Customer Identification and Segmentation in Six Sigma Black Belt

Customer Identification and Segmentation: A Comprehensive Guide

Introduction

Customer Identification and Segmentation is a foundational concept in the Six Sigma Black Belt DEFINE phase. This critical process helps organizations understand their customer base, identify distinct groups with similar characteristics, and tailor Six Sigma improvement initiatives to meet specific customer needs and expectations.

Why is Customer Identification and Segmentation Important?

Understanding why this process matters is essential for any Six Sigma professional:

• Targeted Improvements: Different customer segments have different needs, preferences, and pain points. By segmenting your customer base, you can identify which improvement projects will have the greatest impact on customer satisfaction and business results.


• Resource Optimization: Organizations have limited resources. Customer segmentation helps prioritize improvement efforts on the segments that contribute the most to profitability or strategic importance.


• Reduced Variation: Different customer segments may experience different levels of process variation. Understanding these differences allows you to address the root causes of variation specific to each segment.


• Enhanced Customer Focus: Six Sigma is fundamentally customer-centric. Proper customer identification ensures that improvement projects directly address customer requirements and expectations.


• Competitive Advantage: Organizations that deeply understand their customer segments can develop more targeted solutions, leading to improved customer loyalty and market differentiation.


• Risk Management: Identifying and understanding all customer segments helps organizations avoid overlooking critical customer groups or their unique requirements.

What is Customer Identification and Segmentation?

Customer Identification is the process of clearly defining who your customers are and understanding their role in your organization's value chain. This includes understanding different types of customers, their touchpoints with your organization, and their specific requirements and expectations.

Customer Segmentation is the process of dividing your customer base into distinct groups (segments) based on shared characteristics, behaviors, needs, or other relevant criteria. Each segment typically has similar requirements, preferences, and value perceptions.

Types of Customers

Six Sigma practitioners must recognize different customer types:

• External Customers: End users or organizations that purchase your products or services. These are the ultimate consumers of your outputs.


• Internal Customers: Departments or individuals within your organization who receive outputs from other internal processes. For example, the packaging department is a customer of the manufacturing department.


• Suppliers: While not traditional customers, suppliers are part of your extended value chain and can impact customer satisfaction.


• Stakeholders: Shareholders, regulators, and community members who have interest in your organization's performance.

Segmentation Criteria

Customers can be segmented using various criteria:

• Demographics: Age, gender, income, education, geographic location, company size (B2B), industry, etc.


• Psychographics: Values, attitudes, lifestyle, personality traits, and beliefs.


• Behavioral: Purchase frequency, usage rate, brand loyalty, price sensitivity, and decision-making process.


• Needs-Based: Specific customer requirements, pain points, and desired outcomes from your product or service.


• Value-Based: Profitability, revenue contribution, growth potential, and strategic importance to the organization.


• Geographic: Location-based segmentation for organizations serving multiple regions or countries.


• Channel-Based: Segmentation by how customers interact with your organization (online, retail, wholesale, direct sales, etc.).

How Customer Identification and Segmentation Works

The process of customer identification and segmentation follows a structured approach:

Step 1: Define Your Organization's Scope

Begin by understanding your organization's mission, products, and services. This provides the context for identifying who your customers are. Understand your industry, competitive landscape, and overall business model.

Step 2: Identify All Customer Types

Create a comprehensive list of all customers across all categories:

• External customers (end users, intermediaries, resellers)
• Internal customers (downstream processes, departments)
• Stakeholders (investors, regulators, community)

Develop a SIPOC diagram (Suppliers, Inputs, Process, Outputs, Customers) to visualize your customer ecosystem.

Step 3: Gather Customer Data

Collect information about your customers through:

• Primary Research: Surveys, interviews, focus groups, observation, and direct engagement
• Secondary Research: Industry reports, market analysis, existing company data, customer databases
• Transaction Data: Purchase history, frequency, volume, and value
• Feedback Data: Customer complaints, comments, reviews, and satisfaction scores
• Behavioral Data: Usage patterns, product adoption rates, returns, and customer lifetime value

Step 4: Define Segmentation Criteria

Select the most relevant segmentation criteria based on:

• Your organization's strategic objectives
• Availability of data
• Actionability of insights
• Relevance to the improvement project

Different projects may require different segmentation approaches. For example, a marketing improvement project might use demographic segmentation, while a product quality project might use needs-based segmentation.

