For decades, marketers have segmented their target customers to get a read on who will buy a product or service. But if your firm is still doing traditional segmentation using demographic details or psychographic profiles, you may be wasting your money. Worse, your old segmentation may distract you from major shifts in customer behavior that could cost you your customer base.
Traditional segmentation approaches are at best correlative ??? they take an identifiable characteristic and match it with a likely behavior. Back when consumer choices were limited by which products got stocked on the local shelves, those characteristics did a pretty good job at drawing a straight line connecting where you live with, say, where you buy milk, how often and at what price. What geography or demographics never did was identify with certainty what else you might have wanted other than milk. For a long time it didn’t matter, because your store couldn’t easily get it at a reasonable price anyway.
The limitations of place and space are no longer as relevant today. Technology trends around ubiquitous communications and cheap, unlimited bandwidth and processing power have dropped the boundaries of availability for any number of products, converting some of them into digital formats and easing the restrictions of geography for others. Technology trends have also created a two-way flow of information between consumers and suppliers (if the suppliers actually listen), enabling an entirely new set of customer behaviors and expectations around how, when, and where they can buy and use products and in what form. Your location, age or sex are no longer reliable proxies for what you consume. Nor are these details, especially age, reliable indicators of your technology savvy. The straight line that once linked a person’s demographics to their buying patterns today looks more like a crack in the windshield, a meandering path marked with more than a few dead ends.
The good news is that the wave of information and technology functionality that is making old segmentation obsolete is now making a new segmentation possible. Marketers no longer need to be so indirect about figuring out what a customer will do or like. Every time you watch a television program, make a phone call, search for an address, order something on the Internet, or get in your car and turn on the GPS navigation you leave a trail of data behind you, data which can tell a savvy business who is paying attention a lot about the platforms you use, the kind of content you consume, the things you buy, where you are and what topics distract you along the way. Many of those data points exist in silos ??? with the phone company, the cable company, the retailer, etc. ??? but more organizations out there are able to connect the dots and create a clearer picture of your likely future behaviors based on your current behaviors. Of course, not all behaviors are relevant, and companies need to implement common sense policies around what they ethically can and should collect. But the ability, with advanced analytics, to identify and cater to customer behaviors is only going to get easier over time.
That insight into actual behavior is critical because it provides insight into how, why, where, and when a customer gets value out of a product. Every experienced marketer knows that different customers buy for different reasons, and different customers engage with a product or service in different ways. Only if you understand those differences can you see opportunities (and threats from others) to delivery new and different value ??? and extract new revenue from customers. A good example of this is the proliferation of revenue models in the music industry. The amount of money customers spend on musical entertainment hasn’t changed all that much ??? it’s just migrated away from record companies to others employing revenue models and value delivery to customers based on how they consume music. It’s a very different world from the traditional demographics that drove the media industry 20 years ago.
For some industries, consumer behavior is already driving new pricing, advertising and product packaging schemes. Auto insurance company Progressive has led its field in pricing risk (and savings) based on the use of GPS-derived information about how a driver behaves behind the wheel. Gaming industry leader Harrah’s has profiled casino visitors over the past half-decade to separate loyal, repeat visitors (a highly profitable segment) from “professionals” (a group that is hard to please and a revenue drain) so they can properly hand out customized freebies and loyalty perks. And more firms in the grocery market, such as Tesco and Sam’s Club, are innovating their “loyalty card” programs to track a consumer’s shopping history and customize offers and discounts on a truly individual basis.
Unlike traditional segmentation approaches, which hold steady no matter what business you are in, the behaviors that help Tesco sell its product will have only a coincidental relationship to Harrah’s, and vice versa. Today’s relevant segments are not only industry-specific; they are probably company-specific as well. And those segments will change ??? constantly ??? requiring revision and correction with new data on real behaviors. The only segmentation that matters today is your own.
Saul J. Berman is the Global Lead Partner for Strategy Consulting at IBM Global Business Services, and author of Not for Free: Revenue Strategies for a New World (Harvard Business Review Press, 2011).