How many times have you seen a set of customer ‘pen portraits’? The format is ubiquitous, normally a series of densely written pages of text accompanied with a stock image of someone smiling into the camera and a generic name, where we are told many specific, qualitative traits that our young professional or retired couple customer possesses – where they shop, their attitudes to politics, whether they have sugar in their coffee.
The problem with this approach to customer segmentation in my experience is that it leaves me asking ‘so what?’. A robust customer segmentation needs to have three things:
A ready comparison to available market demand – how much of the market does each segment account for in terms of volume/value size and growth;
A ready comparison to our existing customer base, allowing us to define our market share of each segment in combination with (1) and define the segments that are worth the most to our business today & in the future (for example based on customer lifetime value; and
‘Prospectable’ characteristics that will allow marketers to take immediate actions to acquire customers from the most desirable segments.
Pen portraits come from an analogue age when things like knowing which newspaper a prospective group of customers read was the most specific information a marketer could hope to know when deciding where to prospect for new customers. In today’s marketing world, a pen portrait can be helpful when thinking about the tone of voice of content or creative concepts, but it doesn’t really help inform where we should go looking for new customers.
How to create a customer segmentation
To create an actionable customer segmentation, you should focus on the ‘prospectable’ characteristics of your target customers. By this I mean the attributes or behaviours that are externally visible and therefore possible for you to target with your marketing activity. For example, in the B2B world this could include attributes such as company size, growth rate, vertical, or geographic location, and behaviours such as the recent appointment of a new CEO or an M&A transaction. In the B2C world this could include attributes such as where someone lives, or in some ages their age or gender, and behaviours such as the day/time they are searching for your product/service.
We can’t really consider an attribute or behaviour as ‘prospectable’ unless it is something that we can target within our main marketing channels – can we bid more within performance marketing, or exclude prospects that don’t have these traits altogether? It is almost impossible to target based on traits such as attitudes – which often form a core part of pen portraits.
If you’ve previously analysed customer lifetime value, this is normally a good place to start when building a segmentation, as it will tell you the traits that make the biggest difference to the value of a customer to your business. We want our segments to be unique and well differentiated from each other.
The result of following this principle to building a customer segmentation is normally a much tighter definition of each customer segment perhaps with only 2 or 3 criteria used to define between 4 to 8 different segments. Because we are only using ‘prospectable’ traits, it is also normally a lot easier to map both the market and our existing customer base onto these segments, allowing us to map the areas of concentration and opportunity for our business. You can then use these segments in conjunction with primary research to understand things like awareness and consideration for your business by each segment.
Figure 1 - example output from a customer segmentation exercise
You can use various statistical techniques such as cluster analysis or more advanced machine learning-based models to use patterns in your own data to build segments, but as a starting point I always advocate starting with a segmentation that you define from first principles and then refine with more advanced analytics. Keeping it simple rarely leads you down the wrong path.
This approach elevates a customer segmentation from a ‘marketing’ tool to a ‘strategic’ tool that can drive business planning and how you report performance. You might base your annual marketing plan on growing your share in a particularly attractive segment or decide to move away from a historically high-volume segment because you’ve realised it has lower overall customer lifetime value. Pen portraits can play a role when designing creative content but shouldn’t be the starting point for an actionable customer segmentation.
If you’d like to discuss how you can create an actionable customer segmentation in your business, please Contact Me.
All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.