Chris Randall and Jon Weber, Managing Directors, L.E.K. Consulting
"Who are your customers?" and "How can you make them spend disproportionately with you?" are the two most fundamental strategic questions for brands and retailers. Often companies define their core customers based on demographics, creating a profile that may read something like, 35-50 year-old white males living in suburban markets with deep pockets; but this information is woefully incomplete. Probing beneath the surface of shallow customer profiles reveals critical information that can unlock hidden opportunities and provide the intelligence required to focus strategies on areas with the highest growth potential.
As consumers ourselves, we are aware that basic demographic information does not necessarily reflect our personalities or pinpoint why we make the purchases we do. Consider two suburban moms who are shopping for sporting goods in the same town. The first woman is less interested in the latest and greatest gear, because her child is playing a number of sports for the fun of the game. Meanwhile, the child of the second mother is highly brand- and performance-conscious as he or she has dedicated him or herself to only one sport and is focused on making the all-star team.
Although the two women share the same age demographic, zip code, household structure, ethnicity, and income, their needs and purchase behaviors will vary widely. If a retailer or brand relies on the same value proposition to attract both, it will certainly fail in reaching at least one – if not both.
It is because of this dynamic that organizations must identify the unique customer segments in its markets, the relative value of these segments, and the keys to unlocking their demand based on their distinct profiles (e.g., their attitudes, lifestyles, and behaviors). This high resolution picture of your customers can then enable you to prioritize your company’s strategic agenda.
Market Seismology – L.E.K.’s Growth Opportunity Segmentation Model
Just as scientists monitor the Earth’s interior for early signs of earthquakes, true customer segmentation requires sophisticated analysis to look beneath the market’s surface, identify distinct consumer segments, and track changes in each consumer group. To do this, L.E.K. recommends a four-step approach:
1. Discover and Define Key Customer Profiles
In-depth consumer research is critical to quantitatively define consumer groups based on multi-dimensional factors including their attitudes, lifestyles, and behaviors as they relate to the category. Most importantly, the output must size each segment and provide clear insights into their wants and needs to understand their purchase triggers.
2. Map Brand Positioning to Market Segments
Following definition, the company must objectively analyze each consumer group’s likely affinity for their business, critically assessing where they are strong and where they fall flat. This should result in a clear view of where the brand or retailer’s business model is the best fit.
3. Prioritize Market Opportunities
With learnings from steps 1 and 2, the business can now understand the relative value potential from each consumer segment. Using that information, strategies for each prioritized consumer group can be connected to the triggers most likely to unlock spend (e.g., product assortment, marketing and brand alignment, channel, and pricing strategy).
4. Track Behaviors and Course Correct
Once the strategy is in place, it is critical to track and monitor success. On-going consumer surveys are key to tracking improvements in vital areas important to each consumer group. Conducting this systematic tracking ensures the focus remains on the most important strategies and can also help identify new ones.
Organizationally, a common and deep understanding of the consumer across all functional areas enables the business to make the right strategic choices and work together to drive growth. Success begins with 20/20 clarity across functions on who the consumer is, and a robust consumer segmentation ensures all functions are not flying blind when setting their strategies.