Success Strategies: Published Articles (Market Segmentation: Do you Know who your Customers Are?)

Marketing managers are continuously searching for information about the people in their market. Many managers can rattle off statistics about them, i.e., what percentage are male, 18-24 years old, and like country music. But do they really know who these consumers are, what they want from a product or service, or the best marketing strategy for them? They may not, because not all consumers of a product or a service are the same; distinct groups exist within a market, people who have different motivations, attitudes, and desires. Segmentation is an effective market research tool used to understand complex categories of customers in an existing or emerging market.

Segmentation research is usually conducted with a combination of methods that group or cluster consumers into groups with similar characteristics. Many marketers are familiar with classic lifestyle segmentation studies that classify people based on their activities, opinions, and interests.

Segmentation can be utilized for a variety of research applications where determining the types of customers within a market is essential. The following are some real world examples of how segmentation research can be used:

A simple way of determining the price for a product would be to ask consumers outright what they think the price should be. This simplistic approach raises validity issues. For example, a consumer may say a product should be priced at $100, but may be willing to pay considerably more. An approach that directly links behavior to price in a survey, such as asking for the highest price one is willing to pay, is subject to "game playing." Respondents may realize that their answers will be used to set the real price for a product or service, and deliberately state a low price threshold.

Understand behavior. Many companies experience a low rate of customer retention. In order to identify ways of keeping customers, one marketer asked why his customers were switching to the competition. Rockbridge segmented the former customers based on their attitudes, and found distinct groups who perceived the service category very differently, and therefore, had unique motivations for turning to the competition. Some customers were satisfied with the service but left because the competition offered a better deal, while others were unhappy with the service they were receiving and switched to gain better service.
Determine service needs. Not all consumers want the same level and type of service when they purchase a product or service. This became evident when a lending company hypothesized that different groups of its customers required distinct levels of service. Rockbridge segmented its customers on needs and found that they indeed wanted differing levels of service. Some customers required a "hand-holding" relationship (i.e., frequent meetings and constant phone contact) with the service representative. Others wanted to be left alone, meaning they would call the service representative only when needed.
Assess emerging markets. Segmenting an emerging market enables a marketer to define appropriate potential target markets within the broader market and to identify how best to approach these consumers. To achieve these goals, Rockbridge has segmented emerging markets, including both users and potential users of a category, based on attitudes towards the product or service. We commonly find that different attitude segments have unique uses for the product or service along with differing attitudes toward the category.
Develop marketing strategies. Rockbridge has also segmented markets in the United States based on social and economic variables for a charitable organization. The segmentation allowed the organization to construct appropriate marketing strategies for similar areas of the U.S., and the representatives of similar markets were able to share their strategies and ideas for increasing donations.

A full-scale segmentation effort may involve a series of steps including defining issues in a management workshop, conducting focus groups to identify purchase process themes, a survey implemented by telephone or the web, and ultimately a concluding workshop to map strategic direction. An effective segmentation has a number of features:

The segments link to indicators of value (e.g., usage, intent) so it is possible to prioritize and allocate resources
The segments are differentiated by demographics as well as attitudes, can be identified in a list or database, or found through some other differentiated marketing channel (e.g., a search engine)
The resulting differences in attitudes and needs across segments is logical and valuable for planning communications and tailoring products.

The underlying analysis for market segmentation can require a range of sophisticated statistical techniques (including factor analysis, clustering procedures, and discriminant analysis). The goal is to identify homogenous groups of individuals who have more in common with each other than with individuals in other groups. The most common methodology for creating segments consists of “cluster analysis,” which refers to any number of techniques that allocate individuals to groups. Clustering techniques have undergone criticism for lacking precision and consistency across datasets and studies.

Rockbridge has developed its own proprietary statistical methodology for developing attitudinal segments called “Persona Mapping.” The underlying idea is that different mind-sets exist in a buyer population (much like personalities) and that it is possible to quantify the degree to which any individual can be characterized by a persona. Our statistical procedures for identifying personas are more mathematically precise than solutions from clustering algorithms. The solutions also tend to have a high level of differentiation between segments, making them easier to understand and act upon. And, we can assign individuals to multiple “personas” in situations where a single segment identity is insufficient for precision.

While a scheme for segmenting a market is initially developed from a specific survey or database, it is possible to continually reclassify consumers in subsequent research studies using a concise set of core questions. We can also link segments to items in a database to support direct marketing efforts.

Segmentation is a versatile tool that can answer many questions marketers have about a current or emerging market. Depending on the goals of the study, a researcher can segment a market based on a variety of variables including attitudes, needs, demographics, and social and economic variables. Segmentation is a complex tool to implement but yields rich results for marketing managers.