đ§ Knowledge Series #9: How to segment customers
Practical tools and frameworks explored
đThe Knowledge Series is a series of easy to read guides designed to help you plug the gaps in your tech knowledge. One topic at a time.Â
If youâre a free subscriber and youâd like to upgrade to receive them you can do so below. Or you can find out more about paid access here.
Hi product people đ,
A company called Rewind caught my eye this week. If youâve not heard of them before, Rewind is a product that allows users to record everything they do on their laptops so that it can be easily retrieved later. And last week, their CEO announced that alongside their desktop app they were set to launch another new product: a pendant. The pendant works by recording everything you say so that you can listen to it later. Critics quickly attacked it with one saying that âonly a deranged lunaticâ would want to buy it. A day later, Rewindâs CEO responded by sharing that over 1,600 of the âderanged lunaticsâ had placed pre-orders for it.
I personally couldnât think of anything worse than recording everything I say and do every day. But the fact that feedback on Rewind was so split got me thinking: if indeed there is a market for it (which it would appear there is), Rewind will need to do their best to find enough of those people and build a proposition around their needs.
And that leads us onto the topic for this Knowledge Series: customer segmentation.
Customer segmentation is an important diagnostic activity to understand who actually uses your product, what value they get out of it and - crucially - who might potentially want to use it in the future.
Coming up:
Lessons in failed customer segmentation
How to segment customers: some segmentation questions to ask yourself
Useful frameworks for customer segmentation
Practical tools you can use
What happens when segments and value propositions are misaligned
Do you remember Quibi? Quibi was a short-form video streaming service that launched in April 2020. The company was founded by Hollywood mogul Jeffrey Katzenberg and CEO Meg Whitman, and it targeted younger viewers who wanted to watch high-quality, mobile-friendly content.Â
However, the company failed to understand that younger viewers were not willing to pay for premium, short form content when there were so many free alternatives available, like YouTube and TikTok.
And how about Juicero? The Juicero machine was expensive and the pre-packaged bags of fruits and vegetables were also costly. The company assumed that its target audience was willing to pay a premium price for the convenience and health benefits juice in a packet. However, most consumers were not willing to spend that much money on a juicing machine and opted for more affordable alternatives like buying fresh produce and using a simple juicer.
The company failed to understand that its target audience was not just health-conscious individuals but also people who wanted convenience and time-saving solutions. The Juicero machine required too much effort and time to operate, which didnât meet the needs of its potential customers.
If these companies had spent a little more time understanding their potential customer segments and the needs and desires of those segments, itâs likely they wouldnât have built the products they did.Â
But customer segmentation can be overwhelming; where do you start? On what dimensions can or should you segment your audience and what are the trade offs for product teams when considering each of these?
Customer segmentation tactics - dimensions of segmentation
Customer segmentation is a cultural habit thatâs often associated with startups; youâve built nothing so it makes sense to ask yourself who your target segment is. But larger corporations can - and should - do it too.
Hereâs a snapshot of how different sized businesses tackle customer segmentation:
When do you need to segment?
If youâre assessing your productâs own performance or conducting a product health check it makes sense to take stock of your customer segments. And if you're launching a new strategy or product line for your existing business, this is also a good opportunity to take some time to think deeply about who you might want to serve.
Types of segmentation - and real world product examples
Letâs imagine youâve realised that itâs important to take some time to understand your customer segments in a bit more detail. Hereâs some of the types of segmentation dimensions you can use:
đĽ Demographics - what is the demographic breakdown of our existing customers? Does this matter to our product? Are features or products more likely to be used by one demographic?
đ Geography - where do our users live? Are we particularly skewed towards a specific region and do we want to be?Â
đ§ Psychographic - what lifestyles, attitudes, values, interests or personal beliefs do user segments have?
đśââď¸Behaviours - are there specific behavioural patterns that constitute a segment? Usage rates, purchasing behaviour, loyalty or other factors relating to their interaction with your product could all be useful indicators.
đValue - some power users might want to use all of your features, some users might want the basics. If your product is complex, consider bucketing users based on the value they use.
đľđť Lifecycle - where are your customers in their lifecycle? Factors include awareness, purchase history, loyalty
đ° Commercial - segmentation based on the commercial value of a customer. The needs of enterprise customers will be completely different to small businesses. Some companies can straddle both (Shopify), others narrowly focus on one (Salesforce).