(Re)Thinking Customer Segmentation

Customer segmentation isn’t easy.  It takes a decent amount of time and collaboration to get it right.  As a result, many commercial organizations set it once and leave it alone for 3, 4, 5+ years.  Even when done well – which isn’t always the case — many organizations fail to revalidate their segmentation strategy frequently enough.  This isn’t to say that you need to change annually.  However, you likely need to revalidate your strategy every 2^nd or 3^rd year.

What is customer segmentation?

Customer segmentation is the process of creating homogeneous customer groupings so sales leaders can customize sales execution and better deploy sales resources. Segmentation is essential when customers are varied or sellers require specialization — e.g., knowledge of regulations, familiarity with market dynamics, technical aptitude, etc.

In my conversations with many sales leaders, many describe a segment like “enterprise.”  This is not fundamentally wrong.  But, it does conflate segmentation and tiering.  For more on that topic, see Revisiting Customer Segmentation and Tiering.

Common Segmentation Criteria

Based on Gartner research, the most common segmentation criteria include:

• Market or vertical – this extremely popular right now as vertical conditions and nuances impact the buyers’ journey and critical priorities.
• Product – this dynamic is becoming less popular as sales leaders recognize that product segmentation limits cross-selling.
• Geography – this is often a misnomer. Geography often conflates aspects of organizational design – specifically for balancing workloads and distributing decision rights – as well as territory design.  Geography makes sense with highly regulated businesses that function uniquely across countries – think about things like data privacy laws, anti-money laundering regulations, utilities, etc.
• Customer type – the most notable carve out using this strategy would be federal or local government agencies, education, etc. Some aspects of partner programs – like OEMs – may also be fitting here.

These are popular firmographic dynamics that lead to a successful segmentation effort.  They aren’t the only options, but they are the most common.  Plus, some organizations opt to apply more than one criteria to devise their most effective strategy.

Challenging your current segmentation strategy

A common question is when should I redo my customer segmentation strategy.  There is no “one size fits all” answer.  However, there are some common triggers including:

• New strategic priorities – like new product launches or markets entered
• Significant organizational design – especially linked to M&A activity
• Commercial performance – slower growth or declining performance are both calls to action
• Time – while change may not be needed, segmentation should be revisited every 2-3 years

When examining their segmentation strategy, progressive leaders ensure the needs of both the enterprise and buyers are met.  Serving the enterprise, customer segments improve resource allocation, seller burden and business reviews.  All of these indirectly benefit buyers.  Still, more directly, buyers benefit from segmentation as they will have their specific needs more uniquely met.  Sales messaging, buyer enablement and even seller enablement should all be geared to improve the buying experience with segment-specific needs in mind.

Ultimately, organizations can use sales analytics, the voices of the buyer and even the voices of the sales force to prompt a need to change.  If your organization is meeting its growth and revenue targets and has a segmentation strategy that serves the enterprise as well as buyers, you are likely in good shape.  However, as soon as one of these critical elements begins to show signs of misalignment or underperformance, or if you experience one of the triggers noted above, segmentation strategy must be examined.