Customer segmentation is a powerful tool for businesses and entrepreneurs.
Much like creating a business canvas, very few startups today skip doing a customer segmentation. When we surveyed more than 200 startups we found that more than 90% stated they had done customer segmentation.
That’s good, right?
Sort of. Most customer segmentations do distinguish potential customer groups by identifying common characteristics or attributes within those groups. What is often missing is that these segmentations are rarely actionable.
Some important action-oriented questions that is missed include:
Does willingness-to-pay differ between groups? If so, how much?
How can our packaging or offer create different responses from our segments?
What is the basis for different perceived quality between segments?
Unfortunately, for many startups the framework and research supporting their segmentation is too broad and unfocused.
Let’s take a look at how customer segmentation is traditionally done.
A Breakdown Of Traditional Customer Segmentation
In traditional customer segmentation, companies create groups or clusters of their customers based on a selection of traits and descriptives to identify those groups of customers.
Generally these segments are based on socio-demographics such as gender, geography and income. For more B2B companies, segments are created using high-level attributes such as company size, number of employees and number of locations. Helpful, but just scratching the surface. Some segmentations go further and identify psychographics such as behavior, needs, values, and preferences.
The ultimate goal for customer segmentation is to help the company to engage and sell their products more effectively and efficiently. When done right, effective segmentation is measurable by metrics such as:
Sales velocity and conversion rates
Customer inquiry and engagement rates
Willingness-to-pay and price increases
While this basic framework for segmentation is a helpful starting point to get a general understanding of your customers, this is not enough.
What’s Wrong With The Old Way?
Too many times, companies in the early stages of their business do a broad assessment of their customer and then move on. When segmentations are not created with the intent of using them (for pricing, marketing, sales, etc.) they become useless.
These segments are usually too broad and descriptive. Segmentations should be designed to be actionable and prescriptive for a company’s go-to-market strategy. At the early stages of a company, specificity and focus is critical. Unfortunately, many customer segmentations exercises often fall short to help make these critical decisions.
Being too broad can also be expensive. Why? Defining your customer segments with non-actionable generalities exhaust your time and resources while also giving you too many inconsistencies and inaccuracies. It is too common to hear companies that have created a customer segmentation, but when they go-to-market struggling to focus on a specific customer.
Being too broad with your customer segmentation allows for too much leeway and causes a larger deviation from your actual customer. This unintended deviation costs your marketing and sales money as they throw good money trying to reach customers that are not within your actual segment or the segment your business should be targeting right now.
Another missed opportunity in traditional customer segmentation is the focus on change and adjustment. Over time, companies inevitably change and develop. What sometimes is forgotten is that their customers change as well.
Many times companies progress and not re-analyze their customer segments. As this occurs, companies begin to market their products towards new groups who don’t really care or even want what they offer. Only going through one round of customer segmentation can be detrimental which is why it is important to adapt and update segmentation over time.
Introduction to Customer Rings
While the initial segmentation steps are useful, pitfalls make it difficult to develop a go-to-market strategy that actually works. An alternative approach is to assess your segments as customer rings.
Customer rings are micro-segments that look at customer segments in terms of layers. Customer rings start with traditional customer descriptives, but go further by identifying customer preferences, perceptions, value drivers, and for more advanced companies, willingness-to-pay.
The customer rings approach consists of three main principles.
Your customer segments are layers
Customer rings are layers. Like a tree trunk, the core is the foundation your business is built on. The core circle are your loyalists. These are the initial customers who go beyond function and features, and believe in mission and inspiration.
As you move further away from the core, these segments are likely to have different requirements, urgencies, product alternatives, and potentially more price sensitivity.
The further you move towards the outermost ring, the closer you are to the weakest and most vulnerable and sensitive rings. You can ‘protect’ these outer-rings by marketing your product to meet their needs.
Each ring layer are hyper-specific
Each company is made up of not only 3 or 4 customer types, but a series of 10 or more customer groups. Customers today are expecting more customization and tailored experiences, making generalized groups less effective.
Think of your customer rings in sub-segments and get hyper-specific. We advise our clients to take every segment that was originally researched and split each segment a further down into four additional separate rings. So if your company has 3 customer segments to start, then the goal is to break this down further so you have up to 12 customer rings. Ensure sufficient time is spent on customer research and behavior attributes.
This can be great practice for your company to go deeper, and define your customers even more specifically. While the starting point may be an initial set of hypotheses, the end result of any set of customer rings must be research-driven.
Each ring is actionable
Each progressive customer ring is a step. They are customers that not only must be targeted, but where products, packages, and pricing are designed to their needs and value.
Each customer ring has their own value drivers, so you are building offers for each targeted ring. The prices you use do not only go from high to low, but different pricing models (e.g. subscriptions) can be used to align with that customer ring.
Some founders may question whether the rings are “big enough” or may be missing potential opportunities. It is important to recognize that winning the earlier rings are hard enough. Studies find that a startup does not start to move into the growth stage until they have won 2% to 5% of their prospective target market.
In our own experience with thousands of startups, we see that chasing opportunities creates lost focus, and less wins and validation for initial customer segment hypotheses. Hyper-focus, clear action items and accelerated wins is the winning combination.
Benefits of Using A Customer Rings Approach
One of the key benefits of using the customer rings approach is that it is actionable.
For example, companies that are actively going-to-market and acquiring customers, willingness-to-pay and price drivers must be a core dimension of any customer segment.
In a study we conducted, we found that more than 90% of companies have created a customer segmentation, but less than one-third know their customer’s willingness to pay.
That raises an vital question of how well we know the customers we want to attract and what offer makes the most sense to win them as customers. A key insight for any customer segmentation.
By using our customer rings approach helps you understand not only to identify the customer, but begin to identify what drives value for that segment.
There are four primary goals for your customer rings that will create stronger customer segmentation. Customer rings are:
Measurable and quantifiable;
Describe detailed shared attributes of your unique customer;
Make it easier to target ring-specific customers; and
Drive higher impact business outcomes (e.g. conversion, retention, and profitability).
Your goal is to reach customers who find the most value in what you offer as effectively and efficiently as possible. While traditional segmentation is a helpful first step, customer rings enhance the power of segmentation.
Rings are designed to be tight and focused. If more granular rings are quickly acquired, then you can move to the next layer and craft the go-to-market accordingly. If you run into challenges making meaningful headway into a specific ring, then it should give you room to make necessary adjustments without the noise of different ring layers.
Customer rings help you to embrace diversity and the uniqueness customers identify with. This focus and targeted actions to drive positive results your company requires.
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