Why use market segmentation ?

Why use market segmentation?

The myriad breakfast options available to consumers in a supermarket are not down to manufacturers’ altruistic desire to appeal to everyone’s tastes, but the more prosaic imperative of maximizing profits. Segmented marketing is almost always more commercially effective than mass marketing (that is, where everyone is targeted in a uniform way). This is because:

-Buyers are more inclined to select products and services that appear to be crafted to their requirements.
-Companies can better ‘cut through’ in their marketing if their message resonates and is targeted through relevant channels.
-Companies can be selective and chase only to those parts of the market that they know to be most profitable for them. Choosing exactly who a company wishes (or does not wish) to do business with is perhaps the most important principle of segmentation.
-Some organizations may have a competitive advantage in serving specific parts of the market. For example, national ‘flag-carrier’ airlines that have access to landing slots at the world’s most popular hubs are well-placed to serve the needs of business travelers. By contrast, budget airlines with bases at less-costly provincial or regional airports instead have an advantage in appealing to more price-conscious fliers.
-Segmentation drives innovation. Where the requirements of a segment are not adequately met, having a framework for defining what the market wants or needs catalyses efforts to plug these gaps.

Types of segmentation approach

Geo-demographic segmentation

At its simplest, an organization may choose to segment markets based on location. For example, a multinational company may have different marketing strategies for specific countries or regions.

Demographic approaches capture observable or measurable characteristics about individuals or purchasing units that may have implications for how an offer might be perceived (such as age, gender, household income, education level or occupation). These variables can be taken individually, or combined together to form composite descriptions of a target audience (eg ‘young, wealthy professionals’ or ‘middle-aged, male, blue-collar workers’). Within consumer marketing, it is common for demographics to be used as a basis for defining life stage groups that correspond with specific requirements. For instance, car manufacturers focus cheaper, smaller and more stylish models at younger, newly qualified drivers, whereas retirees instead may be targeted with products and messaging around practicality, reliability and fuel economy. The interface of location and consumer profile gives rise to Geo-demographic approaches, where specific clusters of demographic characteristics occur in combination. with each other. Voting intentions are often linked with age and social class, and so a political party campaigning for public office will closely analyze the demographic composition of a specific electoral area. The soundbites and political policies that are then promoted to the electorate of each region are targeted based on its demographic composition. Messages about schools and childcare will be emphasized where there is a high incidence of families, while there will be a greater focus on healthcare and pensions for areas with older populations. Several market research and marketing information providers have developed segmentation frameworks that describe populations at the neighborhood or postal code level. Acorn (in the United Kingdom) and PRISM (in the United States) are two such commercially available schemes, each with around 60 or 70 distinct segments. This information can be appended to an organization’s customer and marketing databases to assist with local targeting of products and services.

Behavioral segmentation

It is often said that actions speak louder than words. This is no less true in the discipline of market segmentation. A buyer’s habits and observable behaviors can be very strong predictors of their underlying needs. The analysis of one’s behavior is especially powerful because it can reveal insights that research respondents cannot recall or express through conventional surveys. Retailers have long recognized the value in mining purchase behaviors. Many supermarkets use loyalty cards to link a customer’s purchasing patterns and store usage back to individuals. These enormous internal transnational datasets are then analyzed using complex statistical modeling techniques to categorize consumers into segments. This information can then be used to target tailored promotions and special offers at specific groups of shoppers. Behavioral segmentation tend to be highly ‘dynamic’ in the sense that the size and nature of segments may constantly be in flux in response to the latest data. This dynamism has been further accelerated by rapid developments in digital technologies. Brands and digital marketing providers (like Google) have access to a huge amount of constantly updated data regarding the online behavior of individuals. Market research agencies are also now using specialized applications to collect online usage data from opted-in research participants. The data collected from these passive metering techniques then forms the basis for segmentation, often as a complement to survey-based research. At a much simpler level, organizations may also choose to segment their markets based upon the purchasing status of a customer. Those that are current, loyal customers may be grouped and treated differently from recently lost customers, or those whose purchase volumes have steadily decreased over time. For committed customers, the marketer’s chief objective will be take advantage of their loyalty – for instance, by encouraging them to refer the brand to a friend or family member. For lapsed customers, the organization will wish to understand how to win this segment back.

