This past week I had two buyer experiences with interesting examples of segmentation, although the sellers may not have realized they were segmenting their customers. The two situations resulted in different outcomes and provided some good lessons. The most important lesson is that segmentation should enable you to expand your customer base, sell more products or services, and improve your profitability. If those are not the results you are obtaining, you are doing it wrong.
My first example is in New York City housing. My daughter will be starting her career in New York very soon and has recently been looking for an apartment. She learned that most property managers require three things from potential tenants:
- They must have been in their job for at least one year
- They must make at least 40 times the monthly rent
- They must have either owned or rented their previous residence for at least 12 months
Their data show that tenants who meet all those criteria have a low probability of defaulting on their leases, but those who do not meet all the criteria are more likely to miss payments.
The property managers also realize there is a large segment of the New York population comprised of young people starting their careers who may not completely qualify. Rather than simply excluding that segment of potential customers, the property managers offer alternatives that will enable the young people to qualify and live in the city.
- They can have parents, relatives, or friends guarantee the payments of rent
- They can pay in advance, presumably after borrowing money from parents or relatives
- They can add more renters in the unit so their combined incomes meet the tests
Not all those solutions are easy, and they may not be feasible for everyone, but the point is property managers have identified a challenging segment and are offering options that may enable them to be customers.
My second example is in healthcare. Last week I called to make an appointment with an orthopedic surgeon. After asking for a description of the injury and my reasons to see the doctor, the representative asked for my insurance information. She then looked it up in her system and said, “Oh, that is the only one we don’t accept.” When I asked why, I was told they do not accept high-deductible insurance plans.
I told the representative that our high-deductible plan simply meant I was responsible for the first $7,000 of our medical bills in any year. She responded that she understood how it worked, but orthopedic medical care can result in some large bills. Her office has found that many people accept high-deductible plans in exchange for lower premiums but cannot actually afford to pay the deductibles. As a result, their practice chooses not to do business with that segment of customers.
While I applaud the medical office’s use of data to understand how their customers behave, they have used their segmentation to eliminate customers rather than expand their base. Perhaps they have all the patients they can handle, but if so, why do they say they accept new patients? It is more likely that they have just been lazy and have not tried to come up with alternatives for the high-deductible segment, and it is resulting in less business.
If the medical practice thought about the problem the same way New York property managers have, they would have come up with some options. For example, the large bills get run up when a patient has surgery, not just with office visits. So before scheduling the hospital and the surgery, they could tell patients how much the deductible will be and:
- Ask them for a credit card
- Ask for proof they can pay it
- Ask for a deposit toward the deductible
- Direct the patients to third parties that will finance their deductibles
There are probably other options that would work. The point is there is a group of potential customers with different characteristics than their most frequent customer. If you want to grow your business, figure out a way to work with them.
Usually when I write about segmentation, the issue I cite is customers who don’t value or can’t afford all the features and benefits of a product or service. Rather than simply sell it for a lower price, I recommend de-scoping the product by removing features, and then selling it for a lower price. The common theme is you are finding a way to grow your revenue and profit by including more buyers. That should always be your goal in segmentation. If you are segmenting your market and reducing your customer base, you are probably doing it wrong.
Leave a Reply
Want to join the discussion?Feel free to contribute!