Does your company, honestly, have proper segmentation?

A well-known family compensation fund "segments" its users (employees of affiliated companies) according to their income level. Those earning more than four current legal monthly minimum wages belong to segment A, while those earning less than four minimum wages belong to segment B. If the user belongs to segment A, the compensation fund offers them, among other things, gym and spa services. But if they belong to segment B, they are only offered gym services. This may seem normal: one segment is offered certain products and another segment, others. However, two questions may arise from this practice: (1) Do all users in segment A value and use the spa? Probably not, and (2) Is there someone in segment B who would like to enjoy the spa? Probably yes. This situation means that, with the current segmentation, the compensation fund is not necessarily offering its users the services they truly value, but those the company believes they value. How can this problem be solved? The answer lies in needs-based segmentation.

Common needs
Segmenting by needs means dividing a market into uniform groups of customers (segments) that have common needs among themselves but different from other groups. Segmentation by age, gender, income, profession, nationality, among others, is the most well-known, but it does not necessarily determine the solutions that should be offered to each customer. The following example helps illustrate this concept.

Hospital patients share the common goal of seeking good healthcare. But to properly treat and cure all patients, does the hospital initially need to know how many are men or women, black or white, aged 30–40 or 40–50? Of course not. With such demographic segmentation, it would be impossible to address each patient’s needs properly, as each group contains people with different illnesses requiring specific treatments. While everyone wants good healthcare, some may have the flu, others digestive issues, cardiac problems, or only need preventive or check-up services. Segmenting patients by illness type ensures that each patient receives the most appropriate care for their condition.

This is needs-based segmentation: all customers with the same needs, regardless of their demographic profile, belong to the same segment. In the hospital example, understanding each patient’s need is easy, but in companies selling products or services, it may not be as clear. To do this, one must start from the consumption occasions of the product or service, group common ones, and determine the need.

No labels
Furthermore, most companies tend to label customers as members of a segment as if they would always behave the same. Nothing could be further from the truth. Returning to the hospital example, if a patient who had the flu returns the next month with a heart condition, they would be treated as if they still had the flu, because that’s the segment they belonged to last time. If treated this way, the patient’s treatment would likely not address their actual condition, since their need has changed. In other words, the segment changes with the need: in this case, the patient moves to the "cardiac" segment.

It is important to clarify that there are no good or bad segmentations. The purpose here is not to criticize segmentations that are not needs-based. What matters is understanding the goal, to define the most appropriate segmentation. Just as needs-based segmentation is not suitable for managing a loyalty program, value-based segmentation in a CRM strategy is not suitable for managing product-price strategy.

In summary...
To design value propositions that truly satisfy customer needs, segmentation should be based on consumption occasions and needs, recognizing that customers do not always belong to the same segment, but can move from one to another as their needs change. Traditional segmentation can lead a company to offer solutions that are not competitive in the market, losing share in some segments, and probably leaving money on the table in others.