Attitudinal and needs-based segmentation

Arguably the most difficult-to-achieve and implement segmentation is one based upon the buyer’s opinions and needs. Needs-based market segmentation is notoriously challenging because the requirements or beliefs of an individual constantly change (indeed they may even be different from one day to the next). Customer needs are also very difficult to deduce from afar, making it tricky to allocate current or potential customers to segments unless they are asked questions directly. For all the potential pitfalls, needs- and attitudinal-approaches are often the most powerful. The brand that is best able to appeal to the deeper-seated feelings, motivations and concerns of the market is the one that will frequently win out. Many research-driven segmentation have classically been formulated from survey responses to a series of many agree/disagree attitudinal statements that seek to get under the skin of the attitudes of the end-user or buyer. This feedback is often recorded on a 5-, 7- or 10-point Likest scale as in the example below table one(1):



A significant drawback of this approach is that it is possible for respondents to give similar answers to many of the statements, thus limiting the scope for creating distinct segments. In reality, very few segmentation are based upon attitudes alone.

More often, attitudes are used in combination with other variables such as demographics and behavior to imbue descriptive segmentation schemes with more character or ‘personality’. When segmenting the needs of a market, it is typical to measure this through the use of ‘trade-off’ exercises. In any purchase decision, buyers will have one or two purchase criteria that are non-negotiable, some which are of secondary importance and others that are merely ‘nice to have’. To test this in survey research, a list of between 5 and 10 purchase criteria are identified and then evaluated, either using a simple ranking or through a constant-sum scale or points-spend question – as in this example below table 2:



Below is a list of factors that others have said are important when choosing a brand. Please spend 100 points across the factors to indicate their importance to you. You can spend your points on as many or as few issues as you prefer. The list of purchase factors tested can either be based upon the judgment of the researcher and their client, or it can be informed by prior, exploratory research based upon qualitative methods (such as in-depth interviews or focus groups). The constant-sum scale question is well suited to needs-based segmentation exercises because it forces respondents to make compromises between their different requirements in a way that simulates real-world purchase decisions. When the sample size is large enough, the data gathered from this question can then be run through cluster analysis in order to identify respondents with similar response

patterns. The resulting segments tend to be characterized by high scoring on just one or two of the factors, conferring them a clear and distinct profile. The constant sum question is also able to be used in low-sample surveys as common patterns of response can still be deduced qualitatively in a table or spreadsheet. Needs-based trade-offs can also be measured using other statistical techniques:

Business segmentation

Much of the preceding is concerned with the segmentation of consumer markets. Even so, many business-to-business organizations use similar principles in order to segment their markets too. Instead of demographics, the B2B organization typically segments based on what are termed ‘firmographic’ characteristics such as:

-the size of the company (judged by number of employees, revenues, sales or profit margins);
-the industry vertical of the organization;
-channel used to serve the customer (customers served through intermediaries or brokers are usually separated from customers that are sold to directly);
-the future growth potential of an account (even small customers may be considered strategically important if their growth trajectory is ahead of the rest of the market).

The very largest customers of a B2B organization are often small in number, but high in complexity. Adopting a sustainable, segmented approach with large accounts is often impractical, as the requirements of these companies are too specific to be generalized under broad labels. Accordingly, many business-to-business firms use dedicated, key account managers to serve these customers, leaving segmentation techniques to divide and conquer their ‘longer tail’ of smaller companies. Just as in consumer markets, behavioral and needs-based approaches to segmentation are increasingly being embraced by B2B organizations. The researcher should be mindful, however, not to conflate the personal views and preferences of the business decision maker with those of his or her employer.

Hybrid segmentation

Each of the approaches described above has its advantages and drawbacks. Needs based techniques are powerful, but are difficult to implement, while demographic-led techniques are simple but easy for competitors to copy. Companies are increasingly using hybrid segmentation that blend the best aspects of each approach. An effective way of structuring these different segmentation methods is to align them into a grid, where the intersection of different groups of needs, behaviors or demographics defines the segments themselves. This example is based upon a segmentation adopted by a US low-cost airline. Their scheme combines flying behavior (in the columns) with the key needs of different groups of passengers (in the rows):



It is notable that the airline elects not to address certain needs because they do not form part of their business model. The company also chooses to prioritize only three segments of the market where it has the greatest competitive advantage – that is, in serving the needs of frequent travelers and coordinating group bookings. To the occasional traveler or those looking for an upgraded experience, the airline is not necessarily any better than its competitors and so it does not actively market to these segments (although it will take bookings from them).