Rocky Sharma (@rockyrunz) is Founder & CEO of ProductLedCEO, ProcurementAI, and Luxeo Platforms — 3x Head of Product, Stanford GSB alumnus, and Forbes Thought Leader

Product management involves building and nurturing products/services that: (a) meet business goals, (b) bring customer delight and (c) offer a competitive edge. For product managers, customer segmentation is the process of classifying target customers based on similar traits. As a company founder, two-time CEO, three-time head of product in the e-commerce and e-learning industries and someone who has taught product management to learners from 33 countries, I’ve seen the importance of this process many, many times.

Organizations should be centered around understanding the needs of customers and fulfilling them. If an organization does not have an in-depth understanding of its customers, then they are pretty much looking at each customer in the same way, and the business relationship with customers remains at a tactical level.

This could severely impact an organization’s metrics, including revenue, profit, customer churn, lifetime customer value, net promoter score and more. If an organization does not take the time to understand the needs of its customers, then customers may not bother to stick around. Hence, customer segmentation is essential in product management and is foundational to any organization.

Need-Based Segmentation

Conducting a customer segment exercise based just on demographics, such as age, is something I have never supported in my work life. What this simply indicates is that organizations do not know much about their target customers and are simply throwing spaghetti on the wall, hoping that it sticks somewhere.

I am a big supporter of need-based segmentation, which classifies customers into groups based on their need for a product or service. As my teacher said when I was a kid: “If you do not know the answers, then ask questions.”

Understanding customers is the first thing that a product manager needs to do. If you don’t understand your customers, then the strategies to achieve your business goals may be jeopardized.

In a startup, the founder/product leader must conduct this exercise as the product, customers and team may not exist yet. In scale-up and large organizations, a product manager should conduct this exercise in collaboration with the marketing and sales team, leveraging any past knowledge. The exercise should be conducted by talking to customers and utilizing digital outreach methods to seek customer feedback when the size of customers is large.

For example, Taylor Swift’s Eras tour is projected hit to over $2 billion in concert-related revenue. Considering the economic uncertainty in the U.S., this piqued my curiosity about who these fans are (customer segment) and how they can afford the high cost associated with the concert (propensity to consume) in this environment when the average ticket price is $254, and the average resale ticket price is $3801. Hence, I decided to experience it myself at her Seattle concert.

I joined the merchandising queue inside the venue to mingle with the fans before the show. Most fans were wearing glittery outfits resembling Taylor Swift and attractive wristbands, with 10 in each hand. They explained to me that these were friendship bracelets that they made at home. I further asked what they do with so many of them. Their answer further surprised me—they trade the wristbands with strangers. This is pure customer delight.

I spoke with everyone around me sporadically for the next two hours, mingling, chatting and goofing around—and even received some bracelets. And it was then I felt part of the group. This spirited and animated interaction resulted in a need-based customer segment based on the limited sample size. This included things like her songs helped people going through breakups and romance; she provided fashion inspiration, confidence, dance numbers and more.

Propensity To Consume

Propensity to consume means ascertaining if the target customer segment can afford to pay for a product/service offered by an organization. If this exercise is not conducted thoroughly, then marketing dollars get wasted, do not convert into revenue and could lead to reputation management issues for an organization.

For a startup, founders need to assess the propensity to consume by speaking with customers, as there is likely no other direct data at that stage. For scale-up and large organizations, the propensity to consume exercise is typically conducted by speaking with customers and using digital methods to seek feedback, especially when the number of customers is large.

Your focus should be on understanding the pain areas of customers, if a new or existing product/service could alleviate that pain and how much customers would be willing to pay happily.

A common mistake is that organizations bombard customers with product/service features, and the pain-related questions get superficially touched, making customers feel unloved. This information directly ties to business goals (revenue) and is helpful for an organization to plan future steps.

Back to the Swift example, based on need-based segmentation, my hypothesis from talking to fans about their capability to pay/propensity to consume was:

• Some bought tickets one year in advance when the prices were reasonable.

• Some saved their hard-earned money for months by doing part-time jobs and/or double shifts to afford such a trip.

• Some are doing great in their career and can easily afford the tickets.

• Some borrowed money from friends, family, colleagues, their credit card.

Conclusion

Don’t wait for a formula or template to conduct need-based customer segmentation and propensity-to-consume exercises. Talk to your customers, put your learnings on a sheet of paper and group customers based on need. Remember, this is an ongoing process.

I became a fan at some point during the Taylor Swift show. I pondered: “Where do I fall in the need-based customer segment? I was not sure yet. Perhaps a new category of fans who wish to understand and see the world from a girl/woman’s perspective via her lyrics.

Focus on ‘solving problems that matter’

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This article also appeared in Forbes.