how to use segmentation effectively

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How to use segmentation effectively

Laurie Young

Go to: EXECUTIVE SUMMARY

Go to: WHERE TO START?

Go to: ESSENTIALS

Go to: REMINDER CHECKLIST

Go to: LEADING CASE STUDIES

Go to: REFERENCES & FURTHER READING

EXECUTIVE SUMMARY

Customer segmentation is one of the fundamental building blocks of marketing. It is hard to imagine creating effective

communications, innovative offers or successful brands without it. So, senior marketers frequently need to challenge

outmoded or ill-conceived segmentation strategies before they can do anything.

Segmentation is based on the fact that human beings tend to behave like tribes, with group similarities, and therefore buyers

can be clustered around common, identifiable traits. By customising a brand's offer to meet those traits, suppliers can gain

competitive advantage and save costs by prioritizing the most attractive segments.

Unfortunately, potential segments can be complex, hard to access, and awkward to reconcile with existing ways of targeting

buyers in sales, customer service or media scheduling. To deliver genuinely competitive benefits, effective segmentations

need to be individually crafted, at some expense. They must be long-term, applicable across different activities, forward-

looking, sustainable and strategic. Once developed, there are several ways to check that they are effective but the key test is

when the company's leaders have agreed not to serve sections of the market. Only then is segmentation really affecting

company operations.

Some thinkers argue that traditional segmentation approaches have been superseded by technology. They emphasize the

Title: How to use segmentation effectively

Author(s): Laurie Young

Source: Warc Best Practice

Issue: August 2011

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increased personalisation of goods and services in a digital age, arguing that companies must increasingly respond to each

individual buyer's needs, and do so, where possible, by using real time data and interaction.

Yet, this is not entirely new. High-end industries have always taken this approach (in tailored clothing, custom cars or personal

banking, for example). Technology is now allowing customisation to move into mass markets, enabling the likes of Amazon and

Zappos to unite scale and customisation. At the time of writing, however, many organisations are reporting failures in the

implementation of CRM systems designed to support such granular profiling and marketing. There is also little evidence that

buyers have ceased to follow trends or display group mentalities.

This paper, therefore, takes the view that numerous businesses are creating profits through the careful identification of

valuable segments and the positioning of brands, products or services toward those segments. Insights built on deep

knowledge of groups of human beings have always been a source of competitive advantage. They remain so today.

WHERE TO START?

The best way to start is probably by jettisoning any groupings of customers which have been used mainly for the internal

convenience of the business. For instance, a number of companies simply group their customers around the products and

services they buy. This is wrong, restrictive and self-serving. In reality, there is no such thing as a market for mortgages or

personal computers. There are only human beings who buy things and they have a multiplicity of different needs, contexts,

wants and aspirations. Marketers must start with a desire to understand those human beings.

Whether the supplier is operating in a business-to-consumer or business-to-business environment, it is important to consider

the characteristics of the people targeted. These characteristics may relate to the benefits buyers expect from their purchase,

their use of media, attitudes to the category or preferences for different retail and distribution channels. Properly done,

segmentation can prefigure the future intentions of buyers. Moreover, although human beings can be unpredictable, difficult

and irrational, they tend to group naturally. In the real world, markets segment themselves.

ESSENTIALS

i. How to construct a segmentation strategy

Although this is so fundamental to marketing, there is no recognised process to develop an effective segmentation. Some

commission research agencies to look for identifiable clusters in customer data. Others use the creative teams of their

advertising agencies to unearth crucial insights. In fact, several of the famous segmentation strategies of the past (like

"YUPPIES") were created by agencies. One academic who studied market planning processes very closely, Professor

Malcolm McDonald (see McDonald, M. 1998) identified some common steps, shown in the diagram below.


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Most client-side marketers start with an idea of the groupings in their market; with a hypothesis. This might be created by

examining customer buying behaviour or it might be the intuitive conclusions of experienced managers. It might even be based

on an opinion that a clever segmentation from somewhere else might be used as a starting point (perhaps one published by a

social observer or one from the past).

During this initial exercise, marketers ought to identify common issues around which the different groups will behave. These

segmentation dimensions or variables can be scaled using some simple, judgemental criteria. For example, if the category

under examination was coffee, the exercise could seek to use dimensions such as the particular benefits sought by consuming

the product, and the impact on attitudes and consumption of variables such as mood, need state, social situation and time ofthe day. By contrast, in the consumer electronics sector more focus might be placed on distinguishing technological literacy. In

B2B markets, the variables would be quite different.

