As a communication professional, you will become more valued if you can contribute to your company’s marketing activities. Much better than just leaving marketing-related activities totally with marketers. A key aspect of marketing is market segmentation, and even though communicators play a minor role, it is important for us to understand the process, which is more sophisticated than we generally realize. It’s in our own interests to be able to talk knowledgeably about the process in collaboration with marketers, with our own team, and in management meetings. In this way, we can add value to the communication role, the marketing communication role, and the strategic planning role of the organization. The bottom line: Understand market segmentation better so you can be a more effective communicator.
Equally important is that we can adapt some of the concepts from market segmentation to the comms role. This knowledge is invaluable for planning and implementing stakeholder relations activities.
So, let’s walk through a thoroughly professional market segmentation process, which will show us where marketing communication and market segmentation activities fit.
It is too costly and overwhelming for a business to market directly to everyone who could be a possible future customer, so market segmentation is needed to enable businesses of all sizes to reach groups of consumers who have similar characteristics. These groups can be subdivided into the most promising segments, and messages developed to appeal strongly to them to satisfy their needs and wants.
At the simplest level, segmenting (also called matching, targeting, tailoring, customizing, or personalizing, or niche marketing) takes place when “a persuasive message has a characteristic in common with the recipient of that message,” explains Jacob Teeny from the Kellogg School of Management at Northwestern University in Illinois.
Firstly, a couple of definitions:
“The purpose of marketing is to match the genuine needs and desires of consumers with the offers of suppliers particularly suited to satisfy those needs and desires,” state Dolnicar, Grun & Leisch in their 2018 book, Market Segmentation Analysis, published by Springer. You can download a free PDF of the 324-page book, or individual chapters. A softcover version of the book costs 49.99 euros, so the free PDF is an attractive alternative if you are interested.,
The purpose of market segmentation is mainly to increase profitability in marketing to potential customers, and is also valuable for achieving greater impact with other target audiences.
Market segmentation is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program, as defined in Marketing Strategy, by Walker, Gountas, Mavondo & Mullins (2012).
Another angle: market segmentation is the practice of dividing your target market into approachable groups. Market segmentation creates subsets of a market based on demographics, needs, priorities, common interests, and other psychographic or behavioral criteria used to better understand the target audience.
Market segmentation lies at the heart of successful marketing. In simple terms, it involves cutting markets into slices. Ideally, consumers belonging to the same market segments – or sets of buyers – are very similar to one another in their consumer characteristics. We’ll look at this more closely later.
Market segmentation analysis, as defined by Dolnicar, Grun & Leisch, is “the process of grouping consumers into naturally existing or artificially created segments of consumers who share similar product preferences or characteristics.”
Companies that properly segment their market enjoy significant advantages. The main short-term aim for most of these companies is increased profitability, while other types of organizations may use other performance measures like the amount of donations received or number of volunteers recruited.
Several examples show greater profitability and other benefits resulting from market/customer segmentation activities:
A study by Bain & Company, reported in the Harvard Business Review in 2008, found that “81% of executives said it [customer segmentation] was a crucial tool for growing profits.” However, “fewer than 25% believed their companies used it effectively.” Bain also found that “over a five-year period, businesses that successfully tailor product and service offerings to desirable customer segments post annual profit growth of about 15%. By contrast, companies that fail to connect the right value propositions to the right customer segments realize annual profit growth of only 5%.”
A range of other benefits outlined by Qualtrics:
Market segmentation is a key marketing strategy, but it needs to be the most appropriate solution. It is a long-term strategy requiring senior management to make a significant commitment, and provision needed for resources involving substantial changes and financial commitments.
Research is necessary, including field surveys and focus groups, testing of alternative marketing messages and advertising concepts. Clearly an anticipated increase in sales is necessary to justify the commitment of resources. The market segmentation strategy needs to create more net profit than other marketing options.
Potential changes include the development of new products, refining existing products, changes in pricing and distribution channels used to sell the product, as well as all marketing communication in support of the changed strategy. In turn, these changes are likely to lead to changes within the internal structure of the organization. To maximize the benefits of market segmentation, organizations base themselves fundamentally around market segments, rather than organizing around products. Business units responsible for segments are suitable to ensure ongoing focus on the evolving needs of market segments.
These changes require a long-term organizational commitment, and therefore the decision to investigate the potential of a market segmentation strategy must be made at the highest executive level, and must be systematically and continuously communicated and supported at all organizational levels and across all business units.
Several factors are likely to affect a company’s segmentation strategy:
Organizations need to make a substantial financial commitment in implementing market segmentation. Various people have to commit considerable time to conduct a thorough analysis, which can be quite a sophisticated process. If senior management commit to a segmentation strategy, more human and financial resources are required to develop and implement a customized marketing mix.
