Market segmentation

Segmentation is concerned with identifying different groups of

purchasers in a market in order to target specific products and
services for each group or segment.
By tailoring the offering (communication, product, channel, price) to
different groups you are able to more precisely meet the needs of
more customers and consequently to gain a higher overall level of
share or profit from a market.
The process of segmentation starts with research and market
analysis to identify key segments. However the findings of the
research are just the start. To be successful, implementing a
segmentation strategy involves aligning the organisation to deliver
appropriately for each segment and there are realbusiness issues to
be considered because each segment requires investment if it is to be
properly addressed.
Segmentation is a major element of marketing. At its simplest it
involves finding groups with different preferences and different
levels of willingness to pay and creating products and offers that
target these different groups better matching what you offer
against what the market will pay for. It's important to realise that
segmentation can come with a cost and complexity overhead so
segments need to be robust, replicable and have sufficient potential
sales volume to make them worth addressing.
At a research-level there are four major ways of segmenting a
market according to the level of precision you require and the type
of data and analysis available about your customers. However, in
finding different market segments it is important to keep in mind
that the business will have to use the segments and implement
segment specific business decisions - such as tailored products,
pricing or service to meet the needs of each segment. Important
questions are therefore how are you going to place customers into
each group and how are you going to target and track each group.
Do you leave it up to the customer to select themselves into a
segment, or do you have specific segment sales managers?

1. A Priori segmentation
A-priori (pre-existing) segments are the most basic way of creating
market segments. In A-priori segmentation, the market is split
according to pre-existing demographic criteria such as age, sex or
social economic status. More sophisticated versions include lifestage
(which combines information about age, presence of children and
working status) and geodemographics such as Experian's Mosaic or
CACI's Acorn classification systems where households are allocated
to specific clusters on the basis of typical household make up and
housing type.
A priori segments are easy to define and easy to target with
advertising and media. For some sectors, for instance technology,
there are such strong relationships between age and use, that a
priori segments are all that are needed. However in other markets for instance drinks, it is more difficult to use pre-existing variables
for segmentation.
A priori segmentations are also the simplest segmentation to apply
and use. A database can be flagged or sorted on the pre-existing
data and that data used to drive sales and marketing campaigns.
However, although better than pure mass marketing, even the most
sophisticated a priori systems are quite crude. In geodemographics
there is the assumption that you buy or think the same way as your
neighbour which is clearly not always the case.
2. Usage segmentation (also known as decile analysis or pareto
analysis)
There are two ways of carrying out a usage segmentation, firstly
customers are split according to their weight of use. - heavy
users/buyers being more important targets than light users. This
segmentation can be carried out directly on customer databases
and can be extremely powerful in focusing activity based on the
value to the business, not just the number of contacts. Decile

analysis splits users into 10 evenly numbered groups, which Pareto

analysis splits the top 20% from the bottom 80%.
This is normally used in business-to-business marketsand is a
core part of database analysis for consumer markets.
Secondly, usage can be considered in terms of time and place. A
cafe might sell sandwiches at lunchtime but main meals in the
evening because the purchasers are looking for different things. It
may even be the same purchaser just in a different "mode".
Usage studies are also extremely common in market research, but
normally to determine measures of market share and
other metrics. However this information can also be used as the
basis of a segmentation approach.
Often usage segmentation is used to try and establish underlying
driving forces from other demographic variables. So if women are
more likely to be heavy users would it be easier to convert more
light users who are female, rather than target their male
counterparts. This focusing of market activity on groups that are
similar to heavy users gives rise to measures such as "uplift" - the
improvement possible over a purely random approach.
3. Attitudinal research and cluster analysis
When market research is used for usage studies, it is also often
accompanied by attitudinal research - what do customers think or
believe about the category in question. This is commonly achieved
through banks of agree-disagree scales or ratings out of 5,7 or 10.
The aim of these studies is not just to understand commonalities in
opinion, but also what makes one group of users different from
another.
To understand how attitudes affect purchase statistical techniques
such as "cluster analysis" are used where people with similar
attitudes are combined together. For instance grouping those for
whom the environment is important separately from those who
think price is more important.

This information can then be used to target groups by what they

think and how they feel, rather than just who they are. This is
particularly valuable in determining branding strategies and
keeping a brand in tune with consumers.
However, attitudinal clusters do not fit easily into database or
conventional media targeting which are more often than not based
on demographics. The translation from attitudes to demographics
means that some of the usefulness of an attitudinal segmentation is
lost. Companies can reach different attitudinal groups by offering a
range of products and a range of communication, but clearly the
lack of a clear definition means cross-over between the targeting of
segments.
Attitudinal grouping also suffer from some problems with regard to
their robustness and replicability. Cluster analysis cannot be carried
out in the field so scoring systems (similar to credit scoring) or
surrogate measures and variables are needed to allocate individuals
to a group. These additional measures can be guessed at, but
normally need to be defined and tested post-hoc. Repeating
attitudinal analysis successfully can be very difficult and expensive.
Attitudinal groups may also change or move over time as some
views become fashionable or unfashionable. It is possible to find a
segmentation that quickly disappears or is superseded by events
(imagine the music market). There is also debate about how
attitudes change - is it the advertising and the product that create
the attitudes, or do the attitudes lead to the choice of a particular
product. In particular a single individual in different circumstances
or mode, may fit into a different segment. Capturing this complexity
in a single dimensional study is difficult.
4. Needs based segmentation
The fourth method is to try and determine fundamental drivers for
the decision to create what is known as a needs based
segmentation.

Most needs-based segmentation uses Conjoint Analysis to split a

category into different levels of functional performance
(see Conjoint Design). By understanding what elements are key
drivers for individuals, specific needs and requirements can be
identified from the trade-offs that each person makes. Using cluster
analysis, this information can be drawn together to find different
segments with similar preferences and needs from the product
category in question.
Needs based segments are typically the most actionable forms of
segments as you know what drivers and performance the product or
service has to satisfy. These are normally more stable than
attitudinal groups as they should directly reflect and predict existing
market share.
However, like attitudinal studies, because cluster analysis is used,
targeting each of the underlying groups can be difficult.
Nonetheless you also have the benefit of being able to produce a
market model or market simulation using the Conjoint output.
Choosing a technique
The type of segmentation you use will depend on a lot of factors
including the cost not only of conducting the research, but also of
implementing the solution and the business impact. Consequently
ideally for each segment or group you want to know what the
economic value and the economic potential for each group is and
have some idea as to whether this is increasing or falling.
Consequently most quantitative segmentation studies are detailed
and complex.
A more cost-effective approach is to develop groups based
on qualitative research. Typically a business wants to minimise
the number of segments it has as each costs money to target
properly (database marketing and digital printing techniques allow
for far finer targeting without too much additional cost). With small
numbers of big segments, a good researcher will be able to identify

these groups within a programme of qualitative research. This will

not gather economic data, but it enables deeper insight into each
group and, if monitored over time, provides core information about
how segments change and develop.