The Market Segmentation Process: Customer or Market Assessment

Before conducting primary market research to accomplish the objectives of your market segmentation process, typically the team would conduct a market or customer assessment.

Comprehensive and focused are the watchwords for this analysis.

Usually this review looks at data and research findings on the the state of the industry, major competitors and products, market share, the product development pipeline (yours and competitors) and the shape of the immediate and mid-term future of the market.

If your framework is designed to bond with and grow your current customers' relationships with you, you would conduct a classic 80/20 analysis. Taking various financial metrics, such as profitability and total revenue as well as purchase behavior such as amount and frequency, this analysis sorts customers into percentages generated (of your metrics) and the percentage of customers represented. That is, what percentage of customers are generating what percentage of sales.

The usual rule is that 80% of revenue comes from 20% of customers. (Or 70%/30% or 90%/10%.) The idea is to identify your most valuable customers.

Having done so, the assessment would dig further. What other characteristics do these groups of customers share? Do they tend towards similar frequency and amount of purchase? Are they seasonal? Do they share common demographics (using the data you have in-house either from databases or previous market research studies)?

The team periodically reviews the results of the on-going assessment. In true Socratic form, the team generates additional questions, digging deeper and deeper and more and more refined and relevant information is discovered. The objective is to uncover distinctions among customer groups for further exploration.

For example, you might find that while 20% of your customers are generating 80% of your revenue, only 5% are generating 45%. As you continue to explore, you discover that you cannot distinguish the 5% from the 20% on any other variables than revenue. In short, you know that the 5% are contributing a large percentage of revenue, but you don't know why.

If your framework is desinged to assess markets rather than customers, the process would work in a similar fashion, especially focusing on your entire customer base, particularly those infrequent or lower revenue customers as a proxy for your competitors' targets (or, of course, whether or not these customers are simply infrequent users of the product category).

With a market assessment, you will probably reach the end-point of your analysis more rapidly than with a customer assessment.

Having run down each of the developing information leads as the team goes through the assessment process to the point where the existing data does not provide an answer, you are ready to move forward in the process with brainstorming.