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The Promise of “Self-segmentation”

Rather than putting consumers in arbitrary “buckets” for targeting, marketers should join them online in communities of passion and interest.

(originally published by Booz & Company)

Before making large investments in advertising and other marketing, companies seek to identify and segment potential customers. Such knowledge is vital in evaluating market opportunities and differentiating messages, product offerings, media strategies, and even pricing. Today, a community-based approach to segmentation — which is both less expensive and more effective than the traditional methodologies based on customer relationship management (CRM) systems — is becoming possible as consumers flock to the Web.

Ever since the rise of the mainframe, companies have relied on CRM systems for segmentation. These systems slice and dice market and customer data, placing customers and prospects into different “buckets” based on demographic, behavioral, attitudinal, and other insights. Such segmentation enables companies to tailor product development and marketing.

CRM has had many stellar successes. Credit card leader Capital One, for example, can immediately access the profile of a customer who calls, cross-reference it with information derived from other customers, and then route the call to a company representative, complete with guidance on how to meet requests or stem defection. With such successes, it’s no wonder that current CRM spending totals US$14 billion annually, with projected growth to $22 billion by 2012, according to AMR Research.

But CRM-based segmentation comes at a cost. Data has to be collected, behavior analyzed, and segments identified before offerings can be created and messages communicated. Implementation can be complex, involving building multiple bridges to islands of information. Ongoing data collection, plus the resources required for sophisticated analysis, can put CRM out of the reach of small and midsized companies.

As a result, the CRM report card is mixed. An AMR survey of 190 IT executives in 2007 found that 29 percent of CRM projects fail. Forrester Research reported that fewer than half of 94 businesses surveyed were fully satisfied with their CRM implementations. And gauging the return on investment from CRM is so difficult that only an estimated 20 to 30 percent of firms that use the technology have even tried.

A better alternative is now available: The rise in social networks and online communities, combined with the new era of the Web-empowered consumer, makes it possible for companies to reap the benefits of segmentation without many of its costs or complications.

Online, consumers are increasingly segmenting themselves into communities, based on common characteristics, passions, interests, or needs. Such “self-segmentation” is likely to be much more accurate and reflective of consumers’ attributes than CRM data, since no one knows consumers — with their Rubik’s Cube complexity of demographic, psychological, and other variables — better than they know themselves. Rather than confronting the difficulty of placing consumers into such ill-defined buckets as “traditionalists” or “achievers,” companies can bind themselves to consumer communities of interest — or “tribes,” as marketing guru Seth Godin calls them. Unlike arbitrary CRM buckets, such self-selected communities not only reflect consumers’ true interests but, more important, also involve their connection to others with the same passions. This opens the door to fostering brand ambassadors, enabling customer collaboration, and facilitating word-of-mouth cross-fertilization.

How to Leverage Self-segmentation
Consumers have long interlinked themselves within communities, groups, clubs, leagues, and associations. Such communities represent a valuable launchpad for word-of-mouth efforts, since trust and credibility are among the ties that bind. But until the Internet reached a global tipping point, it was impossible to cost-effectively identify, reach, or scale such communities. Now even a simple search can identify groups united by interest in topics as obscure as competitive pumpkin tossing.

That identification presents numerous opportunities. First, relevant communities represent self-selected groups who share one or more interests, substantially reducing the costs, time, and toil required to identify — and segment — qualified prospects out of large markets. Additionally, participation in passion- or interest-based communities provides a better guide to potential purchasing behavior than such attributes as place of residence or political leanings.

Communities provide other advantages over the traditional buckets. Interactions within communities represent an ideal listening post, enabling marketers to glean direct insights without the filter of market research. Next, companies can participate in brand and other conversations rather than competing with the estimated 3,000 to 5,000 messages that carpet-bomb consumers daily. As long as community rules are observed, companies can interact without “do-not-call” or “opt-out” constraints.

Finally, engaged participants can provide product development guidance and identify shortcomings in service or other areas to help a company improve its brand. Dell’s community of customers, for example, not only makes product suggestions and signals developing problems, but also helps fellow customers get more from their PCs.

Thus, self-segmentation provides a foundation for leveraging customer experience and input, as identified in C.K. Prahalad and Venkat Ramaswamy’s work on value co-creation. Google is one of the best examples of the power of self-segmentation. The ubiquitous search firm doesn’t identify consumer segments and target ads to them in the classic way. Rather, it displays ads based on the content chosen by the consumer.

Three Approaches to Self-Segmentation
Companies can utilize three approaches to leverage self-segmented communities — engaging with social networks, tracking online communication behavior, and mass customization.

Social networks: Social networking is having the same revolutionary impact on companies and customer relationships that CRM had on mass marketing. But whereas CRM involved a top-down approach — mapping markets, targeting groups, and positioning messages — involvement with social networks requires a bottom-up, collaborative approach based on a company’s brands, mission, or social goals.

