CUSTOMER SEGMENTATION: FINDING THE HUMAN DIMENSION

by Donald V. Potter

Product innovation usually calls to mind the big breakthrough idea – the dramatically new product or service that revolutionizes a category or industry. Those innovations are powerful, but rare. The more common innovations change the current products and services in a less dramatic fashion. Businesses have dozens of opportunities to improve their current product or service in ways that will strengthen their market position and bottom line – and these innovations lie waiting for those with the will to find them.

Finding them calls for segmenting customers by their potential needs – needs that may be emerging as technology changes, or may be unrecognized and so unmet. These segment needs are traits or characteristics that distinguish a group of customers from the larger population.

The key to finding these needs lies in recognizing that the customer is always a human being – a man, woman, or child with physical, emotional, and intellectual needs and desires. A systematic scan of possible unmet needs in those three categories can bring to light customer-need segments with potential for innovation.

We describe a diagnostic tool based on a series of questions in each of the three basic categories of needs – physical, emotional, and intellectual. We have found that fifteen questions cover most of the needs a customer has. Drawing on an extensive database of recent examples, we illustrate how these questions could reveal need-based segmentations in any business segment or industry. Our examples describe product innovations directed toward the specific segment needs.

Physical Needs

The Physical Needs category explores how and where a customer uses, transports, or stores a product. Some of the questions that may identify new segments:

1. Could some customers have difficulty fitting into standard product sizes?
Customers vary in dimensions and weight, potential bases for segmentation. Reebok recognized that the best athletic shoe should fit a customer’s foot precisely. The company introduced technology to put moveable air pockets throughout their shoe, allowing a custom fit and cushioning where the customer most wants it.

Herman Miller’s ergonomic Aeron office chair sells in one of three basic sizes, to accommodate users’ different heights and body weights, and then adjusts in a variety of ways for optimal personalized comfort.

The women’s fashion industry traditionally focuses on the young and the slim. Charming Shoppes, under the brand names Lane Bryant, Fashion Bug, Catherine’s and Crosstown Traders, has developed a business serving larger-sized women who want stylish clothing.

Some products may have more than one end user. Select Comfort, for example, recognizes that a double, queen, or king-sized bed is often shared by a couple whose individual body sizes and ideas of comfort differ widely. The Select Comfort design incorporates two separate air-filled mattresses with individual adjustments.

2. Might some customers using your product have widely varying physical capabilities?
Stamina may be a problem for some customers. As women move into occupations traditionally dominated by men, and vice versa, equipment designed for one sex may have to be used by both men and women whose basic size and strength differ. For example, male police officers have worn heavy leather duty belts, called Sam Brownes, for years. This 2-1/4 inch black leather belt with a metal buckle carries the officers’ equipment. As women became more prominent in police forces, manufacturers, such as Don Hume Leathergoods, introduced smaller, curved belts, called Sally Brownes, to reduce the strain on women’s bodies. Greenspeed produces recumbent tricycles, for adults, that are comfortable enough to allow a rider to tour for hours without the aches and pains of a bicycle.

Mobility and strength challenges confront some, like the elderly. Japan’s population is aging. Its automakers want to be there to help. Nissan developed a car with swivel seats and a motorized crane to lift a wheelchair into the trunk. Toyota created a car seat that doubles as a wheelchair.

3. Might some buyers wish to use the product outside of “normal” conditions?

Ambient conditions such as wind, dirt, temperature and humidity may affect the ability of a product to perform. Fuji developed a cardboard disposable camera to take pictures where a conventional camera could never be used. Power Integrations, a semiconductor maker, offers products that automatically adjust to whatever voltage is available, anywhere in the world.

In recent years there has been a steady increase in the number of single-person households. Whirlpool responded to their needs for a smaller, more convenient dishwasher with the Briva. This in-sink appliance washed and dried a small load of dishes in a few minutes.

4. Could space constraints affect how the product is shipped, used, or stored?

Storage space is an issue for many users. Dreyer’s, for example, ships its ice cream to Japan in small packages, to accommodate the limited freezer space in most Japanese retail stores and homes. The cross-country ski machines from Nordic Track fold into a smaller form for easier storage in a closet or under a bed.

Making space more efficient is an incessant problem for web site hosting firms, who operate hundreds of computer servers for their customers. Floor space is a major cost for these companies. RLX Technologies designed an “ultra-dense” server for these firms that would deliver several times the processing power per cubic foot of the competing current servers.

Emotional Needs

Some customers might respond to a more desirable emotional experience, individually or as part of a social group. Some useful questions:

5. Would some customers appreciate a product or service that appeals more to their five senses – sight, smell, sound, touch, and taste?

Sony developed the Clie, a premium-priced hand-held personal digital assistant with a color display that was brighter, more vivid, and with twice the resolution of the competing Palm device. The home improvement chain Lowes gained market share by making its overall layout cleaner, appearing less cluttered than that of its competitors. Grand pianos in Nordstrom stores add soft music to the shopping experience. Schick introduced the Intuition razor for women. The razor enhanced the sense of touch by surrounding the skin with conditioning solid soap, which lathered and shaved simultaneously. Anhauser-Busch introduced Rhumba, a beer with the flavor of citrus and Caribbean rum, to attract drinkers who liked tropical tastes.

