Expert Insight – Consulting Advisor: The Secret to Profitable Growth
Needs-based customer segmentation allows organizations to maximize customer equity and profitable growth.
As customers' expectations continue to rise, understanding their needs is becoming more important than ever before. Needs refers to the motive behind purchasing a product or service, not the product or service itself. Determining the underlying purchase driver allows an organization to treat different customers differently based on those needs, maximizing the profitability of each customer or group of customers.
Building a deep understanding of customers' needs begins with customer segmentation—dividing a customer base into homogenous groups that present similarity in specific ways relevant to marketing and customer service, such as demographics, firmographics, psychographics, or transactions. Customer segmentation helps companies to focus on the different attributes and behaviors of their customers and serve them more effectively.
Peppers & Rogers Group customer segmentation methodology is built on an integrated framework of customer value, behavior, and needs dimensions. Customers' lifelong experiences with their surroundings, community, family, and network, as well as the competitive service offerings they face on a daily basis, are the source of their inner perceptions, which drive their needs. Basically, "customers have different needs from each other." Those unique needs drive their behavior, and that behavior drives economic value for companies serving their needs. So, "customers have different values than other customers."
Therefore, managing customer equity effectively requires uncovering the cause of customer behaviors by understanding the needs driving those behaviors, which ultimately determines customers' value. Determining the motivation behind a customer's interest in a product or service is at the core of needs-based segmentation.
If not now, when?
Astute companies race to streamline their processes, enhance current product portfolios, develop new offerings, improve customer service, reduce attrition, and retain market share amid today's challenging conditions. The best way of tackling all this is by truly understanding what customers need and offering it to them, at the right time, through the right channel, and at the right price.
What makes needs-based analysis difficult is that it requires clustering customers using a combined structure of qualitative and quantitative research methods. However, this integrated segmentation methodology uniquely enables companies to be more adaptive to changing customer preferences, proactively identify and describe potential customer groups, develop truly targeted services or products, and craft highly relevant, custom marketing strategies. It also provides the basis for marketing optimization; that is, best allocating resources to target customers that will be most attracted by a specific value proposition.
Understanding customer needs entails understanding the difference between common and differentiated needs (see chart below). Common needs are the needs shared among all customers; they must be served by companies to survive against the competition. Understanding common needs is the initial stage of needs analysis. The next step is to determine shared and differentiating needs, which must be served by companies to be competitive for a specific customer group. Companies must gain an understanding of these needs to assign customers to needs segments.
The relevancy of the value propositions made to customers increases with the enhanced ability to understand their individual needs. Once a company is able to do so, it is much easier to meet customers' unmet needs, as well as to offer them one-to-one value propositions.
Determining underlying needs
Distinguishing common and differentiating needs begins with qualitative research, including focus groups with select customers and one-to-one sessions with front-office staff. This will allow an organization to build a hypothesis of common and differentiating needs. Additionally, organizations need to define customers' value-offering and experience needs through the research. Value-offering needs are needs related to why customers use specific products; experience needs are the needs related to why customers choose specific companies.
Once a company has created an initial hypothesis of the various needs, it can confirm its findings through quantitative research, including customer survey and market research study. Customer surveys can drill into specific needs; market research can help to assess why customers prefer specific services or companies. Based on the results, an organization can identify statistically distinct, homogeneous needs segments.
Finally, using look-a-like models or golden questions a company can assign its customers to suitable needs-based segments according to their profiles. Look-a-like models predict the needs segment of individual customers, using the previously developed segments of sample customer population. Golden questions are strategically selected questions used to collect critical customer information to instantly classify customers according to their needs into a needs group with the same profile. Companies can ask golden questions during sign-up or on-boarding, making the tool effective in newcomer differentiation and growth, or over time, providing sampling at multiple touchpoints . Since customer needs change, using a series of golden questions over time enables companies to capture those changes.
Step by step
Determining customers' needs—their underlying motivation for making purchase decisions—begins with research. Analysis of those findings helps to align common, differentiating, and one-to-one propositions with customers' needs. The more relevant those propositions, the more likely to company will see positive outcomes.
Needs-based segmentation enables companies to shape their overall customer management strategies according to the customers' needs. It's especially effective when used as basis for determining product mix, marketing, and service models. Ultimately, it will improve marketing effectiveness and business performance by speaking the voice of customer in a way everyone in the company will understand.
About the Authors:
Onder Oguzhan, CFA, is a partner in Peppers & Rogers Group Managed Analytics division. Asli Cantutan, is a customer analytics specialist in Peppers & Rogers Group Managed Analytics division.