Successful Marketing Segmentation = More Effective and Profitable Marketing

by Steve Boespflug

 

Marketing must invent complete products and drive them to commanding positions in defensible market segments.”  – William Davidow, Marketing High Technology

Market segmentation is…

The process of partitioning a market into groups of customers with similar needs and/or characteristics who are likely to exhibit similar purchase behavior and can be marketed to more efficiently.

A market segment is…

A large identifiable group of customers within a market who respond differently than those in other groups to a company’s offerings and communication.

Having been in marketing for 30 years, I can’t help but think of market segments when I see new products and advertising.  Fast food, automobiles, insurance, Internet and wireless services, for example…all of them have products and messages targeting different segments.  Fresh and healthy vs. familiar and flavorful, big and rugged vs. small and economical, cute and funny vs. conservative and professional, or basic vs. feature-rich.  These distinctions are critical for any company to effectively reach, engage, attract and retain customers, and to optimize the profitability of offerings.

Behind every successful company is a good market segmentation model that guides them during every stage of the commercialization process.  Companies segment their markets to increase their competitiveness and profitability by:

  • Developing products, services, and marketing messages that meet the specific needs of the various segments, which in turn improves customer acquisition and retention.
  • Focusing marketing resources (e.g., sales efforts, media channel selection, other promotional strategies) on segments with the most potential.
  • Setting prices that fully optimize the balance between profitability and demand per segment.

Companies usually identify and describe market segments based on the results of market research and analysis. Market segmentation research reveals the most important divisions in the market and characteristics of segments that can be used for the most effective and profitable marketing.  Research can deliver a competitive advantage by identifying ways of dividing and approaching the market not yet discovered by competitors.  To be a marketing leader, every action and decision should be inspired by segmentation and profiling.

Listed below are the most common differentiating data inputs that reveal homogeneity within and separation between segments.  Whether for consumer or business segmentation, the decision on which data inputs to use depends on many factors.

  • Demographic:  considers differences and similarities by age, gender, race, family size, marital status, income, occupation, education.
  • Geographic:  country, region, state, county, zip code, city, community, neighborhood.
  • Attitudinal/Behavioral:  user status, purchase frequency/usage rate/consumption habits, price sensitivity, brand loyalty, benefit preferences, shopping habits, interests, values and beliefs.
  • Psychographic:  personality life style, social class.
  • Business-specific characteristics:  geographic and behavioral-based variables along with number of employees, annual revenue, industry, technology adoption rate.

Analysis should reveal more than one viable segmentation model, as there are multiple different ways of dividing the market.  The one to choose depends not only on how segments will be used tactically, but also on the company’s strengths and long term marketing goals.  A basic model might reveal only two segments, for example one that is more price sensitive than the other.  Another model–developed from the same data–might have six segments distinguished by personality lifestyle traits like self-driven and materialistic, mature and sensible, or opinionated and realistic.  The basic model would most likely be used in product management for product and pricing decisions, and the second model would be better in communications and advertising for designing messages and campaigns.

One segmentation model rarely works equally well for all decisions, so clients are encouraged to consider using more than one model.  Over 20 years and literally hundreds of segmentation studies, I’ve developed a process that usually involves examining and rejecting many segmentation models (up to 50 on one study) before presenting two to four really good ones to our client.  At times it’s more of an art than a science!

 

Segmentation Research Steps

Below are the most common steps (phases) of any market segmentation research study:

  1. Determine market boundaries (what segments can be ruled out?)
  2. Design instruments based on thorough understanding of objectives and client (user) expectations
  3. Collect data
  4. Perform segmentation procedures and develop multiple models
  5. Discuss models with client and repeat steps 4 and 5 if necessary (refinement can take several iterations)
  6. Profile segments, analyze data, create segment names
  7. Deliver segment-specific recommendations based on research findings

 

Keys to Success Checklist

Key Number One is to begin with the end in mind.  A grocery list of client information needs isn’t enough.  Involve all stakeholders at the start of project design and identify the specific decisions that are to be made with the segmentation results.

Segments Must Be:

  • Identifiable: Can you easily identify each segment’s wants, desires, preferences, etc.?
  • Reachable: Can you contact the segment and can you do it efficiently?  e.g., via the Internet, email, radio, TV, newspaper, mail, telephone or directly (sales meeting)
  • Significant and Relevant: Is the segment large enough or wealthy enough to justify serving them?
    Responsive: Will they respond to your message?
  • Understood and Used Properly: Do all stakeholders / employees understand and know how to use the segments for competitive advantage and efficiency in their respective areas of responsibility?  The presentation of results is only the beginning.

Market segmentation is one of the least “cut and dry” areas of the research profession.  A successful study is challenging and time consuming, but it ultimately leads to more effective and efficient marketing for the client.  THAT is the ultimate reward for market segmentation done well.

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