One of the biggest mistakes you can make as small business owners is try to serve all customers who walk in to your business equally. We showed in an earlier post that not all customers are created equal. It is your responsibility to find the customers that are “right” for your business. Many business owners, however, struggle to find these “right” customers. They either go about finding them in an ad-hoc fashion or not worry about it at all. This could be a mistake.
We showed a 2-step process to find the right customers in the earlier post. It involves first understanding what value your business has to offer and then identifying the customers that appreciate them and are willing to pay reasonable money for it. In the marketing literature, this is known as finding the customer segments that match your business. Broadly speaking, there are three ways to segment your customers.
- Based on Demographic – In this approach you look at customer characteristics such as age, income, marital status, etc. Much of this information is available through commercial database vendors who sell this information to businesses at a high price.
- Based on Location – This approach divides the customers based on geographic area around your business.
- Based on Need – This approach looks at customer needs and aggregates customers with similar needs in various segments. For example, for pizza restaurant business the customer needs could be delivery convenience, price, variety and so on.
As you can see there are multiple ways to look at your customer base and devise a strategy to serve the customer segment that matches your business. In our experience, large companies spend considerable amount of time and effort in identifying customer segments based on all three approaches described above. However, small business owners do not have the resources to spend on customer segmentation like large companies.
Our recommendation to small business owners is not to mimic this approach, but rather segment the customers based on need. This is due to several reasons. First, small businesses do not have sufficient customer data to segment customers based on demographic. Second, the number of potential customers for small businesses is not as large as big companies. This limits the effectiveness of the segmentation approach based on demographic and location. The third, and most important, reason to not do segmentation based on the first two approaches is that it doesn’t tell you what actions you need to take once you have identified the segments. Customer segmentation serves no purpose if you cannot take appropriate actions to target those segments.
This is the reason we like the segmentation approach based on customer needs. Once you know what your customers are looking for you can formulate strategy to meet those needs. We will show how you can do that in the next post.
Do you agree with our recommendation? What are the pros and cons of this approach?
I do agree that focusing on need for the small business owner is very important. However I do think that the small business can focus on selling to their demographics and based on location in small doses (unless the business can afford otherwise). For example for small business owner can plan to attend a trade show that caters to their customer demographic. A small business owner could also plan to market on location with the assistance of a live radio broadcast either from their own location or at another location where there customers will be.
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Ashley – Agreed with you. You should try to understand the segments based on location and demographic. However, segmentation based on customer needs has so many benefits that it has to be where small business owners should be spending lot of their time and effort.
This seems logical enough — forget about the method of segmenting your customer and focus your energies on the segmentation that you can actually get a handle on, their needs. But why should the middle method, segmentation based on location, be difficult? There are tons of free and low-cost methods of advertising your business locally, even for small businesses (or maybe especially for small businesses, which are often more involved in their community and in a better position for this than big businesses).
Sarah – Difficult is probably a wrong word. I agree it is not difficult to market based on location, but that doesn’t help you as much as segmenting and marketing based on customer needs. One you have identified the needs and align your business to those needs the marketing comes naturally. In fact, you can get away with lower marketing spend because customers are going to like your products and will market it for you through word-of-mouth.