Christian Brandstrup, Partner
The perception of who your customers are is often distorted by biased views and a lack of data. Having conducted more than 200 customer and target group analytics projects over the last decade, we’ve come across many of the common pitfalls that prevent companies across industries and geographies from gaining a true picture of their customers and in turn hamper their growth.
1. A one-eyed focus on the ‘Next-customer’
Working hard to get more customers is integral to every business executive’s work day. It’s vital to growing business. The tricky part for every marketer is to correctly define and target the next customer.
Too often we look for a new type of customer. In the hunt for growth it’s tempting to widen the scope and target new customer segments far different to core customers. But that’s a very expensive strategy – new customer types require revisions of the very fundamentals of the business model, products, value proposition and distribution channels. Not done right, it can alienate the core customer as they sense the loss of focus and experience a diluted value positioning.
We believe companies need to keep a razor-sharp focus on their core customers. And by core we mean the customers who constitute a significant part of the value, not just volume. Surprisingly enough, our experience shows that some senior executives don’t always have a clear idea about just who these core customers are. And even if they do know, they get caught up in why some potential customers don’t buy from them. What they should be concerned with is why the most valuable customers do buy – and then use this reason to cultivate even more!
2. Average customer fallacy
While it’s important to understand your core customers, that does not mean there is such a thing as an average customer. You might hear, ‘Our average customer buys for X and has a profitability of Y’, but the very idea of an average customer is a fallacy, and can lead to erroneous decision making and wrong conclusions.
Closely linked to the concept of “core customers”, a customer base usually comprises a high amount of diversity. There are low-value customers and those of very high value – and just as many in between. The problem is, that the misconception about the average customer is frequently used to guide decision making.
The ‘average customer’ illusion is also used to determine digital conversion funnels, profitability of loyalty clubs and calculate customer lifetime value. Dealing with averages when it comes to customers is a dangerous path, as the customer base and underlying metrics, such as retention rates and revenue, usually vary greatly.
3. Death by over-segmentation
At the other end of the spectrum we have over-segmentation. This occurs when segmentation exercises become too theoretical and churn out 15-20 segments with highly specific – often demographic and psychographic - profiles. Our experience is that over-segmentation leads companies to:
- Address a market or customer base that is much smaller than the one actually likely to participate in the category. This is because they have been too selective about the so-called segments
- Fragment their messaging to address a multitude of segments with different propositions at the expense of overall positioning and marketing efficiency
- End up with a theoretical piece of paper that is impossible to act upon
The problem is that all these segments are identified by statistical methods that are prone to overemphasise statistical differences. In real life, they become almost impossible to target and, because they’re usually ridiculously small, require 100% penetration just to live up to commercial objectives.
What companies should be addressing is their largest possible segment – or segments. This should be done by looking for commonalities instead of differences. Commonalities can then be used as the base for the positioning and marketing strategy. This will turn out to be a far more efficient, actionable and valuable approach to customer segmentation and targeting.
4. Chasing a marginal positioning for marginal customer segments
We have always been taught that you should carve out your own niche space in the market. This belief rests on the premise that the market is divided into clearly sizable market segments with clear-cut heterogeneous characteristics. Yet, in our experience, not all markets operate in this way.
Many companies, particularly those that operate in industries where it is notoriously difficult for customers to discriminate between different market options, try desperately to stand out from competitors. They do so by chasing exotic or marginal market positions that might make them hyper relevant to 10 % of the market. This is often at the expense of the remaining 90% of customers that base their decision on 3-4 basic value drivers.
These drivers are usually related very closely to the product and the experience itself. For instance, in grocery retail you don’t get very far by failing to dedicate yourself to delivering on value-for-money, quality, assortment and freshness in core destination categories. These include bread, fruit and vegetables and meat, as well as location and waiting time in the cashier line. While these might not be the hottest elements to optimise a business around they are the key criteria that customers value the highest.
The challenge is that companies chasing differentiation through esoteric positions can forget to communicate and deliver on the basics. And, in industries with very little brand loyalty, like grocery retail, it doesn’t take a lot of effort from competitors to move customers on basic parameters, while you are busy building marginal concepts for marginal customer segments.
5. Bias towards young people
Many well-established companies mistakenly think they should target young people. The reality is that for the first time in history these generations are at real risk of ending up poorer than their parents. Despite this, marketers explicitly or implicitly target them. It’s not unusual at all to hear things like:
- ‘If we get them early they will buy from us when they grow up.’
- ‘All people want to be young – old people love looking at young people and identifying with them.’
- ‘We need to target young people because they are “digital natives”’
- ‘This is a hidden segment that doesn’t buy much in the category today, but they will if we manage to “unlock” them.’
But this is not the case. The so-called baby boomers (age 50-70) control 70% of the disposable income, and dominate purchases in 119 of 123 CPG categories in the US. Contrary to popular belief, they also have smartphones and research and shop online. What’s more, this demographic’s spend is projected to double in the next ten years, giving the ‘grey-gold’ further headway as a key demographic. Just look around in the airport lounge, car dealership, high-end hotel or the business class cabin. Most of the people there are actually rather old.
The one-sided bias towards young people leads marketers down a short and very dangerous path towards low-value customers, wrong choice of media and channels, and aims for the wrong positioning. So, when someone starts talking about millennials, walk away. Just walk away.
6. Technology bias
Another road to trouble is to become over-involved in your own products. In technology-driven businesses this leads to a bias that passes this techno-craze on to consumers, where companies enhance the complexity of the innovation through a feature-function focus. The truth is that rarely more than 20% of the market is keen on chasing the latest technological breakthrough just because it is new.
Instead, our experience is that most are triggered by baseline parameters such as, ease of use, product longevity, reliability and convenience. For these consumers, technology is simply a means to an end – not the end itself. Consequently, they look for trust in a brand they know and technology that removes complexity and simplifies their lives.
Of course, this doesn’t mean companies should stop innovating, rather they should consider that launching new technologies requires a nuanced understanding of core customers. A crucial element is to qualitatively and quantitatively test and refine messaging and positioning of new technologies prior to launching them. As a general rule, don’t start in the lower part of the funnel arguing for features and functions. Instead, understand which positioning story to tap into to ensure relevance for customers.
Begin with asking the right questions
Not all the above observations are relevant to everyone. On face value, some even contradict. Much depends on your market position, the industry’s maturity, customer dynamics and other factors. However, we still experience too many taking too lightly the importance of understanding customers and the market. To avoid some of the pitfalls we’ve discussed here, you need to be able to answer these key questions:
- Who are your core customers measured by profitability?
- Which market segments hold the largest potential?
- Too what extend do you serve those segments today?
- What are the positioning scenarios (if any) in your market and what potential do they hold?
- What are the key value drivers and trends in the market?
- From the customer’s point of view, what is your brand heritage?
- How do you take these insights out of the PowerPoint and make them actionable?
At Kunde & Co we have vast experience and a proprietary test method that we have applied across multiple industries and countries over the last 30 years. A cornerstone of our unique methodology is to develop creative qualitative concept material that fleshes out different market positions and tests these through a quantitative approach.
This has given us a method to understand not just the customers that buy today, but also tomorrow’s potential for growth.
By analysing and understanding core customers, market potentials and choice drivers – rational, emotional and societal – we support companies by developing positioning and marketing strategies that ensure focus on the most valuable customer segments and make these drivers for the brand.
Do you need a better understanding of your customers today, and avenues of growth for tomorrow? Then contact Christian.