Evaluation of the success of the segmentation strategy, and the continuous monitoring of market dynamics (which may indicate a need to modify the strategy) imply an ongoing commitment of resources. And these resource commitments are made under the assumption that a worthwhile ROI on this investment will be achieved.
In the worst case, if market segmentation is not implemented well, the entire exercise is a waste of resources. Instead of leading to competitive advantage, a failed market segmentation strategy can lead to substantial expenses generating no additional return at all, instead marginalizing staff involved in the activity.
Descriptions of the number of steps in the segmentation process may vary, depending on the strategists involved and whether some steps are subdivided. Here are some important steps:
The segmentation team has to ask a number of questions which fall into two broad categories. Answering these two questions forms the basis of the target segment decision:
Unfortunately, there isn’t a standard formula for evaluating the attractiveness of market segments and so a good deal of subjective judgment must be exercised. Nevertheless, a number of considerations can be used to assist in evaluating market segments for overall attractiveness. The following lists a series of questions that can be asked.
Despite all the benefits of market segmentation, businesses still find it hard to implement market segmentation best practices. This raises concerns regarding best practices of market segmentation. It is highly important to understand market segmentation benefits and limitations to overcome its challenges effectively.
Most of these barriers can be identified from the outset of a market segmentation study, and then proactively removed. If barriers can’t be removed, the team head should seriously consider abandoning the attempt of exploring market segmentation as a potential future strategy.
In addition to tasks, this checklist includes a series of questions which, if not answered in the affirmative, serve as knock-out criteria. For example: if an organization is not market-oriented, even the best market segmentation analyses can’t be successfully implemented.
If going ahead with the market segmentation analysis, you need a strong sense of purpose and dedication, along with patience and a willingness to appreciate the inevitable problems that will be encountered in implementing the conclusions reached by analysis.
You need to be able to action these steps to set up a market segmentation team:
According to Dolnicar et al., certain criteria are used to determine if market segments resulting from the market segmentation analysis show enough promise to proceed. Segmentation work requires several criteria to be satisfied. If not, you should not commit:
These criteria must be understood by senior management, the segmentation team, and the advisory committee. Most of the criteria don’t require further specification, but some do. For example, while size is non-negotiable, the exact minimum viable target segment size needs to be specified.
Market segmentation is a strategic marketing tool. The selection of one or more target segments is a long-term decision significantly affecting the future performance of an organization.
Work done in the earlier stages of the segmentation process enables analysis to identify where consumer preferences are.
Many marketers consider the 4Ps of marketing comprise the main elements of the marketing mix:
Market segmentation is not an independent marketing strategy. Instead, it partners with the other areas of strategic marketing, most importantly: positioning and competition. The process of segmenting the market is deceptively simple. However, the task can be very laborious because it involves reviewing volumes of data, and requires a great deal of skill in analysis, interpretation, and some judgment. Considerable analysis is required, and many decisions need to be made.In fact, the segmentation process is frequently seen as part of what is referred to as the segmentation-targeting-positioning (STP) approach, which proposes a sequential process.
Perhaps the most important marketing decision is the selection of one or more market segments on which to focus. Since consumers in a market segment are judged to have unique needs, a firm that develops a total product focused solely on the needs of that segment will be able to meet the segment’s desires better than a firm whose product or service attempts to meet the needs of several segments.
There are two approaches to segmenting a market – a discovery approach or an analytic approach. Each approach is appropriate to the type of business and market they are approaching. The two approaches give an indication of the probable future profitability of a segment, and the tendencies and behaviors it exhibits.
An analytic approach is based much more on research and data, where two sets of information have been sourced and used to segment the market. This approach indicates the likely future growth of the segment, and whether it is worth investing funds. Therefore, this will usually be done in advance. The second approach is based more on observing buying behaviors within the segment and on primary research.
The discovery approach is more suited to a market with a comparatively low number of customers, and the process of discovering segments is based on interest in the offer or a similar offer the business may be able to provide to the potential customer. For this reason, a discovery-based approach is a much quicker process for determining the profitable segments. Both approaches can benefit from elements of the other and, in most situations, work well in combination when determining a profitable and defined segment.
The potential market for a given product or service to be segmented should be first explored by identifying the size of the potential market. For existing products and services, estimating the size and value of the market potential is fairly straightforward. However, this becomes much more difficult when a product or service is totally new to the market and there is no previous data available on which to base forecasts.
A basic approach is to first assess the size of the overall market, then estimate the percentage of people likely to use the product or service, and finally to estimate the revenue potential.
