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Imagine using a piece of technology from 1964 and expecting it to be relevant. Is anyone still using an IBM System/360? No? Then why are you still using customer segmentation that's as passe as old hardware?

In 1964, in the Harvard Business Review, Daniel Yankelovich introduced the concept of "non-demographic" segmentation. Before that, the common classification of consumers was by rough cuts of attributes like age, home ownership, income levels, and others that could generally be found in census-type information.

By moving past demographics, Yankelovich's goal was to look at things that mattered more—customer usage and adoption patterns. This meant that marketers could craft better messages and develop improved channels to reach them.

While this revolution helped us to understand customer requirements and interests, it has its own limits.

Traditional segmentation does broad well

Because marketers haven't been able to do an infinite cut of segments, we end up with segmentation based on attributes like these:

  • Usage. Users who select and use devices for information gathering vs. entertainment.

  • Interests. Women 20-40 interested in recording family events and creating movies to share online.

  • Priorities. Which nonprofit (social justice nonprofit vs. clean water nonprofit) receives the greatest amount of funds.

  • Purchase drivers. Ease of purchase (read: online shopping, simple return policy, purchase guarantee) may trump many other product attributes (price, quality, brand) for time-starved consumers.

After doing good research and finding some natural "clumps" of interests, usages, priorities, or purchase drivers, we typically end up with 3-5 segments for any particular product, service, or solution area. If we had the money and the time, we might even be able to do some "psychographic" detail and in-home research that would allow us to get a clear "snapshot" of what that typical user's life is like.

But, in the end, most technology firms catering to consumers have four or so groups that look like this:

  • Technology enthusiasts. Typically male, 30-45.

  • Families with children. Price-sensitive, focused on protection and safety.

  • Older with money. They may tend to be price insensitive but need guidance on what to purchase and how to use/service it.

  • Teens and entertainment addicts. Low threshold for boredom, on the go, want the latest.

These are gross exaggerations, but I've done that to make a point.

With 3-5 segments, we can never really get a clear picture of each individual beyond a certain level of abstraction. To some degree it's because we don't want to see the individual—that complicates our decision process for product offers. Instead, we need to focus. We cover 60% to 80% of the market, and we figure that gives us targets to go after that are broad and deep enough.

Web 2.0 blows out the Yankelovich Model

What's wrong with those four segments we used to use?

  1. Geography doesn't matter anymore. Your best customers might be in France or Singapore—not Dubuque. If people are educated, speak English (or whichever languages you've localized your site in. You have localized your site, haven't you?) and have an Internet connection and a credit card—they're your customers whether they're in Beijing or Baltimore.

  2. Fewer barriers to purchasing. OK, what about income? In the U.S., we're using more credit than any nation in the world. New financial products are opening up spending around the world. People are finding inventive ways to bridge any gaps in income that prevent them from purchasing your product. Since your bank helps you finance customers or provide them with an affinity credit card, barriers to purchase are significantly lower for your customers. The Wall Street Journal recently reported that major credit card companies are actively going after the teenage set.

  3. Age has become very much a state of mind. As Boomers retire, they're not moving to Happy Acres mobile home park and sitting on the back deck just watching the ducks swim by. They're active, inquisitive, and they're still shopping. Customers are getting younger, too. Your next great group of customers could be teens or tweens. Need we add that offending younger customers is both rude and foolish?

  4. Gender still matters, but in different ways. Men and women are shopping with fewer restrictions. It's still likely that women have a say in what their husbands or boyfriends are wearing—but perhaps less than in the past. Now the involvement may be as influencer rather than as primary purchaser. And it works the other way, too.

And, it all sounds alike

Then, there's another thing. I've worked with a lot, and I do mean a lot, of high-tech firms and what I see is that most segmentation, while extremely focused, ends up with some big bubbles. The interests are refined enough to get to a "wants entertainment and ease of purchase" type of person, but not refined enough to say "goes nuts with both heavy metal and female country rock singers and does most of her purchase online."

