Market Segmentation Tools for Innovation

Companies use demographic, psychographic, and product segmentation schemes to help execute a variety of business activities. For example, a marketing communications team may segment a market by region to help execute a mailing campaign. A finance department may use a segmentation scheme such as vertical industry to report sales figures. But when it comes to segmenting market for the purpose of innovation, the goal of market segmentation is to discover segments of customers who share unmet needs that are distinct from the needs of other customers. Finding these unique segments of opportunity – if they exist – can transform an entire industry, as evidenced by companies such as e-Trade and Curves.

When segmenting a market for the purpose of innovation it makes sense to use unmet needs as the bases around which to segment the market. Many of you may be thinking, “Wasn’t that the idea behind needs-based segmentation? We tried that 20 years ago, and it did not work.” There are two reasons why, as formulated then, it did not work:

First, back then, the concept of a customer need was poorly defined, and most needs-based segmentation studies ended up using many types of inputs for segmentation, not just job or outcome statements. The outcome-driven innovation methodology defines a customer need much more precisely: It is either a statement of a job to be done or a desired outcome statement, i.e., a metric that defines how customers measure the successful execution of a job. These statements, which adhere to a strict set of rules for structure, content, and format, are the only inputs that should be used for market segmentation when innovation is the objective. Precision in the inputs is the first key to success.

Second, to find a segment of the population that has an unmet need, a company must agree on what “unmet” means. Twenty years ago, there was no such agreement. In the outcome-driven paradigm, however, an unmet need is defined as a job or desired outcome that is important and not well satisfied. The opportunity algorithm has been devised to mathematically calculate an opportunity score for these inputs. The more important and less satisfied a job or outcome is, the greater the opportunity for value creation. Using the opportunity score as the value around which to segment a market is the second secret to successful segmentation. With the right inputs and the right algorithm, segmenting markets for the purpose of innovation is possible.

Using this approach to market segmentation, companies are able to:

Identify unique segments of opportunity.

Identify opportunities within each segment.

Discover emerging markets.

Size markets that do not yet exist.

Identify market entry points for disruptive technology, such as segments of over-served customers.

Understand what truly makes customers unique.

Given that customer need is defined as a job or as a desired outcome, depending on the situation, two types of market segmentation are possible:

(1) Job-based segmentation is performed when a company is trying to determine if a segment of the targeted customer population is trying to execute one of more jobs in a given context or situation, but cannot do so successfully. Uncovering a segment of customers with underserved jobs potentially leads to ancillary market growth or the creation of brand new markets. Here job statements are used as the basis for segmentation.

(2) Outcome-based segmentation is performed when a company is focused on core market growth and trying to better serve existing customers who are already using a company's product or service. Here, a company can discover if a certain percentage of the customer population has unique underserved outcomes or if the customer population has unique underserved outcomes or if an untapped segment of the population exists. E-Trade and Curves are both examples of companies that addressed opportunities that were discovered when desired outcomes were used as the basis for segmentation in an existing market.

Keep in mind, we are not suggesting that a company abandon the use of other segmentation schemes; many serve a valid purpose. But when it comes to segmenting a market for the purpose of innovation, using jobs and desired outcomes as the input and the opportunity score in the clustering formula reveal what marketing organizations have long sought – segments of customers with different unmet needs.