The Fallacy of Attribute Based Customer Segmentation


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I operate in and around the constant drone of attribute based customer segmentation. There is a prevailing thought that organizing your product or service design, as well as marketing, around demographics or behaviors is the best way to develop and maintain highly loyal and valuable customers. In many places, behaviors are not even analyzed, so we’re left with simple segmentation based on products used, geographic region, industry, or annual revenue. If you believe that this is working out for you, here are some statistics that might make you feel a bit uncomfortable.

I’ve been doing a lot of reading lately, and one of the handful of people I’ve gained a great deal of insight from is Clayton Christensen. In his book, The Innovator’s Solution, he begins by talking about the growth imperative. He highlights a The Corporate Strategy Board, who published a study called Stall Points in 1998 that looked at companies which occupied a position on Fortune’s list of the top 50 companies at some point from 1955 to 1995 (40 years). It found that only 5% of the 172 companies studied were able to “sustain a real, inflation-adjusted growth rate of more than 6 percent across the entire tenure of this group.” The rest of the group ultimately reached a point where their growth stalled to rates less than or equal to the GNP growth rate.

What is scary is that of all these companies whose growth had stalled, only 4 percent were able to successfully reignite their growth even to a rate of 1 percent above GNP growth. Once growth had stalled, in other words, it proved nearly impossible to restart it. – (p. 5)

Without going into great depth on this topic (it’s an interesting topic, though), I’m going to operate under the premise that we all agree that this is not what 95% of the companies out there are trying to achieve. So, what are they doing wrong? The short answer is they don’t know how to innovate, and they don’t know which disruptions in the market should be defended against and which ones they should ignore. And all of this comes back to one of the bad inputs (there are more) into the process…attribute based customer segmentation.

Why do we use attribute based customer segmentation?

Our CRM systems have touted the ability to collect attribute based information, giving us a 360° view of the customer, for the past 15 years. Our accounting systems, especially if integrated, also give us clear visibility into the buying behaviors of our customers. But is this 360° view really what we were looking for? A bucket which is convenient to the company does not necessarily equate to an actual need of a customer. This approach leads to a one-size-fits-all product strategy which doesn’t incorporate the fact that people hire products to do jobs for them. These jobs, or circumstances, are completely ignored by most modern day product & service development teams and by modern day marketers. The attribute approach really only conforms to the needs of internal company managers who, even if they get it, have to deal with the following realities.

Fear of Focus

Why don’t companies create products and marketing messages that target the jobs people are trying to do better? The answer is pretty simple, they fear that talking about what a product should be hired to do highlights what it shouldn’t be hired to do. Unfortunately, the negative focus is the one that comes to the surface more often than not. Of course, the problem with not following the jobs-to-be-done approach means you will follow a path to markets you cannot penetrate and miss opportunities in new markets where you will have a much greater chance at success.

Executive Demands for Quantification

Executives all too often look for, or hire, market research that helps them define the size of the opportunity. This is done at the expense of understanding how customers and markets really work. If you talk to people about this, they get it, but the resource allocation process they operate in still requires them to define a market in terms of the data which is currently available. As I mentioned above, this is the data we’ve collected in the 360° view. In order to re-work this to a jobs-based view of the market, a completely different research and data collection framework is required with a completely different method of measurement. I’m sure this already sounds like hard work to you, so why would anyone else what to do it?

The Structure of Current Channels

Another problem faced by innovators using a jobs-to-be-done segmentation approach are the channels of distribution required to get them to market. Channels are often segmented by the very attributes we use in CRM (e.g. product categories). This makes it difficult for channel partners to accept an innovative product focused on jobs, when what they are allocating space to is product brands and categories – the space is already taken. The other thing to consider is that anything other than a sustaining innovation may make it impossible for them to profit from it. Think of traditional CRM VARs who could never work in a model where there is very little integration capability or customization capability. Low end disruptors are going after non-consumers who’ve only entered the market because the price was right, and are willing to accept fewer features. These products succeed, and will rise in the market over time as they add features, because they are implemented over disruptive channels, like the web.

Advertising Economics

Marketing is just simpler and cheaper if you organize it by traditional segments like demographics. Doing this makes a product more likely to do several jobs poorly as opposed to one job perfectly. Why is this done? The easy answer is that communicating the job, or circumstance, within the brand leads some executives to worry that this could harm their core brand. The solution to this is to use what Christensen calls a purpose brand which ensures consumers hire the product to help the correct job get done better. Think of Kodak Funsaver or Courtyard by Marriott as examples of purpose brands that actually strengthen the core brand. These are brands oriented around jobs and circumstances, and not traditional CRM attributes.

What Does Getting it Mean?

When it comes to customer segmentation, the successful companies, the ones that are able to sustain growth over a long period of time, orient their sustaining and disruptive product & service innovations around the jobs customers hire products and services help get done better. While this may not be convenient to most executives and managers out there, it’s clear that this is the best way to grow your business over time.

If you’re wondering why your margins are eroding, it’s probably time to begin looking at your customers from a circumstance-based view point. Which jobs do they consider important in their daily lives, and what outcomes do they seek to get those jobs done better. And most importantly, which of these are under-served in the market? This thinking can lead you to a better understanding of not only your existing market and threats from competitors, but it will also introduce you to opportunities that no one else sees, which can lead to new markets of opportunity for your business.

Is your company in the 5%, or the 95%?

Republished with author's permission from original post.


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