This initial planning can be quite easily tested by using data on the behaviour of existing customers. Why invest in new

research when the company has customer knowledge easily and freely available? If this crude test suggests that the

segmentation dimensions might work and that clusters might appear, then serious research is called for. Successful

companies normally invest in a two-step process which uses in-depth, qualitative techniques to pursue and tease out trends;

backed by quantitative techniques to confirm that they are representative of the whole market. If not, then it is back to the

drawing board. If the research identifies potential segments then these should be tested using marketing programmes which

represent, as far as possible, the rough and tumble of the real marketplace.

Only then should the segment be compared to those used in the past by others. They can give real insight into how to develop

and implement effective segmentation-based campaigns. Different segmentation methods include:

Demographics and socioeconomics:Grouping people according to physical characteristics (age, sex) or

circumstances (income, occupation or education). Examples include BT's Freestyle 700 Familyin the UK and Big Pond

Broadband's campaign for Australian retirees, The Power of Belonging.

Life stage:This group's buyers according to the phase they have reached in their life such as "married", "home building"


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or "retired". They might become "freedom seekers", "dropouts" or "traditionalists". It is common in financial services as,

demonstrated by the Halifax's UK Student Current Accounts campaign.

Psychographics:The grouping of people according to various personal characteristics such as personality, interests or

values. The US Effie-winning MINI CarFun Footprintcampaign shows this approach in action.

Related to psychographics is Lifestyle: Grouping customers by a common approach to life. Toyota's US campaign, Are

you Venza?used this approach to a segment of African American consumers.

Behavioural or attitudinal:Grouping according to a particular history of behaviour or attitudes, which may affect product

and category usage, price sensitivity, and other variables. These include purchasing and media preferences and habits in

areas such as smoking, drinking and other public policy fields. Public sector and campaigning organisations often build

strategies on behavioural and attitudinal data.

Geographic/location:Grouping people according to their country of birth or area of residence. This can focus on the

region, population density and climate. It can involve county, town or even street.

Benefits sought:The grouping of people according to the advantages they are seeking from the product or service. For

instance, as early as the 1960's, Russell Haley (Haley, 1968) published segmentation for the toothpaste market based on

this approach. Customers were in the "sensory" segment (seeking flavour or product appearance) or the "sociable"

segment (seeking brightness of teeth) or the "worriers" (seeking decay prevention). More recently, Air New Zealand

employed a needs based segmentation for long haul travellers.

Tribal:A specific example of behavioural segmentation which groups customers according to the social groups or

cultures with which they identify.

Context:Proposed by Professor Paul Fifield in the early 1990s (Fifield, 1992), this method groups customers according

to the context in which they use a product or service.

In contrast to these consumer approaches, business-to-business segmentation types have included: industry sector,

organisation style, organisational structureand company or industry maturity.

ii. Agreeing a segmentation.

Segmentation should shape more than just marketing. Indeed, if the marketing department adopts a sophisticated

segmentation strategy that the rest of the organisation ignores, then serious damage can be done. So, marketers should

create a full investment and implementation plan to support their proposed segmentation.

As part of the implementation of this plan, everyone in the organisation will eventually need to be familiar with the new

segments and the implications for their particular activity. This initiative is likely to involve some return on investment analysis,

political lobbying and effective internal communication. Such real world implementation issues are the reason that many

sensible and well-worked segmentation concepts fail to take hold.

It is, therefore, vital there is an agreement amongst stakeholders from the outset on what the criteria for a successful

segmentation should be. These include:


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l Homogeneity:Can the members of a segment be shown to act in the same way?

l Size and profitability:Is the prioritized segment big and profitable enough?

l Distinctiveness:Are the segments sufficiently different?

l Universality:Will this segmentation work across many/all of the organisation's territories?

l Stability:Will the clusters be reasonably stable over time?

l Usability:Are the clusters usable in terms of our current marketing processes (especially in media and creative)?

l Accessibility:Is it possible to reach this segment?

l Attractiveness/relevance:Would customers want to identify with this segment?

But, above all, does this segmentation make so much sense to the organisation's leadership that they are prepared to decline

or turn off those parts of the market who are not the intended customer groups? Executives are rarely able to say no but that is

the essence of effective, segmented marketing.

iii. How to apply segmentation.

If the segmentation passes these criteria, it will need to be applied to the following functional areas:

i. Communications: all communications to people who form part of the segment need to be increasingly customised to their

understanding, needs and likely responses. This applies to the choice of media and communications channels, brand

positioning and creative components of any campaigns. Response mechanisms need to be set up which will allow

communications to be increasingly customised to these segments.

ii. Brand: a brand is such a multifaceted entity that it will appeal differently to different groups of people. It will need to be

progressively adjusted to each segment's perceptions. In some cases, it will be sensible for a brand owner to position

different brands at different segments.

iii. Products, services & innovation: each of the company's offers should be adjusted to the needs of its main segments.

