Feel the Excitement: Segmentation Data, Part II

We talked last time about the simplest and most effective way to do segmentation.

Step 1. Define success as specifically as possible. For example, you might say: a) We want to create $100 million in incremental revenue in 24 months, while b) leveraging our core competencies in manufacturing to c) create something that can be branded under our name and d) be patent-protected.

Step 2. Define the characteristics you want your segment to have. For example, you want your potential customers to be: increasing in number, willing to spend, open to your brand, findable, and in possession of the authority to write a check.

Step 3. "Simply" find what predicts or correlates with these variables. Most people don't do their segmentation this way. Why? It is easier to pick one variable (e.g., segment by age) and buy media. If your product appeals to teenage girls, you place ads in Seventeen magazine; and explain it to your boss.

The problem with the "easy" approach is that it is not all that effective. You'll end up overlooking at least one potential market for your product or service. At every turn, you'll run into competitors that likely will opt for the "easy," segment-by-one-variable method.

Follow Your Goals and Data

Segmentation is the place where all successful innovation efforts begin. That's why you need to let your goals and the data tell you how to target customers. It may be by zip code, the magazines they read, attitudes, or something else. You simply don't know until you go through the three-step process.

So far so good. But how do you sell this new approach internally?

Here are six of the benefits we tell our clients to stress to their bosses. The overarching message, as you are about to see, is that segmentation will increase ROI because knowledge drives effectiveness.

For example: We will be able to:

Identify and focus on our most profitable customers.

Focus only on targets we want to reach, ignoring those unlikely to buy from us.

Determine how to reach them. (Having identified whom we want to target, we will only use media we know they consume and we will create every communication with our specific targets in mind.)

Figure out where to focus our attention when it comes to developing new products.

Strengthen our overall marketing approach. The sales force will grow more effective as we determine exactly which distributors, retailers, or outlets deserve our attention.

Improve customer service. We will tailor everything we do for our key partners and customers.

The outcome of your segmentation should look something like this. You decide you want to find:

A target population (i.e. segment) that represents, for example, 20 percent of the market, but 50 percent or more of the potential future economic value for your company or brand. As you see from the right-hand side of the chart, this would generate a return of $2.50 for every marketing dollar you invest. Conversely, going after the least productive segment of the market would give you 56¢ back on every dollar you spend; you'd lose a lot of money.

A segmentation that is uniquely yours—not grouped by zip code, or some other commonplace method, and not something your competitors are using. Something that instead remains valid for several years of innovation effort.

Segmentation From AT&T to Wells Fargo

We have people at Maddock Douglas who have been involved with successful segmentations for such companies as AT&T (T), Burberry (BRBY), Coca-Cola (KO), ExxonMobil (XOM), GE (GE), Prudential (PRU), and Wachovia/Wells Fargo (WFC). These efforts have led to billions of dollars (not a typo) of successful in-market innovation launches, using the segmentation model we just talked about. It works. Honest.

One last point about this. You'll find significant power in deciding what channels you are going to use to segment your audience. For instance, have you thought about segmenting your sales channel (e.g., by brokers, dealers, and agents if you are in the insurance sector, for example)? Or if you're a consumer-packaged-goods company, what retail stores do you want to carry your product? You can even segment the staff within stores where you sell your product. (Think "geniuses" in the Apple store or the carpet specialists within flooring stores.) You get the point. You can use the power of segmentation to segment up and down the value chain to help identify open areas of opportunity.

Before it's here, it's on the Bloomberg Terminal.