Defining your Customer Segments

A 10 minutes read
Defining your Customer Segments
Ross Haddow
28/07/2020

Some questions to help you gain a basic understanding of your business segments and where the future profit lies in your business.

The Tool

The Business Segmentation tool is a widely used device that will provide you with a better understanding of the business segments that your company is targeting or should be targeting.

Most importantly, it can indicate where the future profit lies in your business. Using the tool should be a key part of positioning your firm for growth. It should also be a central component of your brand development and marketing activity.

Why use it

Businesses seldom offer one service to only one customer group. Most offer a number of distinct services (or products) to a number of distinct customer groups. Each distinct service (or product) offered to a distinct customer group is known as a business segment (or service/market segment).

One of the key starting points for positioning your brand is knowing where the profit resides in your business. There is little point focusing effort and resource into areas that only offer slim returns and which offer little prospect for growth. Segmentation will help you to focus in on the right areas.

The value of this is shown in the following example:

A company sells three products (small, medium and large widgets) to three sectors (manufacturing, engineering and construction) in two countries (UK and France). It therefore operates in 3 x 3 x 2 = 18 business segments.

Analysis shows that the company’s biggest segment (by far) is large widgets to UK engineering - which accounts for 40% of sales. This is followed by medium widgets to UK engineering at 25% and large widgets to French manufacturing at 15% of sales. Together these three segments account for 80% of sales.

Very often such sales figures would be broken down in three charts by widget, by country and by sector. This is useful information, but what is much more useful is a pie chart showing product/market segments - as set out below:

This shows in a compelling way that one segment alone accounts for 40% of sales. It highlights that the most important decisions to make about the company’s strategy development should focus on one segment - large widgets to UK engineering.

Or to put it another way: Not large widgets in general, not small widgets, not UK as a whole, not all of France, not French engineering and not UK construction!

The bottom line is that there is no point doing hours of research, marketing and sales on a segment that is only going to generate a small percentage of your business. Instead focus on the segments that provide the majority of your profits – or which could be in the future.

How to use it

1. Using the business segmentation tool will require some preparatory work by your finance team. They will need to gather together the data you need to breakdown where the profits lie in your business.

2. Get a mix of the right people together in a room. It is important that your leadership team is involved so that the discussion can draw on their knowledge and perspectives.

3. Ask the following questions:

Q1. How many distinct services does your business offer?

A distinct service (or product) will provide a specific set of benefits to customers. One way to work out what your distinct services are is to look at your competitors in the market place. Your distinct services will normally face different sets of competitors.

Q2. To how many customer groups?

A customer group is distinctive if the customers have key characteristics that differentiate them from others. A customer group can be defined in a number of ways. For example, by who they are (young/old, business/leisure etc.), what sector they are in, where they are located, or by factors that indicate that different marketing approaches will be needed to reach them.

4. Now, multiply the two numbers together - that’s how many business segments you serve. List them.

5. Then answer these questions:

Q3. Which 2, 3 or 4 segments are the most important - which contribute most to sales now?

For more focus, you can also ask which contribute most to operating profit.

Q4. Will these be the main contributors to sales and profits over the next few years?

If not, which ones will?

6. Having answered the questions, and agreed on priority segments for the future, you will be in a much better place to discuss any changes required to your customer strategy and positioning.