This means that the messages and the content produced to raise awareness, provide consideration tools, or create preference end up sounding very similar: a little bland, and for sure a bit too predictable. All the boxes at the supermarket say "healthy," and websites talk about "improved performance" instead of talking in terms of precision.

The more we hit the big targets, the more we focus on the mainstream. But everyone's taste departs from the mainstream somewhere, and the more consumers find new options, new alternatives, the more they find things they like. Our choices are expanded, and by having more choices when we make a selection we have the ability to connect to that choice deeply. What is considered "fringe" to one is of extreme value to others.

Getting outside normal marketing vehicles and language means the communication can be better. It is the effect of the market force Chris Anderson described so well in his book on the "Long Tail" notion. The idea is that there are as many markets as there are people.

For a minute, let's believe that's true.

But we're not all alike

Let's suppose that our broader world is changing so that users can be a market of one: not a part of some bigger bubble of use or interest, but a singular person unique and appealing to market to in and of himself. Rather than knowing he is interested in photography, you might also know that he cares about many things at once, for example:

  • Cleaning products that are non-chemical
  • Furless dogs to avoid allergic reactions
  • Fonts that are sans-serif
  • High-quality paper and ink
  • Fountain pens that don't dry out while you're waiting for inspiration
  • Shoes in patent, peep toe styles
  • Email access 24/7 from anywhere

Do you see where I'm going? This list may seem unrelated to a marketer of any one product, but what is incredibly important and relevant is this is how people really are. It's vitally important to marketing effectiveness.

From mass segmentation to personal identification

Because people are markets of one, and to the marketer an aggregate of their interests, a radical shift is needed in what we do to create viable business and market strategies. In some ways, this suggests that firms like Amazon with their related Web services strategies become more valuable than those offering a branded single product, because Amazon can know many of my interests across product lines.

Right now, many of us reveal a lot online. But no one vendor knows it. For example: when I "Digg" an article, I tell you my ideas of interest; on eBay, I discuss things I'm keen on; on Amazon I share with you my product purchases; while on wikis I share my expertise; and on MySpace I share my social relationships and on Linked In my professional ones.

What would you know about me if you could benefit from that combined set of knowledge? What would you know after I gave you permission to know those parts of my total world, not just the one that relates to your product? If you could be interested enough, you'd likely be able to serve me content that innately has more value because it is targeted and more personalized.

Think about the amount of insights that could form to move us from just 4-5 segments to millions of segments of one.

This is the digital splintering from mass segmentation to personal identification.

What are we to do?

In as much as consumers' interests, desires, past purchasing patterns, and even unstated passions are identified, they then can as a unique user drive their own segmentation. The question is whether consumers themselves, or any company, sets the rules of engagement.

Giving a user control to tell you what matters to them will be the key in the future.

Over the next 10 years, this will be the key source of marketing power—getting to the point where we can derive ways and means to let the customer tells us who they are, what matters to them, what features they want, what things they need solved, and how we can best be of service.

We won't be doing surveys to do broad-brush segmentation. Instead, our marketing job will be to create a dialogue. Thus, you will engage in a dialogue each time a user visits your site and you as a professional may find out some interesting information that will help you engage him—and, ultimately, sell to him. The ultimate goal is to have consumers to share what their interests are so we can provide them with a context that allows more meaningful information, search, products, and communities to form.

I often end articles like this one with a list of three or five or eight things you can do to create more value for your company with the ideas I've presented. In this case, I leave you with one.

Think about this. Think about what your company is going to do to serve the digital splinter of one and how you will change your interactions with customers so the conversation gets richer and more engaged. Oh, wait, that's two things to think about!

Continue reading "Segmentation in a Web 2.0 World—and Beyond" ... Read the full article

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Nilofer Merchant is the CEO of Rubicon Consulting (, a strategy and marketing consultancy based in Silicon Valley that solves complex business challenges for high-tech companies.