Is Needs-Based Segmentation Possible?

Success in innovation often depends on market segmentation: a company’s ability to identify groups of customers who have unique sets of unmet needs. Despite this fact, many managers ignore needs-based segmentation, relying instead on the same demographic and psychographic segmentation schemes in innovation that they use in sales and marketing. Unfortunately, those methods do not work for innovation, as unmet needs often cut across those demographic or psychographic categories and fail to explain differences in unmet customer needs.

So why don’t companies use needs-based segmentation? It is because an effective needs-based segmentation scheme can only be constructed when a company knows all the customer’s needs and also knows which needs are unmet and to what degree. This is where companies struggle. In most companies, managers can’t even agree on what a customer need is, let alone what needs are unmet. Consequently, companies have come to believe that needs-based segmentation schemes can’t work: how can they possibly know all their customers’ ever-changing, latent, and unarticulated needs?

This belief is not surprising. In a survey of product developers, we found that 90 percent have never in their career worked on a project where all the customer needs were known. The same survey showed that most product managers believe it is impossible to know all their customers’ needs. It’s no wonder companies think needs-based segmentation can’t work. But it can work if customer needs are defined differently.

Needs-Based Segmentation around the Job-To-Be-Done

Our needs-based segmentation methodology works because it is built upon a solid definition of what a customer need is. We know that people buy products and services to get a job done. We have discovered that customers consider between 50 and 150 metrics (their desired outcomes) when assessing how well a product or service helps them successfully execute any job. These metrics are the customer’s needs. They power our needs-based segmentation methodology and our innovation process, Outcome-Driven Innovation (ODI). By using these metrics to segment the market, we are able to group together customers who share similar unmet needs. We have discovered that the reason these segments exist is because people struggle differently when executing the job-to-be-done.

Here is the secret: It is not enough to segment customers by their needs. They must be segmented by their unmet needs. Groups of customers with similar unmet needs that differ from the unmet needs of other customers comprise unique segments of opportunity. To segment a market in this fashion, we use our opportunity algorithm to process customer data and reveal which needs are both unmet and highly important to customers. We use this data as an input for factor and cluster analyses, and the end result is a meaningful segmentation scheme.

Formulating Strategy around Customer Segments

Needs-based segmentation is valuable because it reveals under- and overserved market segments and how big they are. It also reveals what needs are unmet in each segment. Because we study willingness to pay, we are also able to determine which segment is the most profitable to pursue. Knowing the size of each segment, which needs are unmet, and how much those in each segment are willing to pay to get the job done better, we are able to formulate a knockout growth strategy.

If a large, underserved market segment exists, then we consider a product improvement or a breakthrough innovation. If a large, overserved segment is revealed, then we consider a disruptive innovation strategy. With our solid knowledge of customer needs, we have drastically reduced the risks typically associated with innovation. Learn more about our market segmentation techniques.