Customer segmentation is a well-established marketing strategy for attracting leads, but it also has applications in new product development.
Customer segmentation can be a valuable tool for a market entry strategy, enabling the identification of potential customers for a new product or service.
As a business, you can deploy customer segmentation models to uncover new customer requirements, which can then inform the development of new products to fulfill those needs. This is a more scientific way of launching new products or services.
Such result-based segmentation thus helps business managers overcome product development challenges. (We’ve explained this in detail further down the post.)
A parallel example here could be that of content explosion. With so much content being churned out daily, marketers are no longer sure of what truly resonates with their audience. That’s where customer personalization comes in, allowing the creation of tailored content to suit individual clients.
The same logic applies to using customer segmentation for product development or innovation.
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With technology evolving at a rapid pace today, companies should adopt a customer-focused product development approach rather than launching a product and then trying to find the right customers for it.
Such a method is also recommended for product expansion or scaling, where the focus shifts from a broad spectrum of potential customers to a subset. The key to doing so is through customer segmentation.
This approach also gives companies a competitive edge when entering the market.
Benefits of Using Customer Segmentation in New Product Development
This method offers several advantages. One of them is getting more bang for the buck from your Sales dollar.
Efforts by the Marketing and Sales divisions in what later turns out to be the wrong segment can prove to be an expensive “experiment”.
It may also lead to a loss of inventory control as unsold products accumulate. Using customer segmentation in advance means not only selling right but also promoting the stability of your customer base.
Not only that, but having a clear idea from the start of who your target audience is also leads to greater customer satisfaction, better after-sales service, and better performance against competitors.
How to go about Customer Segmentation and Challenges in the Way
To use customer segmentation for future products, you need to create a plan with a clearly stated objective(s), a list of the stakeholders involved, and the deliverables.
The identification of a new product idea or even the improvement of an existing one as a viable venture means starting to use customer segmentation modeling methods to define your target audience.
If you choose to adopt this route, it is mandatory to develop and then test customer segment hypotheses and variables to eliminate the guesswork from the process.
A hypothesis is an assumption made based on limited knowledge that must be validated to determine whether it is true or false.
The hypothesis is, of course, put forth before any discernible research has been done. The product hypothesis essentially works on the ‘If this then that’ logic.
Here’s an example:
Clothing company X believes that if it produces black sleeve T-shirts, then they will be bought by athletic body-type boys more than others. Or, if it also adds black to its product range of colored T-shirts, then gym-going teenage boys will buy it.
Once you decide to use customer segmentation to launch a new product, you need to start the process with research. Your business needs to gather the data required for segmenting customer groups, utilizing both primary and secondary research sources.
If you are using customer segmentation to improve existing products, existing customer data can be used.
The next step would be to create customer personas, complete with characteristics such as behavior, lifestyle details, and other relevant information, to understand customer needs better.
But this approach of segmenting customers before launching a product presents a dichotomy for businesses.
How do you segregate customers for a non-existent product or service? That’s why you find many businesses using traditional customer segmentation methods to overcome this hurdle.
However, traditional classification schemes that categorize customers based on factors such as demographics and geography are typically designed for use after a product has been launched. It’s like trying to fit a square peg in a circular slot.
Traditional segmentation models don’t work when applied to new product development.
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Need-Based Customer Segmentation
To overcome this problem, as we explained in our opening paragraphs, one way to address it is to use need-based segmentation; the other is value-based.
Customer needs or wants represent the unfulfilled desires that could define a market for a new product or service. Or, even a new market itself.
Often, existing customers or even leads leave feedback that represents an opportunity to determine if a large enough market exists, and if so, to follow up and launch a product/service that caters to that need.
At other times, such needs surfaced during primary market research.
Here are two examples of customer segmentation:
Taking the black vests example as a starting point, some customers have left feedback with the clothing company stating that they were looking for black cut-sleeve T-shirts with round collars.
Alternatively, market research suggests that the gym attire segment requires a cut-sleeve T-shirt, but with a hoodie.
These two examples of customer segmentation demonstrate that segments are defined based on distinct needs, rather than typical characteristics such as industry size.
Value-Based Customer Segmentation
Under this method, customers are grouped according to their economic score (value).
From a business perspective, every customer who has done business with them represents a certain value. In theory, customer lifetime value equals the net value of the cumulative profits generated by a customer over his/her lifetime.
But before allotting the net value, your business also needs to include all costs that can be attributed to the addition of that customer, including the actual cost of acquisition, infrastructure costs, and so on.
Outside of this, the business worth of a customer, including values and merit, is another important aspect of what is called Psychographic Segmentation.
This refers to what your customers believe in, their opinions on a certain subject, and their interests, among other things. Psychological Segmentation focuses more on psychological factors, such as subconscious beliefs and motivations.
Once this entire exercise is complete, your data analyst team will then need to identify the relevant variables and confirm the hypotheses. There are several ways of doing so, but that is the topic of another blog post.
Conclusion
Customer segmentation represents a double-edged tool: it is not only a way for marketing existing products or services, but businesses can also use it as a form of market entry strategy to identify potential customers for a new product or service.