Slice and dice your audience: Customer segmentation

In most markets, different types of customers want different things, and they take different paths as they make up their minds about a purchase decision. Successful companies acknowledge these differences and inflect their messages to different customer groups, or segments, accordingly. Leading players manage an entire portfolio of brands, sometimes even in a single category, to reflect the diversity of needs and develop attractive propositions for different customer segments. The Volkswagen automotive group, for example, comprises close to a dozen brands, offering everything from versatile subcompact cars, such as the VW Up!, to luxury sedans, such as the Bentley Mulsanne. Other brands in the Volkswagen portfolio include Audi, Skoda, Seat, Lamborghini, Bugatti, Porsche, MAN, and Scania.

But even a single brand today cannot afford to be a monolith. In fact, the most successful brands actively seek differentiation within their lineup of ranges and product brands. Take BMW. The company has enjoyed four decades of success with its sporty M range, introduced the rugged X range in 1999, and most recently launched BMW i to bring the company's definition of driving pleasure into the electric age. But it doesn't stop there. One more level down, the product and model lineup has seen unprecedented differentiation in recent years to cater to the needs of a growing and ever more diverse audience. Previously, there were three model ranges, referred to at BMW as series: 3, 5, and 7. Now the numbers 1, 2, 4, and 6 have been claimed by BMW as well, each series with its value proposition and communication tailored to the respective target audience. The brand's overall range is impressive, from the sporty i8 hybrid to the 2 Series active tourer, a front-wheel drive family van. And we haven't even begun to talk about body styles.

So, successful companies differentiate their brand portfolios – both on the corporate and the product level – to serve different customer segments. In a similar spirit, every brand manager should make conscious choices about which customers to go after and which ones to stay away from. Then again, few companies like to leave substantial profit pools untapped. If an attractive customer segment is too far away from your main brand in terms of needs, it might be worth pursuing it with a second brand. This is a strategy that many players in the mobile telecoms industry have chosen, both in highly saturated markets, such as the Netherlands, and in emerging markets with very different customer types, such as some Middle Eastern countries. See the insert below for an example.

Segmentation is not only a rewarding exercise in its own right, it also serves as a lever to increase the effectiveness of the other success factors discussed in this chapter. While they are all valuable in themselves, each and every one of them is more powerful if applied on a segment level, rather than to the market as a whole. Insights generated for a specific segment will typically be more concrete and take you closer to the actions you can take to improve the performance of your brand. We recommend including a segmentation module in all your brand surveys, both for exploratory purposes and to track brand performance or advertising effectiveness over time. Such modules are typically operationalized as a set of questions covering demographics (e.g., age), sociographics (e.g., income), and psychographics (e.g., values and attitudes). The answers to these questions can be used to derive and monitor clusters of customers with similar needs.

Put your brand to the test: Purchase funnel performance

Some sales agents are great at attracting attention, while others are more effective when it comes to closing a deal. Brands are no different. To find out what your brand is like, you need to compare its performance with competitors throughout the brand purchase funnel: What percentage of your target group is aware of the fact that your brand exists? How many of them would consider buying one of your products? And once they have bought from you, how likely are they to do it again, or to recommend your brand to their friends? What are the brand's strengths and weaknesses in the purchase funnel? Maybe your brand is considered by a lot of people, but many of those who consider it end up choosing another brand. That other brand may generate less consideration, but succeed at converting a higher percentage of those who consider it into actually buying one of its products. This kind of research will give you a good sense of how your brand performs relative to its competitors, and where there are bottlenecks that call for your action. Zooming in on the biggest gaps will make sure you spend your time and money where they will have the biggest impact on brand success. Purchase funnel analysis also is crucial homework to find out what customers are getting from your competitors that they are not getting from you.

Different frameworks are available to measure a brand's performance to model a customer's decision process. While the classic brand purchase funnel (Exhibit 3.1) is linear, assuming that consumers move from one stage to the next consecutively, the decision journey framework (Exhibit 3.2) acknowledges that customers may go back and forth between stages and touch points, or add new brands at later stages. The funnel is well established and widely applied across markets and categories. It is well suited both to quick diagnostics and long-term tracking of brand performance over time. In contrast, decision journey analysis allows companies to capture a more dynamic decision-making process, as well as to examine specific high-impact touch points in greater detail than others. McKinsey pioneered a range of proven solutions in either area, from BrandMatics (classic funnel) to CDJ (customer decision journey²) and BrandMatics 2.0, a recent module that incorporates dynamic elements – such as impulse decisions – into the classic funnel.³ We encourage you to take your time to determine which framework best reflects the decision-making process in your industry, and which tool best caters to your needs as a brand or marketing manager.