Step 5: Create Customer Segments

Divide your customer base into distinct, meaningful segments using your selected criteria. Segments should be:

• Distinct: Each segment should be different from others in meaningful ways
• Substantial: Large enough to justify dedicated resources and analysis
• Accessible: Possible to reach and measure
• Actionable: Insights should lead to specific, implementable actions
• Stable: Segments should remain relatively consistent over the project timeline

Step 6: Analyze Each Segment

For each segment, understand:

• Key characteristics and needs
• Current satisfaction levels
• Critical-to-Quality (CTQ) requirements
• Pain points and frustrations
• Value and profitability
• Potential for improvement
• Response to changes

Step 7: Develop Segment Profiles

Create detailed profiles for each segment that describe their characteristics, requirements, expectations, and importance to the organization. These profiles serve as reference documents throughout the improvement project.

Step 8: Prioritize Segments

Determine which segments should be the focus of your Six Sigma improvement project based on:

• Strategic importance
• Revenue or profit contribution
• Current satisfaction or performance gaps
• Growth potential
• Feasibility of improvement

Practical Example: Customer Segmentation in Action

Scenario: A telecommunications company wants to improve its customer service processes.

Step 1: Identify all customers:

• Individual residential customers
• Small business customers
• Enterprise customers
• Partner organizations (retailers, distributors)
• Internal departments (billing, technical support, sales)

Step 2: Select segmentation criteria:

• Customer type (residential vs. business)
• Revenue contribution (high-value, medium-value, low-value)
• Service usage patterns (heavy users, moderate users, light users)
• Geographic location (urban, suburban, rural)

Step 3: Create segments:

• Segment A: High-value residential customers in urban areas
• Segment B: Small business customers with moderate service usage
• Segment C: Enterprise customers requiring premium support
• Segment D: Low-value residential customers in rural areas

Step 4: Analyze and prioritize:

• Enterprise segment (Segment C) receives priority due to high revenue impact
• High-value residential segment (Segment A) receives secondary focus
• Improvement initiatives are tailored to each segment's specific needs

Customer Identification and Segmentation Tools

Several tools support this process:

• SIPOC Diagram: Visualizes the entire process ecosystem including customers


• Voice of the Customer (VOC) Analysis: Captures customer needs and expectations through interviews, surveys, and feedback


• Customer Journey Map: Traces customer interactions across touchpoints, identifying critical moments and pain points


• Affinity Diagrams: Groups customer feedback into themes to understand common needs and concerns


• Pareto Charts: Identifies the most important customer segments or requirements (typically the vital few)


• Statistical Analysis: Cluster analysis, correlation analysis, and other statistical techniques to identify natural groupings


• Segmentation Matrix: Visually displays segments based on two or more dimensions simultaneously


• Customer Value Analysis: Evaluates profitability and strategic value of each segment

Key Concepts and Definitions

Critical-to-Quality (CTQ): The specific product or service characteristics that are most important to customers in each segment.

Customer Requirement: What customers need from your product or service to solve their problem or meet their need.

Customer Expectation: What customers believe they should receive based on their previous experiences and market standards.

Customer Satisfaction: The degree to which your product or service meets or exceeds customer requirements and expectations.

Voice of the Customer (VOC): The customer's requirements, preferences, and feedback communicated through various channels.

Net Promoter Score (NPS): A metric measuring customer loyalty based on their likelihood to recommend your organization to others.

Common Challenges and How to Address Them

Challenge 1: Too Many Segments
Creating too many segments makes analysis unwieldy and improvement efforts fragmented.
Solution: Start with 3-5 major segments and combine similar groups. You can create sub-segments later if needed.

Challenge 2: Lack of Customer Data
Insufficient data makes segmentation analysis difficult.
Solution: Conduct targeted research through surveys, interviews, and focus groups. Leverage existing transaction and feedback data.

Challenge 3: Static Segments
Customer characteristics and needs change over time, making historical segments irrelevant.
Solution: Review and update segment definitions regularly. Build flexibility into your segmentation approach.

Challenge 4: Overlooking Internal Customers
Focusing only on external customers misses important improvement opportunities.
Solution: Explicitly map internal customer-supplier relationships and include them in your analysis.

Challenge 5: Misalignment Between Segments and Project Scope
Segmentation criteria that don't align with the improvement project provide limited value.
Solution: Ensure segmentation criteria directly relate to the problem being solved and the objectives of the project.