6. Could some customers use the product to identify themselves with distinctive people or groups?
Unusual or trendy styles appeal to some segments. Coke markets Powerade as the “insurgent” brand with bold colors and flashy graphics. Retailer Hot Topic has infused an anti-establishment vibe into the suburban mall in appealing to its alternative teen clientele.

Some customers might relate themselves to high-profile individuals. Louis Vuitton’s magazine advertising pictures its bags in use by Mikhail Gorbachev. Athletic apparel and shoe companies use the endorsements of well-known athletes.

Other customers gravitate to icons of culture. Nickelodeon’s popular bilingual children’s character, Dora the Explorer, is part of the emerging category of ethnic dolls. Toy companies pioneered the black doll movement in the mid-80s; now dolls are increasingly available in African-American, Asian, and Hispanic versions.

7. Would some customers respond to a community focused on the product?

Some customer segments may seek other customers with whom to share common interests or values.

Harley Davidson, the motorcycle maker, and Airstream, which produces recreational vehicles, create and sustain lasting bonds with customers through their company-sponsored owners groups. These groups offer events, trips, magazines, advice and, most importantly, good fellowship to their company-loyal members.

Many small bookstores have struggled to survive in the era of super stores and Amazon. Joseph-Beth Booksellers in Lexington, Kentucky distinguishes itself from national chains by appealing to its customers’ regional affiliation with an offering of more than 1000 books about Kentucky or written by Kentucky authors.

The growing desire of many people to be socially responsible, and especially “green,” offers opportunities to segment in many sectors. The Sofitel Water Tower Chicago recently developed a 65-point environmental plan that includes the use of ozone laundry machines to reduce the use of hot water and detergents. Other businesses have met consumer needs by sourcing their raw materials responsibly. Home Depot is now committed to buying wood products only from forests managed in a responsible way, and even assists in the monitoring of sustainable wood harvesting worldwide.

8. Are there potential customers who might want to look better or perform better through the product?
CooperVision introduced a line of cosmetic contact lenses, which enhance or even change a user’s eye color. Crest introduced a mouthwash that whitens teeth while it freshens breath.

Golfsmith, the specialty golf retailer, provides in-store putting greens, computerized swing analyzers and training programs for pros and hobbyists to improve their techniques.

St. Paul Travelers supports its independent insurance agents with detailed reports on their most and least profitable customer segments to help the agents improve profits. Xerox has created a fast-growing business in coaching its customers on how to manage their flow of documents.

9. Do some potential customers have out-of-the-mainstream tastes or interests?

Considering a few alterations to current products might reveal customers now hidden in niches.

When Century Theatres opened an 18-screen theatre in a Chicago suburb, it segregated six of the screens into a theatre-within-a-theatre called Century CineArts, which showed art and independent films and featured a bistro in the lobby.

The Amsterdam Hospitality Group owns several small art deco hotels in Manhattan. Each hotel has a theme, so that customers can pick a venue that reflects their tastes or sense of themselves. One hotel, for example, has a Marilyn Monroe theme with loud red colors, silver upholstery and pictures of the star.

Marriott’s exacting attention to service yielded the At Your Service Program, which records guests’ requests and desires so the next stay is as comfortable as possible, anywhere in its chain of hotels. Legacy airlines offer extensive concierge services to their most elite passengers. Compaq built a server with special software that automatically configures the server’s hardware and network information to suit the customer’s operating system and application programs.

In the previous questions, we looked for new segments by adding a benefit. In the next four questions, we will take something away. Specifically, these next four questions segment customers by identifying their anxieties about the product.

10. Would some customers prefer a product or service that is less risky, and less intimidating to use?
Risk belongs in Las Vegas, not in a customer purchase. Still, there is some risk in every transaction. Avoidable risk presents a rich vein of potential segments.

Some customer segments may seek assurance that they can trust a product, a company or a process. Lesser known automobile brands offer longer-than-average warranties. Companies of all stripes feature prominent satisfied customers in marketing materials with an implied promise that their performance for you will be just as good. Tech products tout their products’ conformance to industry and third party standards.

Trust in a person offers another segmentation opportunity. While most electronics retailers give customers a web-based contact form or a toll-free number, J & R Music and Computer World in Manhattan offers a list of actual sales people – names and numbers – that the customer can call.

Other customers might help reduce risk. Netflix asks subscribers to rate movies they have seen, and develops a continuously updated profile. It can then rate DVDs available for rental according to how well an individual subscriber, with a similar profile, might like them, and can feature member reviews written by other viewers with similar tastes.

11. Are there some customers with a greater “need for speed”?

Delays in the purchase and installation of the product produce anxious customers. So Walgreens has more 24-hour and drive-through pharmacies than any other drug store chain. No waiting until tomorrow. TiVo offers a “Wish List” feature that picks up programs with any title, actor or director specified, no matter when it is broadcast, saving customers the time needed to search through TV listings. Web Ex, the on-line meeting company, added the ability to launch meetings from AOL’s Instant Messenger service. Fandango sells movie tickets on the web: print them out at home and breeze right into the theatre.

