is, limits the conversation. Users should be treated differently than non-users who should be treated differently than competitors. Post comments, share tips, share information, add data. Companies that figure how to do this before their competitors do are going to win, and win big.

Develop / sponsor /create / incubate user INFLUENCERS as market advocates. In this new paradigm, vendors don’t matter as much as users. Having your company say how great it is far less powerful than having real users say how great you are. This has always been true, but now individual customers have a Web-enabled voice that can reach millions. Endorsements, peer groups, affiliations will all matter much more in the future because the Internet allows these groups to act globally. Smart companies will forego trying to outspend one another on broadly targeted marketing campaigns that cost a lot but don’t provide focus and instead deploy an influencer marketing strategy to shape customer perceptions.

(This article was published by Pragmatic Marketing in their June 2007 issue.)

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