Viewing market segmentation as the first step in the segmentation-targeting-positioning approach is useful because it ensures that segmentation is not seen as independent from other strategic decisions. It is important, however, not to adhere too strictly to the sequential nature of the segmentation-targeting-positioning process. It may well be necessary to move back and forward from the segmentation to the targeting step, before being in the position of making a long-term commitment to one or a small number of target segments.
If the market segmentation analysis is conducted to inform advertising decisions, benefits sought, lifestyle segmentation variables, and psychographic segmentation variables are particularly useful, as is a combination of all of those.
A major step in the segmentation process is the selection of a suitable base. In this step, marketers seek to minimize differences between people in a segment and maximize differences between each segment. Marketers can segment the market using any base or variable that is identifiable, substantial, responsive, actionable and stable:
With segmentation and targeting, you want to understand how your market will respond in a given situation, like purchasing your products. In many cases, a predictive model may be incorporated into the study so that you can group individuals within identified segments based on specific answers to survey questions.
Demographic segmentation sorts a market by elements such as age, education, income, family size, race, gender, occupation, and nationality. Demographic is one of the simplest and most commonly used forms of segmentation because the products and services we buy, how we use those products, and how much we are willing to spend on them is most often based on demographic factors.
Geographic segmentation can be a subset of demographic segmentation, although it can also be a type of segmentation in its own right. It creates different target customer groups based on geographical boundaries. Because potential customers have needs, preferences, and interests that differ according to their geographies, understanding the climates and geographic regions of customer groups can help determine where to sell and advertise, as well as where to expand your business.
Firmographic Segmentation is similar to demographic segmentation, except that demographics look at individuals while firmographics look at organizations. Firmographic segmentation would consider things like company size, number of employees and would illustrate how addressing a small business would differ from addressing an enterprise corporation.
Behavioral Segmentation divides markets by behaviors and decision-making patterns such as purchase, consumption, lifestyle, and usage. For instance, younger buyers may tend to purchase bottled body wash, while older consumer groups may lean towards soap bars. Segmenting markets based on purchase behaviors enables marketers to develop a more targeted approach because you can focus on what you know they, and are therefore more likely to buy.
Psychographic segmentation considers the psychological aspects of consumer behavior by dividing markets according to lifestyle, personality traits, values, opinions, and interests of consumers. Large markets like the fitness market use psychographic segmentation when they sort their customers into categories of people who care about healthy living and exercise.
Targeting follows segmentation, and is the process of actually determining the target markets, and planning the promotional media used to make the segment appealing. Targeting is a changing environment. Traditional targeting practices of advertising through print and other media sources, has made way for a social media presence, leading to a much more ‘web-connected’ focus. Behavioral targeting is a product of this change, and focuses on the optimization of online advertising and data collection to send a message to potential segments. This process is based around the collection of cookies, which are collected by a consumer’s browser and sold to businesses to identify potential segments to appeal to.
For example, someone consistently accessing cookware-based searches is likely to have ads for cookware sales appear, due to the cookie information they deliver showing an interest in this area.
In targeting a market, there are three different market coverage choices to consider – undifferentiated, differentiated and niche marketing. Choosing which targeting choice to pursue depends on the product or service being offered:
According to advertising guru, David Ogilvy, “Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the minds of the target market. The goal is to locate the brand in the minds of consumers to maximize the potential benefit to the firm. A good brand positioning helps guide marketing strategy by clarifying the brand’s essence, what goals it helps the consumer achieve, and how it does so in a unique way.”
Positioning is the final stage in the ‘STP’ process and focuses on how the customer ultimately views your product or service in comparison to your competitors. This stage is important in gaining a competitive advantage in the market. Therefore, customer perceptions have a huge impact on the brands positioning in the market.
There are three types of positioning that are key in positioning the brand to a competitive advantage; these are functional positioning, symbolic positioning, and experiential positioning.
Regarding market segmentation as the first step in the segmentation-targeting-positioning approach is useful because it ensures that segmentation is not perceived as independent from other strategic decisions. A combination of the three is key to positioning the brand at a competitive advantage to its immediate competition. Just remember it is important not to maintain a completely strict sequence to the segmentation-targeting-positioning process. It may well be necessary to move back and forward from the segmentation to the targeting step, before being being able to commit long-term to one or a small number of target segments.
Overall, positioning should provide better value than competitors do, and to communicate this differentiation effectively to the consumer
Marketers use a variety of data sources for segmentation studies and market profiling. Typical sources of information include:
You can read further about marketing communication in my article, “How to use features and benefits in your marketing communication“.
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