As you look at the output of any one of these methods, go beyond absolute values (such as “21 percent of all customers buy my brand”) and look at the conversion rate from one stage to the next (e.g., “half of those who consider my brand end up buying it”). This will even out differences in size or current market share and get you closer to the kinds of insights that are relevant for your brand management decisions. For example, luxury brands will always have lower purchase rates than mass market brands, simply because the size of the target market is much smaller. However, even a luxury brand will rightly be keen to compare its conversion rate from consideration to purchase with its direct competitors.

Find out what customers want: Attribute relevance

You may think you know what your customers want. Do you really? Then why are so many of them are still buying from your competitors? Get ready to be surprised by what customer insights can tell you about why people behave the way they do. Done right, brand research will reveal the root causes behind customer decisions, causes that even they themselves are sometimes not aware of. Imagine for a minute you are the CMO for a major insurance company. Pretty much everybody knows your brand. In fact, your brand might well be the first one that comes to mind when you ask people to name an insurance company in many of the markets in which you compete. Assume that your main competitor, although slightly less well known, is more successful at converting customers from consideration to purchase in the brand purchase funnel. To take action, you need to understand what really matters to customers when they are about to choose a policy. To put it in technical terms, you need to find out which brand attributes drive the purchase decision.

A major European insurance company used BrandMatics research to determine these purchase drivers in the health insurance category and found that they differed by type of customer, validating their assumption that any improvements should be devised and implemented at the segment level. While prospective policyholders who had children were keen on family benefits, best agers who lived alone typically made their decision based on whether a given company pays for innovative or unconventional treatment methods.

Typically, only a few attributes really matter, and their relevance differs greatly depending on which stage of the funnel you look at. While dumping prices may be great to attract initial attention, building long-term loyalty requires strengths in areas such as product reliability and superior service. Even today, some companies are wasting millions by talking about attributes that don't contribute to what they are trying to achieve in the marketplace. Take the example of a major US retailer. Hoping to drive loyalty, the company ran a nationwide campaign promoting its loyalty card and the associated benefits, such as free meals at in-store restaurants. The effect was close to zero. To find out what had gone wrong, the retailer invested a fraction of the campaign's cost to determine the actual loyalty drivers in their market. It turned out that “has a loyalty card with good rewards” was at the bottom of the list. Rather, loyalty was mainly driven by two by attributes: “the store I trust the most” and “my preferred store to give myself a treat”. Based on this insight, the company devised a new campaign revolving around trust and indulgence, a step that helped them close the loyalty gap to their main competitor.

To apply this kind of analysis to your industry, it is crucial to feed the right set of attributes into your survey design. Keep in mind that the list should not only reflect the profile of your own brand, but also attributes other brands use to differentiate themselves in your competitive arena. This is to make sure you capture the dynamics of the market as a whole. However, the total number of attributes respondents can meaningfully assess is limited. Some say you should keep the list down to 20, others will let you include up to 40 items. In any case, every slot in the questionnaire is quite valuable. We recommend that you use your own experience, existing research, qualitative studies, and the elements contained in your own and your competitors' value proposition to shape your list of attributes. Make sure to include functional attributes, like “long-lasting”, as well as symbolic attributes, like “prestigious”. While certain industries, such as personal finance or detergent, are primarily driven by rational factors, others, such as apparel or personal care, are more dependent on creating symbolic value. That said, some brands also succeed by zigging when others zag, e.g., by making insurance fun (think Geico), or by taking emotion out of the equation altogether (think Muji).

Also, keep in mind that customers will deceive you – be it deliberately or unknowingly – when you ask them directly about their preferences. For example, if you ask car buyers what they value in a car, many of them will quote fuel efficiency, good safety ratings, or value for money. But when you observe how they actually arrive at their purchase decisions, it becomes apparent that design, handling, and trendiness are actually much more important. Many ascribe this distortion to our inclination to say what is considered socially desirable in surveys. To correct for this effect, you should use derived importance, rather than stated importance, in your attribute relevance research. In practice, this means submitting actual behaviour to advanced analysis to uncover the driving forces behind consumer behaviour.⁴

Take stock of your strengths and weaknesses: Attribute performance

You think you know what your brand is really good at, and you have the test results to prove it. We hate to break it to you, but your target customers might disagree. Let's return to our insurance example. After consulting with the CFO, you have decided to go after affluent best agers because of their high customer lifetime value. Since they are already familiar with your brand and consider buying one of your plans, you need to understand what makes so many of them pick your competitor over you. You have previously determined that they value coverage of innovative treatments, such as homeopathy, and that they consider your company inferior to others in this respect. But when you look at the actual insurance plans, you find that your company actually pays for a wider range of treatments than your key competitor. Objectively, you are outperforming the other company, and still you can't get people to pick your brand. What you have is a perception problem, not an actual gap in terms of benefits provided. Of course, this effect can also work in your favour. Many US motorcycle companies, for example, don't achieve the level of their Japanese peers in reliability surveys. Yet American brands are widely regarded as makers of high-quality bikes anyway.

