Consumer Behavior Is Essential to Effective Segmentation

Customer Experience
Customer Experience
Reaching customers whose needs are ever-evolving requires understanding their preferences -- as revealed in their behaviors.

Reaching consumers today is continues to increase in difficulty. Relevancy helps to cut through the clutter. Marketers need to understand customers' needs, behaviors, and value to improve relevancy. In term of media consumption, those attributes are a moving target as consumption shifts more and more from TV to computers and handheld devices. The IBM Institute for Business Value "saw three important behavioral consumer segments in media: the Massive Passives, the Gadgetiers, and the Kool Kids," writes Saul J. Berman in Not for Free: Revenue Strategies for a New World. Massive Passives, who comprise 65 percent of consumers, are "traditional," for example, they watch TV on TV. Gadgetiers, who make up about 15 percent of consumers, actively adopt new technologies. For example, they balance TV watching with their use of computers and other multimedia devices. Kool Kids, at 20 percent of the population, are more comfortable in front of a computer than a TV. However, they may not be "kids"; in some cases they will be older than their mid-twenties.

In this excerpt from Not for Free, Berman explains how understanding the behavioral drivers of these segments-or any segment a marketer may choose to target-can improve the revenue models and results for each:

Innovation and consumer segments

When I work with clients to develop revenue strategies, I advise that they look first at the customer and behavioral segments they currently serve and the ones they want to serve in the future, to identify opportunities to offer value up and down the value chain. Your existing customers, for better or for worse, will drive how you pursue new revenue streams.

While your existing customers and your existing revenue stream are in the driver's seat, that doesn't mean you should stick to your current approach to segmenting and targeting those customers. Remember that the goal is to view consumers not only through their demographic or psychographic characteristics but through the lens of their behaviors: What product volumes do they consume? How do they use the product and how often? How do they interact with or alter the product through use and through the addition of information to supplement their experience?

This is not a one-and-done exercise. You will need to be constantly monitoring the flow of data to see how behaviors are changing. Otherwise, you risk launching innovations that miss their mark because the mark has moved. The problem is analogous to what Clayton Christiansen lays out in his canonical books, The Innovator's Dilemma and The Innovator's Solution. The same once successful behaviors and approaches become blinders when markets change, just as outdated ideas of who your customers are cause blunders when their behaviors and attitudes shift.

Consider the perception of social media sites like Facebook and Twitter as digital playgrounds for the Kool Kids. Corporate social media campaigns aim to connect with younger demographics. Yet the largest group of Facebook users is women between the ages of thirty-five and fifty-four, and users over fifty-five make up more than 10 percent of the audience. Kool Kids also use Twitter at a far lower rate than they use other social media and far less frequently than Gadgetiers, despite the fact that the platform evolved out of the quintessential Kool Kid behavior of texting.

Surprised? Lots of people I talk to are, but that's because they've locked into a view of Kool Kids that doesn't change. In reality, the first generation of Kids is already aging into Gadgetiers and Massive Passives. Massive Passive behaviors are shifting too. Nearly 70 percent of Americans use the Internet as one of their primary sources of news, according to a recent Pew study. More than 40 percent of adults use a phone to check the Internet, use e-mail, and instant-message. If your grandmother is still alive, she just might be reading e-mail on her iPhone. YouTube has introduced its Leanback product specifically for people on the cusp of being Massive Passive. In other words, Massive Passives are just about at the point where they are consuming television on their computers.

Attitudes within your consumer base about how "free" certain types of value should be may also be considered at the customer evaluation stage of the innovation process. Don't take anything for granted. IBM's 2010 Digital Consumer Survey shows that willingness to pay doesn't at all fall into the neat segment categories you might expect. Gadgetiers are more likely than members of other segments to express willingness to pay, but Massive Passives are the least likely to want to pay at all-they did, after all, grow up with free-to-air radio and television. Curiously, a greater proportion of Kool Kids are willing to pay directly for content than Massive Passives, probably because they are more accustomed to the pay-per-view model (even if they often find ways
around it).

Keep in mind that this data doesn't show the full picture, since self-reported behaviors are notoriously false. When consumers say they won't pay for content, it means they don't want to, not that they won't. You can influence behavior by making something easy to do. Perhaps only 20 percent of consumers are willing to pay for online content because some fraction of the rest finds existing payment methods cumbersome. Improve online payment options, and more consumers may willingly open their (digital) wallets.

The lessons from media on looking to the customer base for opportunities lean largely toward what not to do at this first stage of the innovation process. In short, don't just look at what your consumer segments are doing now but what they want to be doing, or will be doing, in the future. Don't just look at where you operate in your value chain but where value might be shifting and what you would have to do to play there as well.

Media's big names in many cases put far more resources into halting revenue loss from their existing customers based on existing behaviors than in innovating new revenue sources. As a result, the digital initiatives of most traditional media companies are overtly not revenue innovations. Porting existing content and revenue models onto a different platform is not an innovation. Nonetheless, the approach is popular among incumbents, as evidenced by Hulu, The New York Times, Comcast's proposed TV Everywhere, and many other media efforts. To its credit, Hulu is certainly a success story in amassing audience. But the primary offering ofthe site is exactly the same product in exactly the same spot on the value chain with the samepayers. Hulu's owners have largely prevented it from experimenting with ways to really appealto Kool Kids and Gadgetiers. Even Hulu's new subscription model is a weak attempt at pricing innovation, given the seemingly random mix of free and pay content and the confusion around what the subscription includes.

In contrast, most of the real innovations in media have come from new entrants or parallel initiatives that, if successful over the long term, will blow up traditional economic models: Redbox in film rental, Spotify in music, Amazon's Kindle in e-books, Google TV in television, and Craigslist in newspaper classifieds.

It is not hard to see why those who work for incumbent firms have so much trouble thinking outside existing views of the customer and existing monetization models: they have established partnerships and an installed base of customers they want to keep happy. Likewise, there is the pervasive fear that any move to digital services won't earn because users won't move beyond free. The data from the 2010 Digital Consumer Survey outlined above shows how both true and false that statement can be.

The most important takeaway lesson here is about the continually changing dynamics that happen when you look at the customer through the lens of what they are really doing-not what may do based on their age, gender, political views, and so on. Your segmentation will evolve with customers and markets, and you will need to adjust as they do.

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About the Author: Saul J. Berman is the global lead partner for Strategy & Innovation and Growth practices at IBM Global Business Services and leads IBM's annual CEO studies.

Reprinted by permission of Harvard Business Review Press. Excerpt from Not for Free: Revenue Strategies for a New World. Copyright 2011 Saul J. Berman. All rights reserved.