Would some customers trade sophistication for simplicity and speed? At Ameritrade, an investor may answer six questions to identify tolerance for risk. The answers funnel the investor into one of 25 model ETF portfolios.

Does location cause delays? Radioshack offered its mobile phones at kiosks in several hundred Sam’s Club warehouse stores. UPS bought Mail Boxes Etc. and FedEx bought Kinko’s to move closer to retail customers.

Can you add more price points to your product line? Would the sale of related products reduce the customers’ purchasing time? The common tendency of many companies in many industries to become one-stop-shops for their customers reflects the need for speed segments in these many industries.

12. Might some potential customers face money constraints or fear of spending?

Some customers can’t afford it or can’t afford it all at once. In other cases, the company might improve the margins of some segments.

One approach to reducing customers’ price sensitivity is to offer a lower-priced alternative. Book Baron’s niche as one of the nation’s great rare and used-book stores attracts customers despite flashy competitors like Barnes & Noble and Amazon. Wall Street created exchange traded funds to track specific market indexes. These hybrid mutual funds have very low shareholder expenses because their index tracking process costs less than research-based stock picking.

Another approach is to offer a creative payment plan that overcomes a customer’s economic obstacles. The Rhapsody online music service rents, rather than sells, its music. The service charges a monthly fee that allows the subscriber to play an unlimited amount of songs on a personal computer.

Is there an opportunity to improve some segment’s economic situation? General Electric signed off on a $50 million dollar line of credit for a customer. GE then worked with the customer to save millions on its transportation costs and to improve the efficiency of its accounting system. The cost to the customer for these consulting services? Nothing. The benefit for GE? More business from a very satisfied customer. During the 90s, Kodak helped Walgreens set up a national one-hour photo developing business, including an interest-free loan to implement the systems.

13. Is there a health-conscious set of customers for your product or service?

Some customers may be concerned about the healthfulness or side-effects of a product.

The restaurant chain, Panera, innovated by putting Bell& Evans antibiotic-free, hormone-free chicken in its sandwiches and salads. Crest offers an alcohol-free variation of its mouthwash, and a tarter-control version of its toothpaste. Tire maker Continental developed the Continental Wheel System, a second generation run-flat tire. If the tire deflates, a special support ring inside the main tire allows the tire to run more than 100 miles at highway speeds. Soft drink manufacturers respond to consumer concerns about aspartame by introducing drinks flavored with Splenda, a substitute made from sugar.

Intellectual Needs

Potential customers may have new needs for knowledge. Some of the possible segments:

14. Would some customers benefit from knowing more about your company or your brand?

Some customers may not buy your products until they know more about who you are. Build-A-Bear Workshop is a retail experience center in which customers design and create their own personalized teddy bear. To reach people who didn’t yet know of the company or the brand, Build-A-Bear developed a mobile store that travels to various sports and family entertainment venues, introducing a new set of potential customers to their unique product.

Kendall Jackson Winery, as a small company, faced size disadvantages in distribution and marketing. The company built a large sales team to supplement its wholesale broker channel, ensuring that the company and its wines got good retail exposure.

The choice of a name can also be helpful in telling people what a company does. For example, a company that sells music in 24 U.S. airports chose the clever and informative name “AltiTunes” for its service.

15. Would some customers benefit from knowing more about the specific product, its technology and its workings with other products?

Tractor Supply Company hires ranchers, welders, and horsemen at each of its stores to advise customers on products and their proper use. Tomboy Tools Inc. trains its sales consultants in simple home improvement projects, enabling them to demonstrate the use of the company’s tools at parties and other gatherings.

Air Liquide, the producer of industrial gasses, can produce industrial gasses in small plants on-site at customers’ factories. Then, the company permanently stations members of its staff at clients’ sites to help customers improve operating efficiency and increase the quality of the output.

A number of companies have found ways to address the need for ease of interoperability among products in a system. Apple ensures that its iPhoto, iDVD, iTunes, and iMovie are simple to use individually and in combination. The company succeeds at this difficult task by teaching all product developers, both inside and outside the company, to follow strict protocols in writing software for its products. In response to competition from giant discount chains, which sell system components at rock-bottom prices, some specialty consumer electronic retailers offer broader based “solutions” such as home theatre systems and personal computer networks. These retailers offer advice, provide delivery, set up the system, and if needed provide ongoing counsel.

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Nature abhors a vacuum – and an unmet need is a vacuum. The surest way to keep current customers from drifting away, and draw in new ones, is to find these unmet needs and fulfill them sooner than, and better than, competitors do.

In most cases, the segment needs we cite in this article are those that many people in the organization might readily identify. These are needs visible to salesmen, marketers, logistics people, customer service representatives and others. These people need only an approach and some encouragement.

This article proposes a systematic approach to finding unmet needs, based on an assessment of the customer as a human being with physical, emotional, and intellectual desires. The encouragement comes from a management team willing to invest the brainstorming time for their people to identify currently unmet needs. Then, segmentation and the resulting innovation can become the work of many people in the organization.

(Note: This Perspective was written in the context of the economy over the last 25 years. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)