Ultimately, what counts is how customers see your brand, even if this perception is sometimes at odds with the sober facts. However, an assessment of the objective situation is crucial to develop a robust action plan. If you try to play a card you don't actually hold, chances are that you will eventually disappoint your customers. For example, a consumer bank that ran a “worry-free service” campaign long before their staff had been properly trained to deliver on that promise paid a high price for their haste. Attracted by the campaign, customers flocked to the bank's branches. Appalled by cumbersome processes, complicated forms, and unhelpful employees, they were driven away to competitors.

In other words, if you are already good at something that matters, but people just don't know about it, you might fix the gap in perception by way of communication – by talking about it more, or in other media than before, or in ways that make a given attribute more tangible to your target audience. But if you have an actual performance gap in a relevant dimension, such as shorter battery life than your competitor, or higher maintenance cost, don't talk about it before you have fixed the underlying issue. If you deny an actual weakness, or claim a strength you don't really have, customers will stop trusting your brand. To create a quick overview of the biggest opportunities, as well as of potential pitfalls, rank the brand attributes according to their relevance and map the performance of your brand against its key competitor; see Exhibit 3.3 for an example.

Map out your options and make a plan: Positioning and messaging

The potential to generate insight is infinite, but in real life you have to pick your battles. There might be any number of opportunities to improve the performance of your brand through fact-based repositioning, but you have to go after the most promising options. If you try to tackle too many issues in parallel, you risk overtaxing your team, running out of budget midstream, and confusing customers, none of which you can afford to do. So, to prioritize your actions, we recommend that you synthesize your findings into what we refer to as the matrix of options. Use one axis to plot attribute relevance in the context of a given decision and the other for the performance of your brand on that particular attribute. See Exhibit 3.4 for a disguised example of such a matrix.

• Top right: This is what your brand is really good at and what matters to customers. Build your positioning on these attributes.
• Top left: These are things that customers really want, but that you don't give them. Try to get your brand at least to market average on these attributes.
• Bottom right: You are good at this, but people don't really care much. Only invest in these attributes if they help differentiate your brand from competitors.
• Bottom left: These attributes are neither particularly relevant, nor do you perform particularly well on them. Don't waste your time with these.

In the insurance example, the decision in question would be “purchase of a health insurance plan”, one of the highly relevant attributes would be “coverage of innovative treatments”, and the perceived performance of your brand would be “below average”.

While you contemplate your moves based on the matrix of options, keep in mind that the “strengths and weaknesses” axis reflects performance as perceived by survey respondents, not actual benefits as provided by your brand. Perception is reality. If an objective characteristic corresponds to the attribute at hand, always cross-check perceived performance with the underlying facts. This works well for rational attributes, i.e., things that can be weighed, counted, or measured, but not so well with symbolic attributes, such as image or personality. Also keep in mind that while you need to make the highly relevant attributes your top priority, some of the slightly less relevant attributes might still matter to set your brand apart from others. This is particularly applicable to categories in which the objective characteristics of all the key players are similar. Most mobile phones today, for example, achieve decent battery life and voice reception. So traits like screen size, camera resolution, or choice of apps might serve as more relevant differentiators in the battle for customer attention and loyalty.

Some companies choose to boil their positioning down to a short statement that is often referred to as the “brand promise” or “brand essence”. Examples include BMW's “sheer driving pleasure”, Nivea's “gentle skin and beauty care”, or Sixt's “rental cars at affordable prices”. This promise can be used both to align employees and as the starting point for creative agencies to translate the positioning into messages and campaigns.

Keep track of your brand: Checks and balances

It's never wrong to hope for the best, but it's even better to have the facts to prove you got it right. To check whether your insights-based positioning work is paying off, enlist the services of a research agency to update your framework of choice on a regular basis. This will tell you whether your actions are taking effect, help you quantify the return on your investment, and highlight areas that deserve further attention. Keep in mind that consumer needs will evolve over time, and that your competitors may try to reshape the market by changing or refining their propositions as well. For example, makers of consumer electronics who missed the trend towards mobile, wireless devices now find themselves out of business. Those, however, who understood that ease of use and versatility have gradually become more important to consumers than ever more features are reaping disproportionate rewards today. Frequent updates of brand attribute research can alert brand managers to such developments and enable them to take timely action.

While best practices vary with industry and market environment, we recommend updating brand performance research every 6 to 12 months to help you adjust your marketing messages. Complement these updates with more flexible tracking of social media and online buzz, potentially in real time. You may want to take advantage of a software solution, ideally hot-linked to your market research database. See Chapter 9 for details on IT tools, such as the BrandNavigator. Once every few years, you should invest in a more thorough analysis of your overall brand positioning to check whether it still reflects the needs of the marketplace.