3 tips for developing opportunity-based segmentation

Many organisations acknowledge that segmentation is a key component of a successful customer strategy. However, we frequently see organisations struggle with traditional approaches to segmentation, resulting in resources and effort being misaligned with potential value opportunities. A dynamic opportunity-based segmentation approach can enable a shift in these resources and effort, optimising marketing, sales and service results. Here we outline our best practice approach with a practical case study.

At its most basic level, segmentation aims to filter a large volume of customer information to segment target markets or customer bases into addressable groups, based on a set of pre-defined criteria. In an opportunity-based segmentation model, there are two critical drivers to understand:

  1. Which customers have the highest potential value?
  2. How does the customer buy and use a product?

At one end of the segmentation model will be significant customers with complex needs and sophisticated demands, who underpin the economics of the organisation. At the opposite end will be a long-tail of lower-value customers who need to be serviced economically, at scale. In the mid-range there will be important segments where value/volume trade-offs can be most effectively applied.  

OPPORTUNITY-BASED SEGMENTATION
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Critically, organisations need to ensure their segmentation is dynamic, and that they revisit the foundations regularly as part of their strategy.

Case Study – FMCG Industry

Let’s take a relatively simple high-level example on wallet sizing for the alcoholic beverages market in Sydney. In this B2B2C scenario, we would start with the end market and end consumer’s wallet, to help determine a customer segment wallet size.

Step 1 – Define segmentation criteria

The first step is to define the future state customer segments including: ‘strategic’ for your large or high value accounts, ‘mid-market’ for key and major customers and then splitting your general market into ‘mass market high’ and ‘mass market low’ to differentiate high potential small customers, from the volume opportunity in the long tail. However, it is less about the label or name of each segment and more the criteria that places customers into different segments, hardwiring the criteria in your systems and processes, and reviewing these rules on a frequent basis. 

Step 2 – Calculate end consumer & customer wallet

The next step is estimating the size of a given geographic market. In this example, let’s take a Sydney metro catchment area with X number of households, and Y number of beverage suppliers and apply a weighted average to determine natural market share. Then you calculate the average weekly household spend on beverages distributed amongst those suppliers to understand the customer wallet size.

Step 3 – Consider qualitative overlay

This knowledge is then applied to the customer base, with an overlay of qualitative knowledge of customers in a given geography or segment. This could include offers, buying behaviours, or specific needs, to adjust the segment thresholds. 

Step 4 – Apply to customer base

Once customers have been re-allocated you will find previously unidentified value and opportunities, for example:

  • Maybe the strategic segment is less significant than previously thought and they are on a quarterly buying cycle so don’t need high frequency intensive attention
  • Maybe there is a massively under-served opportunity in the mid-tier segment
  • Perhaps there is no competition in the high end of the mass market. 
These value-based opportunities would result in the re-prioritisation of specific customer accounts, setting appropriate segment thresholds and re-allocation of marketing, sales and service effort and resources.

ALCOHOLIC BEVERAGES WALLET SIZE OPPORTUNITY SEGMENTATION

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From this case study example, you can see the value in developing a quantitative rules-based segmentation model to identify customer value potential and balancing it with qualitative overlay. The key is making this segmentation model dynamic so that customers and opportunities evolve as the market and buying behaviours shift – thus allowing you to maximise results from your marketing, sales and service effort.

Best practice tips for opportunity-based market segmentation

Through our extensive experience helping clients transform their customer strategy, Blackdot has identified 3 best practice tips for enterprises looking to achieve effective opportunity-based segmentation.

1. Balance quantitative & qualitative approaches to align around value

A quantitative approach will produce an estimate of market size and the value of a group of customers, while a qualitative approach can provide deeper insight on customer needs. Blackdot’s experience has shown approaching segmentation with a top-down, rules-based quantitative approach with a detailed qualitative overlay, produces a dynamic, practical model. This balanced approach identifies areas for the organisation to grow, while adding value to customers.

2. Start with quantitative segmentation as the foundation

It is essential to start with quantitative or opportunity size segmentation first, as it forms the basis for several strategic decisions an organisation makes – everything from resource allocation to product pricing. Blackdot recommends focusing on a specific quantitative method, then applying a qualitative lens to get to an opportunity-based segmentation.

3. Shift from historical customer spend to wallet size potential

By shifting from targeting customers based on revenue size to a segmentation approach based on value potential, organisations can make strategic decisions that will pay off in the mid and longer term, especially around the cost to sell and serve the various segments. For example, ensuring the organisation’s best resources are aligned to the highest value opportunities. Calculating the catchment potential can often be a good proxy for individual customer wallet size when data is difficult to gather. 

What’s next?

With opportunity-based segmentation in place, each segment will require different value propositions, product offers and go-to-market approaches. Look out for our upcoming blog exploring how to customise offerings to segment value.

For further insights into segmentation and customer strategy, download our whitepaper “Reorganising Around the Changing Customer”.