Customer segmentation analysis: Creating a product innovation strategy

3-minute read

As each brand of smartphone competes for more functionality, there is a new competitor entering the market with the opposite focus. These simplistic phones, like The Light Phone, strip away all of the extra functionality of a smart phone to get back to the basics – making phone calls and texting. Although, the introduction of low-tech products may seem perplexing in our high-tech world, companies are not pursuing the development of these low-tech devices on a random whim. This is a highly strategic effort to target the growing group of consumers seeking refuge from the constantly-connected world. Simplistic phones promise a more “zen” relationship with technology while maintaining high quality and sleek design. So, how did these companies discover this unmet need in the consumer electronic market? Most likely with a solid product innovation strategy that includes customer segmentation.

Customer segmentation in product innovation

Customer segmentation is already a well-known marketing strategy, but it is also becoming a powerful tool in product innovation and development. It involves categorizing customers into groups, to define the target audience and then to better understand the needs and behaviors by group. Focusing on customer need first and then matching that need to the applicable technology is becoming the preferred product development approach, and customer segmentation is an important step in discovering customer need.

A few companies have been using this customer-focused approach for a while. Apple, for example, continues to be successful because of their keen understanding of their target audience – customers in the mid- to high-income brackets who value minimal design and high quality over trendy functionality. With technology evolving at a feverish pace, more companies are now seeing the value of a customer-focused, product development approach.

Once market models have determined that a new product idea or improvement of an existing product is a viable and profitable venture, customer segmentation methods can be used to define a target audience and understand the behaviors and needs of the customers in that target audience. There are a few ways to approach the task, but some of the common steps in customer segmentation include:

Research

An important first step is conducting research to gather the data needed for segmenting customer groups through both primary and secondary research methods. For existing products or services, there may already be existing customer data that can be leveraged. For new products or services, it may be necessary to conduct customer interviews or surveys or pull existing information from a data repository.

Break into segments

Once customer data is collected, that data can be used to divide customers into groups. Customers can be sorted by demographic, geographic, psychographic, and/or behavioral variables.

Identify target market

The segmentation of the customer data will begin to reveal possible target markets.

Develop customer personas

Once a target market is defined, customer personas can be developed to better understand customer needs within the target market. Personas are representations of different types of customers and describe in detail customers lifestyles, behaviors, pain points and needs.

Confirm customer value

The customer personas can be compared to the new product, feature or service to confirm whether customer value exists. If the answer is no, the customer data can be used to further refine the product to fit customer need.

Understand non-customers

Another added benefit of customer segmentation is acquiring a better understanding the segment of the population that fall outside of the target market for a certain product or service. Developing personas and better understanding the needs and behaviors of the non-customers could generate a new product idea or an alteration of an existing product to appeal to those people.

For companies looking for an edge on the competition when entering the market with a product, feature or service, having a solid product innovation strategy is key. Customer segmentation is an essential step in that strategy. Catering to customer needs will lead to positive ROI and the ability for continued product innovation. The new product development mantra – before investing in new technology, guarantee customer value.