Even the innovation process itself might vary according to each segment. For some segments, new ideas might arise

from careful, targeted research, whereas in others, they might come from "co-creation" with customers.

iv. Pricing: as the firm's offers become progressively adjusted to each segment's need, marketers will find that they

understand the mix of features and price tolerances more precisely. It will turn pricing from an accounting into a market

based exercise.

v. Customer care: the markets will need to adjust bland customer service operations (like guarantees, call centres or

product replacement mechanisms) toward the more precise expectations of segments. Good service influences

repurchase intent and that, in turn, depends on how customer service meets expectations. Segmentation is a major tool in

understanding the intended customers' expectations. The company cannot provide excellent service without it.

vi. Operational communications: there are a range of communications which companies supply to customers which tend to

be outside the vision of the marketing function. These include: contracts, invoices and product operations manuals.

Segmentation allows the firm to adjust these more precisely for intended customers.

REMINDER CHECKLIST

i. Is the current method of categorising customer really market-based or is it for the convenience of internal management?

ii. Have you reviewed successful types of segmentation of the past and, with the knowledge of your own customers, created

a hypothesis to research?

iii. Have you agreed the criteria for a successful segmentation?


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iv. Do you understand and agree with the segmentation dimensions used?

v. Have you scored the dimensions and tested them with existing customers?

vi. Have you planned for research and test marketing programmes?

vii. Have you devised an investment strategy to present to the firm's leadership and sell to the organisation as whole?

LEADING CASE STUDIES

MINI Carfun Footprint

Effie Worldwide, Silver, North America Effies 2010

This case study explains how MINI set out to target the environmentally-concerned segment of its audience that had been

considering buying rivals such as the Toyota Prius. During the period covered here, MINI grew its sales despite in a declining

industry.

The Power of Belonging

Advertising Federation of Australia, Gold, Australian Effie Awards, 2010

Telstra Big Pond set out to target retirees and empty nesters with a highly emotional campaign which maintained the brand's

leadership position in the Australian broadband market.

Flying With the Simpsons: An Award Winning Research Paper That Helped Air New Zealand Reinvent the Long Haul Air

Travel

Horst Feldhaeuser and Hudson Smales, ESOMAR, Asia Pacific, Melbourne, 2011

This detailed research paper outlines a needs-based segmentation which was then developed into a communications and

service programme for a high value customer segment.

Toyota Venza: Are You Venza?

ARF Ogilvy Awards, Silver, Multicultural, 2011

The automotive brand owner set out to lure African-Americans by selling its brand as a lifestyle choice in tune with this

segment of its audience.

BT Freestyle 700 Family

Design Business Association, Bronze, Design Effectiveness Awards, 2010

This unusual design-led case study highlights the role played by product design in capturing a segment of the fixed linecustomer base namely, pensioners.

Nestle Fruita Vitals: Fruit Fuel

Khalid Naseem and Ainee Kalim, Warc Prize for Asian Strategy, Entrant, 2011

This case study describes how Nestl achieved ambitious growth targets in Pakistan for its packaged-juices by radically

repositioning its brand, targeting a lifestyle market segment and creating the Fruita Vitals sub-brand.

REFERENCES & FURTHER READING


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l John E G Bateson & Douglas K Hoffman, Managing Services Marketing. Thomson Learning, 1999.

l Les Binet & Sarah Carter, Mythbuster: the realities of segmentation. Admap October 2010.

l J Clark, Jones J, E Romanou & M Harrison, Segments, Hugs and rock n' roll. Market Research Society Annual

conference 2009.

l Paul Fifield, Marketing Strategy: How to Prepare It-How to Implement It. Butterworth Heinemann 1992, 1998 (2nd

edition).

l RI Haley, Benefit Segmentation: A Decision-Oriented Tool. Journal of Marketing, July 1968, pp30-35

l M McDonald & I Dunbar, Market Segmentation: How to do it, How to profit from it. MacMillan, 1998.

l Roland T Rust, Anthony J Zahorik, Timothy L Keiningham, Service Marketing. Harper Collins, 1996.

l B Sternthal & A M Tybout, Segmentation and targeting. Kellog on marketing." 2001

l J Stienstra, The myth of segmentation. ESOMAR Congress, Sept 2010.

l Michael Tuma, Reinhold Decker, Sren Scholz, A survey of the challenges and pitfalls of cluster analysis application in

market segmentation. Int journal of market research , Vol 53, no3 2011

l Tupot M. L. & Stock T. What's next for segmentation? Admap Feb 2010

ABOUT THE AUTHOR

Laurie Young is a businessman who likes to write. During his career he has held senior marketing positions at BT, Unisys and

PricewaterhouseCoopers, and built and sold an agency. He has published around a million words, is the author of The

Marketer's Handbook, John Wiley & Sons, 2011, (view on Amazon.com), and writes frequently for Market Leadermagazine.

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