Look closely at any two of your customers, and you may find their needs and wants are nearly identical. On the other hand, you may find they have nothing in common at all except that they buy product from you.
The important thing for you as a distributor is to understand the difference and know what the needs of each are.
Defining and subdividing your customers into clearly identifiable groups based on their similar needs, desires or characteristics is called segmentation. Segmentation is more than an academic exercise – it can save you real money by increasing operational efficiency and it can generate additional revenue through increased wallet share.
Knowing and understanding different segments among your customers is a key first step in positioning yourself in your market. It also is important because it gives you insight into how best to serve each customer’s needs and allows you to better focus your resources.
Internal segments. These are categories you put customers into that are based on factors like the size of their purchase, how often they buy and what they buy. This is the least valuable form of segmentation because it offers no insight as to what motivates your customers or what they want from a supplier.
Demographic segments. As its name suggests, demographic segments group customers based on factors like business size and type, or geographic location. It offers more information than internal segmentation, but fails to delve into a buyer’s needs or motivation. In addition, customers can look similar demographically, but behave very differently. Take, for example, two small contractors. On paper, they purchase roughly the same amount of your product. But one of those companies might be a new start-up with its sights set on growing to become huge, while the other may be a family-owned niche company content with its size. Other than their current size, the two companies will have little in common.
Behavioral segments. Behavioral segments are based on what customers actually do, and why they do it. Generally, customers’ behavior is influenced by their operational strategy, their efficiency, even their organizational structure. Behavioral segments are the most useful because they focus on the key to a customer’s purchasing habits: needs and desires. Not surprisingly, this type of segmentation requires detailed information and so is the most difficult to achieve.
To develop behavioral segmentation, you first need to understand what drives a customer. All end-customers have required services. We’ll call those Service Outputs Demanded (SOD). And there are two main types of those demanded services: those that satisfy (satisfiers) and those that delight (differentiators). Satisfiers are the basic requirements a customer has to have; adding more of them doesn’t make the product more appealing. Differentiators, on the other hand, make a product stand out, make it more attractive. The more differentiators, the better. The trick is, differentiators will be different for each customer.
One of my favorite examples of this involves consultants and cars. Consultant A is all about speed; he can't have a car that is fast enough. Luxury comes second and if the car is reasonably comfortable, he will be happy. In consultant A's case, speed is a differentiator and luxury/comfort is a satisfier. In contrast, consultant B is all about luxury. He wants a car to be fast enough to pass people on the highway but is not going to be taking his car to the race track anytime soon. Instead, he wants the latest and greatest in creature comforts. In consultant B's case, speed is a satisfier and comfort is a differentiator.
Once the basic needs (satisfiers) are met, it’s the differentiators that most influence a buyer’s decision. That’s why understanding a customer’s differentiators and satisfiers is crucial.
Here are three of the most effective means for gaining that understanding:
- Surveys. These are best for quantifying segment sizes or prevalence of characteristics but not for initially defining behavioral segments. Often, they are too narrow, and the questions guide a customer's response.
- In-depth interviews. This approach works best for defining behavioral segments and understanding economic and organizational drivers. It also allows organic customer responses.
- Focus groups. These provide the benefits of both surveys and interviews. The group dynamic can uncover different insights, but it can also influence the results.
Creating a Segment
Once you gather information, it's time to analyze the results and identify characteristics your customers share. What characteristics differentiate them? How and where do their behaviors align? What does a customer always want more of? What is most important to a customer? What is least important?
With this analysis, you can create groups of customers that behave similarly and value similar things. Don’t worry about the outliers now – start with the larger themes and work your way down until they become too nuanced to address. Remember, ideal segmentation maximizes the differences between segments while minimizing the differences within segments.
Your work is complete when you have a clear picture and definition of one customer segment versus another. While your segments will never be 100 percent clear – there will always exceptions – one way to validate your information is to have a sales rep assign their top 20 customers to a segment. They should be able to clearly assign each customer. If they can’t, or want to place customers in multiple segments, then you should review your segments and look for areas where they might need refining. Again, you will never be 100 percent, but if sales reps can assign 80 percent of their customers easily then you are good to go.
It’s important to remember that customers’ needs change. You’ll want to periodically update your information and your segments. And, once your segmentation is complete, the real work (and fun) begins. Your segments will help you better align your resources to position yourself and will help you target your efforts, leading to more productive sales and marketing efforts moving forward.
Dan Horan is an associate consultant at Indian River Consulting Group, which has worked with distributors and manufacturers since 1987. Horan is an expert in sales, marketing, branding and communications strategy. Contact him at [email protected] or visit ircg.com.