Global social networks such as Facebook and MySpace, visited by 67 percent of the world’s online population, according to Nielsen Online, represent the biggest opportunity to link with self-selected segments. Groups within these networks, which usually incorporate blogs, live chats, message boards, videos, and sometimes rating and ranking systems, allow members to congregate around issues of mutual interest. And the new kid on the global social networking block, Twitter, represents a fast-emerging opportunity to learn from — and communicate with — those interested in companies, brands, or social/business issues.

Another type of self-segmentation is localized business, professional, or other networks like Biznik (“where collaboration beats competition”), Ecademy, and Ryze. These can connect supply chain partners, customers, associates, and others that share an interest or stake in a brand.

Finally, there are corporate, or branded, communities. Worried about the free-for-all nature of some social networks, companies have established “branded communities.” (See “The Promise of Private-label Media”, by Matthew Egol, Leslie H. Moeller, and Christopher Vollmer, s+b, Summer 2009.) The best of these branded communities combine customer input, product and how-to information, promotional premiums, and even social events to facilitate customer and brand relationships; the worst of them tightly control discussions and offer little interactivity. Companies using branded communities to establish bonds with prospects and customers while maintaining some brand control include Walmart, BMW, Procter & Gamble, and Sears. Software offerings like Ning enable even small companies to establish their own branded communities. However, care must be taken to ensure that these communities are used as a listening channel rather than as merely another marketing channel. Consumers are not going to listen to a company’s pitches unless they are first convinced that the company is listening to their concerns.

Communication behavior: Major retailers and larger companies may attempt to understand segments, and even individuals, through website personalization and collaborative filtering. These capabilities allow Netflix, Apple’s Genius, Amazon, and others to match information and offerings based on a person’s interests, clickstreams, or previous visits and purchases.

However, such personalization and collaborative filtering are expensive and complex, and have their weaknesses and detractors. A simpler option is to have a variety of optional content — newsletters, RSS feeds, white papers, blogs, and so forth — that visitors can access. These visitors can then be segmented according to their informational interests.

Mass customization: Mass customization takes a base offering and enables customers to tailor it to their requirements. This has been used for products from jeans, sneakers, and skins for electronic devices to computers, cars, and houses. For example, Coca-Cola recently unveiled Freestyle, a fountain dispenser that can deliver more than 120 drinks customized to a customer’s taste. Companies can then easily segment customers based on their choices.

Although self-segmentation is still an emerging arena, it dovetails with today’s marketing imperatives. These imperatives, symbolized by the prosumer, crowdsourcing, and customer co-creation movements, are based on the realization that companies and customers must be interdependent participants in the interactive development of products and services. Not only does self-segmentation avoid the expense and difficulties associated with marketing research and CRM, but it also provides a launchpad for a stronger relationship and increased engagement with customers. In an era when even companies like Procter & Gamble involve customers in brand development, a top-down strategy that sees customers as entities to be managed rather than as partners and collaborators will ultimately lose ground.

Using self-segmentation information for marketing does present challenges. It must be accompanied by organizational changes. These include allowing or expanding customer input into such insular areas as product design, services, policies, and procedures, and may require that departments other than marketing and customer service open their doors to customers. Marketing must de-emphasize product promotion and think bigger than the company’s brand, tuning into conversations and issues that customers and prospects face. Monitoring and responding to conversations among multiple communities is labor-intensive, and the signal-to-noise ratio can be low. There are risks as well. The same community that offers an opportunity for a stronger relationship can also generate a backlash that hurts the brand and affects sales.

Segmentation is vital as mass marketing slips into irrelevancy, with information overload causing consumers to block out many corporate communications, no matter how precisely targeted. But CRM-based market segmentation can be expensive, complex, one-dimensional, and static. It fails to accommodate the multidimensional nature of consumers amid today’s fast-moving technological, economic, competitive, and social environments. It leads to top-down initiatives that view potential customers as targets to be blitzed with campaigns, ambushed with messages, and subjected to guerrilla marketing.

In this new era of branding, companies must focus on ethnic, cultural, religious, sports, or other segments, not markets. This pivot could be achieved through CRM systems, but self-segmented communities of interest provide a more effective alternative. Such communities can provide fast, low-cost market research, generate ideas and feedback about new offerings, help improve corporate and customer-to-customer service, strengthen relationships, provide an early warning system about problems, and promote favorable word-of-mouth. It all starts with finding communities united by a passion or an interest, and talking with them, not at them.

Author profile:

  • Nick Wreden is an international brand consultant who is working on his next branding book, tentatively entitled, Leader of the Pack: How to Use Ethnic, Cultural, and Religious Segmentation to Engage Customers and Communities.
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