Exam Tips: Answering Questions on Customer Identification and Segmentation

Understanding Common Question Types

Type 1: Definition and Concept Questions
Example: "Which of the following best describes customer segmentation?"
Answer Strategy:

• Look for answers that emphasize dividing customers into groups with shared characteristics
• Focus on purpose: understanding different customer needs and tailoring solutions
• Avoid overly simplistic definitions that suggest segmentation is just organizing a customer database
• Remember that segmentation enables targeted improvement, not just data organization

Type 2: Application Questions
Example: "A manufacturing company wants to improve product quality. Which segmentation approach would be most appropriate?"
Answer Strategy:

• Consider what matters for the specific problem: For quality, consider needs-based or behavioral segmentation (how they use the product)
• Think about what drives variation: Different usage patterns may result in different quality requirements
• Avoid demographics if they don't relate to the quality issue
• Consider both external customers and internal customers who might be affected differently

Type 3: Identification Questions
Example: "In the DEFINE phase, what is the primary purpose of identifying customers?"
Answer Strategy:

• Remember that identification precedes segmentation
• Focus on the purpose: ensuring you understand all stakeholders and their requirements
• Think about how this impacts the rest of the project: Missed customers mean missed requirements and poor project focus
• Recognize that identification is broad; segmentation is deep

Type 4: Case Study Questions
Example: Scenario-based questions requiring you to apply concepts to real situations
Answer Strategy:

• Carefully read the problem to identify the business context and objective
• Identify all customer types mentioned or implied in the scenario
• Determine what segmentation criteria would be most relevant to the stated problem
• Consider both customer needs and business strategy when prioritizing segments
• Explain your reasoning clearly, connecting concepts to the specific situation

Key Points to Remember for Exam Success

1. Distinguish Between Identification and Segmentation
Exams often test whether you understand these are two different but related processes. Identification answers who your customers are; segmentation answers how to divide them meaningfully.

2. Know the Different Segmentation Criteria
Be able to:

• Define each segmentation approach (demographic, psychographic, behavioral, needs-based, value-based, geographic, channel-based)
• Provide examples of each
• Identify which is most appropriate for different situations
• Understand that multiple criteria can be used simultaneously

3. Understand the Purpose
Always connect customer identification and segmentation back to Six Sigma objectives:

• Reducing variation specific to customer needs
• Improving customer satisfaction through targeted improvements
• Optimizing resource allocation
• Ensuring project focus on what matters to customers

4. Recognize the Importance of Voice of the Customer
Exam questions often connect customer segmentation to VOC analysis. Remember that:

• Different segments have different voices (different requirements and expectations)
• You must capture VOC specific to each segment
• CTQ characteristics may vary by segment
• Customer requirements drive what variation you need to reduce

5. Include Both External and Internal Customers
A common exam trap is assuming only external customers matter. Be prepared to:

• Identify internal customers in various scenarios
• Explain why internal customer requirements matter
• Apply segmentation to internal customers
• Recognize where internal and external customer needs might conflict

6. Know the SIPOC Tool
Exams frequently test your ability to:

• Develop or interpret SIPOC diagrams
• Identify customers within a SIPOC diagram
• Understand how SIPOC relates to customer identification
• Use SIPOC to ensure no customers are overlooked

7. Understand Segment Characteristics
Remember the criteria for effective segments. Segments should be:

• Distinct - Not overlapping, meaningful differences
• Substantial - Large enough to matter
• Accessible - Reachable and measurable
• Actionable - Insights lead to improvements
• Stable - Consistent over time

Exam questions may ask you to evaluate proposed segmentation schemes against these criteria.

8. Prioritization is Critical
Exams test your understanding that:

• Not all segments receive equal focus
• Prioritization should be based on strategic importance, profitability, and project relevance
• Reasons for prioritization should be stated clearly
• High-impact segments typically drive improvement project selection

9. Avoid Common Answer Traps
Watch for incorrect answers that:

• Confuse segmentation with simple data collection or reporting
• Focus only on demographic or geographic segmentation without considering relevance
• Suggest that all segments should be treated identically
• Overlook internal customers or stakeholders
• Separate customer identification from business objectives

Practice Question Examples and Solutions

Example Question 1:
"A Six Sigma Black Belt is beginning a project to reduce defects in a software development process. In the DEFINE phase, the belt should first:"

• A) Conduct a detailed statistical analysis of current defect rates
  B) Identify all customers and stakeholders affected by the software
  C) Begin process mapping of the software development workflow
  D) Establish the team and project timeline

Correct Answer: B
Explanation: Customer identification is the first step in the DEFINE phase. You must understand who your customers are before you can understand their requirements (CTQ) and measure improvement against their needs. While the other activities are important, they come after you've identified and understood your customers. This ensures the project stays focused on what matters to customers.

Example Question 2:
"A hospital wants to segment its patients to improve surgical wait times. Which segmentation approach would provide the most actionable insights for reducing variation in wait times?"

