Smarter Segmentation

A fundamental task of marketing is to perform segmentation analysis. When properly applied, segmentation guides companies in tailoring their product and service offerings to the groups most likely to purchase them at a price that generates sufficient profits.  Unfortunately, many companies incorrectly segment their markets around factors that are not strongly linked to consumer outcomes, profitability or strategic fit.  As a result, these firms do not maximize share and profitability and are vulnerable to competitive advances.

Most companies segment around a single dimension such as product performance & image, price point, usage or psychographics.  While these are relatively easy to comprehend and measure, they often miss the mark in terms of effectiveness and efficiency.    For example, segmenting by feature or functionality often leads to product improvements that are irrelevant to a consumer’s fundamental need and desired outcome.  This type of segmentation also tends to inflate the cost structure due to wasteful R&D and marketing expenses.  Segmenting by customer type also creates problems of its own.   When marketers design a product to address the needs of a typical customer in a demographically defined segment, they cannot know whether any specific individual will buy the product.  Marketers can only express a likelihood of purchase in probabilistic terms.

Psychographic segmentation is even more nebulous as a tool.  Psychographics may capture some truth about real people’s lifestyles, attitudes, self-image, and aspirations, but it is very weak at predicting what if any of these people is likely to purchase in any given product category.

A better approach to segmentation considers different and multiple factors in aggregating like customers and prospects.  Some of these dimensions include: 

The job to do – Focusing on what outcomes customers actually want will help define what the segment, product and usage boundaries should be.  To quote the famous Harvard Business School Professor, Theodore Levitt, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Arm and Hammer baking soda is an excellent example of job-focused brand that has been extended much farther than traditional baking soda to new usages and markets (think laundry detergent, toothpaste and deodorant).

Link to corporate strategy – Segmentation decisions must be dynamic, reflecting major new strategic moves instead of focusing only on targeting customers in traditional markets. The segmentation analysis should examine the need/outcome states of adjacent markets as well as under serviced or dissatisfied users in traditional markets.  A good example of successfully linking multiple segments to strategy has been the evolution of Apple from a PC-only business to a wireless and consumer electronics powerhouse.

Adjacent revenue pools – To grow revenues, a company should understand what makes its best customers as profitable as they are and then seek new customer segments who share at least a couple of those characteristics. Many banks such as Wells Fargo and ING do an excellent job of ‘following the money’ into new and lucrative product segments.

Although segmentation can illuminate market potential, it lacks the predictive power of actual purchase behavior including usage, brand switching, and retail-format selection. To uncover this information, researchers can utilize laboratory-like simulations like conjoint analysis to measure how purchase behavior would change when you change product features, pricing or channel options.

To sustain profitable growth, marketers must use smarter segmentation strategies to link their products to how customers actually live their lives and how their company competes today and tomorrow.

For more information on our work and services please visit us at Quanta Consulting Inc.


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