Lessons Learned In Market Segmentation

This paper covers some of the challenges in market segmentation - finding the right approach, uncovering new segments, and getting actionable results. SDR Consulting identifies certain practices that are often associated with successful segmentation programs.

Call it regional marketing, target marketing, micro marketing, niche marketing, one-on-one marketing, or plain old market segmentation. For most business firms, locating and specifically targeting unique market segments is both a reality and a necessity in today's competitive market place. In North America, the assumptions of the mass market no longer hold true for most businesses and product categories. Indeed, in a recent article in Marketing Management, marketing guru Fred Webster questioned whether a sustainable mass market ever existed in North America. He further argued that the mass market is the exception rather than the rule in most developed economies. The reason is simple – different product and service category users have different needs, thus different demand functions.

Creative and actionable market segmentation strategies often afford the business organization a strategic advantage over their compe­tition. If a firm can address its markets by way of a creative new vision of how that market is structured and operates and can uncover the needs and wants of the segments therein, then it has the opportunity to act on that vision to enhance its own profitability, often at the expense of the competition. It is no secret that foreign firms often enter a domestic market by segmenting the mar­ket, uncovering an under-served niche, and then concentrating their marketing and financial resources into that niche. Once established, and often dominating in that niche, those market invaders use their dominant position in the niche as a base of operations to expand into and penetrate other segments.

Most firms in North America do some type of market segmentation. Many of those firms use a segmentation basis that is convenient – demographics, SIC codes, or category spending amounts. These segmentation schemes are seldom optimal – that is, they do not adequately differentiate purchasers based on their varied demands for product category performance.

The best market segmentation schemes are based on market research of purchasers and potential purchasers in the product or service category. However, market segmentation research poses unique challenges.

1. Truly actionable results are particularly difficult to achieve in segmentation research without careful planning and forethought.
2. There is no such thing as a significance test that tells you when you got it right.
3. More than in any other research application, different business objectives may lead to very different conceptual approaches, interviewing methodologies, analytic techniques, etc. Hence, there is no single best approach to segmentation.
   • Consumer segmentations have different dynamics than B-2-B segmentations.
   • Multi-cultural (or multi-country) segmentations require different approaches than single-county segmentations.
   • Exploratory segmentations use different techniques then predictive segmentations.
   • Multidimensional segmentation schemes provide different insights than unidimensional segmentations.
   • Products are segmented differently than product users, which are segmented differently than usage occasions.

These are just a few of the complexities of good segmentation research, and they illustrate just how important it is to be clear about objectives and expectations when starting a segmentation program. Segmentation schemes are often deceptively easy to develop – but the results can be stunningly useless if the developer fails to recognize the complexities or simply applies a standard analytical scheme.

That is why many researchers say that segmentation is as much art as it is science. While there is much truth in this statement, it falls short of the whole picture. More than any other research enterprise, good segmentation requires not only technical savvy but also category knowledge, business acumen, a strong sense of organizational dynamics, good judgment, and a certain amount of guts and stamina.

The fact is that all markets have segments with different wants and needs. Companies that are successful in uncovering these segments and delivering products and services tailored to specific segments have been able to achieve uncommonly strong results in the marketplace. But doing market segmentation well is never easy. Based on more than 30 years of experience doing segmentation work, SDR Consulting has identified certain practices that are often associated with successful segmentation programs:

Segmentation is treated as a marketing strategy rather than a research project. As noted above, market segmentation is a strategy for driving business growth. Often, but not always, a market segmentation strategy entails conducting a market research study.

Many companies have been quite successful pursuing market segmentation strategies that were not based on a market research-type segmentation study. Examples of these types of segmentations include:

1. Channel segmentation
2. Geographic segmentation
3. Frequent shopper/traveler programs

Senior Management champions the strategy and the process. Since a successful segmentation is both a reflection of corporate strategy and one of the major inputs to corporate strategy, it is essential to have full senior management support. This also implies that senior management needs to be closely involved in the development process.

Too often market segmentation studies are designed and executed at research staff levels and do not include the strategic mandates of senior management.

The segmentation process balances research approach and implementation. Problems often arise when the segmentation merely is an artifact of an analytical technique and is not aligned with strategic objectives. The most actionable segmentation is rarely the same solution that is analytically optimal. To be successful, you must “begin with the end in mind” and always be thinking about implementation.

A successful segmentation will probably impact many different areas of the company. Some examples:

1. Product development – Products should be designed specifically for a particular segment rather than some “average” customer or consumer. A good segmentation uncovers the different needs each segment has in your product category. Successful implementation of the segmentation strategy involves tailoring new offers to fit the unique needs of target segments.
2. Sales – Segmentation provides the kind of powerful knowledge and insights that Sales can use to drive business, and can be the cornerstone or starting point for a category management strategy. It also provides important guidance into product mix and pricing decisions. For salespeople to effectively use segmentation, however, it must be developed and communicated in a way that Sales can master and customers can understand.
3. Information Technology – Segmentation can often have surprisingly far-reaching IT impacts. For example, segmentation can sometimes provide the organizing principle behind the way the company organizes its web site. Many computer companies set up their websites with completely different areas, product offerings, and pricing by segment. Another example: an electric utility built separate needs-based segmentations for its residential and business customers, then scored all of its customers in its data warehouse using a neural network model. In this way they were able to use segment membership as a tool for understanding customer needs and reporting business performance.
4. Market research – Obviously the research department has to be ready to infuse the segmentation worldview into every piece of research. This means building a practical means of identifying the segment membership of future respondents, and having the resources to target research by segment and analyze by segment.

This is an excerpt from a 2004 report; read the full version in pdf form here.

This content was provided by SDR Consulting. Visit their website at www.sdr-consulting.com.