Customer segmentation is a powerful tool that serves many purposes in innovation strategy. The main objective is to identify customers that can benefit from new products or services. In so doing, segmentation can help to uncover customer requirements, to devise breakthrough products, measure market potential, target marketing and branding messages, and much more.
However, most companies struggle in segmenting customers when it comes to new-product development. They apply traditional methods to fit products or customers into existing groups that by definition don’t apply. Two questions usually come up: How do you segment customers for products that don’t exist? Or conversely, how do you segment products for customers who have not yet bought the product? We look at two approaches.
TRADITIONAL CUSTOMER DRIVEN SEGMENTATION
Often companies use a blend of traditional classification schemes to segment customers, including demographics, psychographics, purchase behavior, and needs-based data. Because these schemes are helpful for sales, marketing, and accounting purposes, when it comes to new-product development companies simply adopt the same customer segmentation schemes out of convenience.
For instance, companies might segment their B2B markets by vertical industry, the size of the company, number of purchases, etc. Similarly, they might segment B2C customers by age, gender, profit bands, etc. The underlying logic is that these classification schemes will identify segments that react uniformly to new products or services. Unfortunately, that logic doesn’t hold.
When applied to new-product development, traditional segmentation leads managers to non-existing segments. These groupings are not homogeneous. They don’t share any similarity about how participants value new products or services. They are meaningless. Consequently, traditional segmentation schemes can be misleading when applied to new-product development, as they lend zero predictability of market success of the new product or service.
OUTCOME BASED SEGMENTATION
The second approach we look at is outcome-based segmentation. The method is based on Anthony Ulwick’s seminal work on Outcome-Driven Innovation. Briefly, the logic is that customers buy products and services to achieve the desired outcome. For instance, a customer who buys a saw is really interested in the ability to make a cut and not the saw. In this case, making a cut is the desired outcome and the saw is a means to an end. In fact, if customers could make cuts without a saw, they would never consider buying a saw in the first place.
Outcome-based segmentation enables managers to segment customers for what truly interests them, i.e. the outcomes they are looking to achieve when purchasing a specific product or service. For instance, customers who buy a circular saw may evaluate outcomes for different reasons. Some may be looking for speed because they need to get through a job fast. Others may be looking to make the perfect cut because they are perfectionist in their work. Outcome-based segmentation enables companies to define segments at this level and refine products accordingly.
Outcome-based segmentation is particularly useful for segmenting customers for non-existing products or services. Desired outcomes that are under-served in the market represent opportunities for improvement. Large-enough segments of under-served outcomes may represent attractive opportunities for breakthrough products.
Outcome based segmentation makes it possible to segment customers for under-served desired outcomes. As a result, outcome-based segmentation enables managers to address several development and marketing challenges. Some of these include the following applications:
The Applications of Outcome Based Segmentation
Leading innovators recognize the challenge of segmenting customers for non-existing products and take a radically different approach than traditional customer segmentation.
With outcome-based segmentation in place, executive management can take confidence that new product development is not an isolated affair but can be steeped in market knowledge about the attractiveness of the new product to customers.
With this information, managers can identify unique opportunities in the marketplace, make effective pricing decisions, determine the best way to enter an existing market, and discover segments of high potential growth.
To learn more about innovation strategy and execution, view our publication: “Innovation Strategy: Getting a Winning Product to Market First.”
Anthony W. Ulwick “What Customers Want: Using Outcome-Drive Innovation to Create Breakthrough Products and Services,” McGraw-Hill, 2005, New York, NY