• A) Demographic segmentation by patient age
  B) Needs-based segmentation by type of surgery and medical urgency
  C) Geographic segmentation by patient zip code
  D) Behavioral segmentation by patient visit frequency

Correct Answer: B
Explanation: Needs-based segmentation is most relevant because the root causes of wait time variation likely differ by surgery type and urgency level. Emergency surgeries have different scheduling constraints than elective procedures. This segmentation would reveal specific improvement opportunities for each segment. The other approaches, while potentially interesting, don't directly address the drivers of wait time variation.

Example Question 3:
"In developing a customer segmentation strategy, which of the following should be considered FIRST?"

• A) Statistical cluster analysis of customer transaction data
  B) Development of detailed demographic profiles for each segment
  C) Clear definition of the business objective and what the segmentation should support
  D) Selection of the segmentation tool or software to be used

Correct Answer: C
Explanation: Before selecting segmentation criteria, tools, or conducting analysis, you must understand the business objective. Are you trying to improve service quality for high-value customers? Reduce variation in manufacturing for different user types? Identify growth opportunities? The objective drives the segmentation approach. Putting the cart before the horse (choosing criteria or tools first) leads to segmentation that provides limited value.

Example Question 4:
"A retailer's Six Sigma team is receiving complaints about long checkout lines. When identifying customers for this improvement project, the team should include:"

• A) Only external customers (shoppers)
  B) External customers and store employees
  C) External customers, store employees, and store management
  D) Only high-value customers and frequent shoppers

Correct Answer: C
Explanation: Comprehensive customer identification includes all stakeholders: external customers (who experience the checkout process), employees (who operate the process and may experience frustration or inefficiency), and management (who care about efficiency and customer satisfaction). Each group has valuable perspective on the problem and different needs from the improved process. Limiting to only external customers or only high-value customers would miss important viewpoints and requirements.

Example Question 5:
"A manufacturing company produces both basic industrial components and high-precision aerospace parts for different customer groups. Why would customer segmentation be particularly important for a Six Sigma quality improvement project in this company?"

• A) It allows the company to charge different prices to different segments
  B) It ensures that quality improvement efforts address the different requirements and variation priorities of each customer segment
  C) It helps the company identify which customers to focus on for future growth
  D) It simplifies the data collection process by dividing customers into manageable groups

Correct Answer: B
Explanation: This question tests understanding of why segmentation matters for Six Sigma. The quality requirements for aerospace parts are vastly different from those for basic industrial components. The sources of variation may be different, the critical-to-quality characteristics are different, and the cost-benefit of improvements differs. Segmentation allows the project to be properly scoped and focused on reducing the right variations for the right customers. Answer A (pricing) is a business consideration but not a Six Sigma purpose. Answer C (growth) is strategic but not directly related to quality improvement. Answer D (data simplification) is too superficial.

Exam Day Strategies

Strategy 1: Start with the Business Context
In every question, first understand the business situation and objective. This context guides everything else. Ask yourself: "Why does customer identification and segmentation matter in this specific situation?"

Strategy 2: Look for the Scope and Purpose
Identify what problem is being solved and what you're trying to improve. The most appropriate segmentation approach becomes clearer when you understand the purpose.

Strategy 3: Remember the DEFINE Phase Context
Customer identification and segmentation happen in the DEFINE phase. Answers should reflect activities and thinking appropriate to DEFINE: understanding what matters to customers, not detailed problem analysis or solution implementation.

Strategy 4: Avoid Over-Complication
Exams sometimes include tempting answers that suggest complex statistical methods or large numbers of segments. Remember that effective segmentation is actionable and manageable. Three to five meaningful segments are usually better than ten complex ones.

Strategy 5: Connect to Six Sigma Philosophy
Six Sigma is customer-focused and variation-reduction focused. Right answers typically reflect these values. Segmentation should support understanding where variation matters most to customers.

Strategy 6: Watch for Absolutes
Answers using words like "always," "never," "only," and "must" are often incorrect. Segmentation approaches vary by context. Look for answers that recognize this contextual nature while still maintaining Six Sigma principles.

Summary

Customer Identification and Segmentation is a foundational Six Sigma concept that ensures improvement projects are focused on customer needs and deliver measurable value. By systematically identifying all customers and dividing them into meaningful segments based on relevant criteria, Black Belts can:

• Understand diverse customer requirements and expectations
• Tailor improvement initiatives to address specific segment needs
• Prioritize resources toward high-impact opportunities
• Reduce variation that matters most to customers
• Increase the likelihood of project success and customer satisfaction

Success on Six Sigma exams requires not just memorizing definitions, but understanding how customer identification and segmentation support the broader goals of reducing variation and improving customer satisfaction. Use these study tips, practice with the provided examples, and remember to always connect your answers back to the business context and Six Sigma principles.