Your customers are not all the same. And so are not your products.
In fact, each B2B customer and prospect is unique and to provide them with a great customer experience, an aspect that is becoming increasingly more important in B2B sales, companies need to understand their customer base to adapt their offering and communication accordingly.
As not all products are equal, it is important to understand their unique characteristics and value components to create meaningful insights that support implementing a profit-oriented strategy while simultaneously increasing customer satisfaction.
Although products and customers may differ significantly it is often possible to find ways to group them considering their similarities. This process is known as segmentation.
In our consulting work and data based advisory we typically apply different segmentation methods based on the context we are working on; the reason to choose one or the other, or even combine them, largely depends on the analysis we aim to perform and our clients’ strategic objectives. In fact, segmentation is the basis for most of the analytical work that we at Solia Consulting conduct when targeting performance improvements in sales.
Following, we present some of the most popular segmentation methods and the 4 fields where we believe effective segmentation provides a real competitive advantage.
As previously introduced, segmentation is the process of grouping products or customers into categories that have similar characteristics. As companies are typically not able to address the whole market due to monetary, time, and efforts constraints they split the market into “smaller” divisions that show homogenous features, thus capturing market potential in a resource efficient way.
Depending on the desired insights and availability of data, there are different methods of segmentation. We will now introduce 4 groups of segmentation methods, and indicate their level of complexity.
- Low complex segmentation methods using existing information:
- Segmenting customers using firmographics (equivalent to Demographic segmentation in B2C)
Similarly to demographic segmentation in B2C-markets, firmographic-based customer segmentation divides customers based on characteristics such as size, revenue, number of employees, location, industry, etc. Compared to other methods it is relatively easy to collect the data necessary for this analysis. Like in B2C it is dangerous to assume that customers that share identical characteristics, also have similar needs. Nevertheless, firmographics allow high level problem statements and can work well when raising awareness and working on demand generating.
- Customer segmentation based on sophistication:
With this method target accounts are clustered based on their awareness about their own problems or based on their industry acumen. For Sophistication is intended the target company’s awareness of the problem your product solves. Sophistication-based segmentation is useful to create targeted marketing messages and sales strategy, nevertheless some faulty assumptions about customers’ sophistication are easy to make.
- High Complex segmentation approaches based on needs and behaviour, that require qualitative analysis
- Segmenting customers based on needs: This method clusters customers based on their needs and what they are looking for in a specific product. It is a powerful method, as it offers the most accurate way to target customer segments with relevant messages. Depending on the customer base, it is possible to create as many need-based segments as possible.
Understanding customer needs provides a powerful tool to develop ad-hoc communication material to drive leads down in the sales funnel, or retain existing customers – nevertheless differently from firmographic, where data are factual, for need based segmentation it might become difficult to assess which are the needs driving a segment accurately.
- Customer segmentation based on behaviour:
While needs-based segmentation clusters existing and prospective accounts based on what they are looking for, behaviour-based segmentation primarily focuses on existing accounts interaction with the product or service. Behaviour based clustering focuses on the buying journey and up-, cross-sell and churn potential.
- Segmentation concepts that primarily focus on prioritizing accounts. Depending on which method is used, they spam from low complexity to high complexity methods.
- Customer segmentation based on status: In its most simple form this segmentation method would cluster accounts into active or inactive, alternatively engaged or not engaged.
- Segmenting based on tiering: Tiering is a method that focuses on maximizing customer lifetime value through focusing on those accounts that fit best to the company’s own strategy. Compared to other segmentation approaches that use historical or existing data it is a method that is forwards oriented and often applied in further optimizing the existing portfolio. It has a medium level of complexity.
- ABC and RFM-segmentation (Recency, Frequency, Monetary):
The ABC prioritization concepts is an application of the Pareto principle (80/20-rule) and uses historical sales data or future sales potential to cluster customers according to their existing and/or future importance for the business. Next to firmographics it is the easiest and most common segmentation concepts applied. A more sophisticated and much more advanced modification is the RFM segmentation-method where customers are grouped based on 3 quantifiable factors that are describing the interaction intensity: Recency, Frequency and Monetary. It is a method that allows to target customers with specific communications and actions based on their interaction with the brand, to generate higher conversion/response rate, and to increase customer lifetime value. It is an objective and intuitive method that is quite simple to be put in place. This segmentation method allows to identifying high value clients, based on their interaction with the brand.
- Product segmentation based on characteristics/values:
Product segmentation is critical to understand better USP, values and characteristics of the products sold. Especially for companies that work with customized products, it might be challenging to group and identify product categories in the product portfolio; but categorization would bring powerful insights for planning and selling, and it is possible through product segmentation.
Product segmentation is the basis for more complex pricing analysis, assessing price sensitivity and enabling cross and up selling.
At Solia Consulting, we believe segmentation works best in 4 specific commercial areas, for which we use data science to develop innovative analytical, technology-based tools that provide deep insights and improvements in the commercial excellence area. We will talk soon about the application of Segmentation, therefore stay alert!
To conclude, segmentation is aimed at segmenting the market to derive targeted and effective fact-based strategies. The method, or combination of methods, applied depends on the desired outcome and on availability of data. There are 4 powerful customer segmentation methods are:
- Segmentation methods using existing information
- Needs and behaviours based segmentation methods
- Segmentation methods that focus on account prioritization
- Value-based segmentation
In the upcoming weeks, we are going to discuss more about segmentation, and what are the areas in commercial excellence where segmentation provides valuable insights. Therefore, do not forget to subscribe to our newsletter, and drop us a comment with your insights or questions on the topic!