How Do You Segment Your Market?

How Do You Segment Your Market?

How do you segment your market?

Segmentation is critical to innovation. Reinvigorating old products or creating new products won’t do much good if you don’t get those products in front of the right people. Segmentation is all about reaching the right customer at the right time. It can offer many benefits to any organization who is willing to gain better insights into their customers, including their lifestyles and their habits.  

Segmentation can be as beneficial to your business as it is to your customers. By categorizing potential customers, you can go where they are at the exact moment they're most likely to buy. As a result, a segmentation can positively impact the following aspects of your business: 

  • Marketing Budget.  One benefit of segmentation is that it allows you to reserve the marketing budget for those who are most likely to become customers. Without segmentation, a tire company might waste money sending direct mail ads to a family who takes the bus. Defining the ideal customer profile and then marketing to those who fit means saving money while increasing the chances of a sale.
  • Pricing and Product Development.  A good segmentation highlights not only what customers want, but what they're willing to pay for those desired features. This type of segmentation-driven product development allows for safe expansion with the confidence that the target consumer represents the high propensity for profits.. 
  • Customer Retention. Customers want to feel like more than just a number, and segmentation allows for a degree of personalization in marketing. While you probably can't afford to send every prospective customer a personalized greeting, you can target ads so that they're relevant to that customer's lifestyle, family, habits, and location. This creates a feeling a brand loyalty for customers who feel like they're being catered to and heard.

There are several different approaches to segmenting a market, but they generally fall into 2 categories:

    1.  Attitudinal Segmentation (based on attitudes, needs, etc.)

    2.  Targeted Segmentation (based on observable variables such as demos, etc.)

Attitudinal Segmentation

Attitudinal segmentation, sometimes also called a psychographic segmentation, is when companies target their customer groups based on a set of shared attitudes.  These can include things such as activities and interests, values, attitudes and lifestyle and personality.  

Attitudinal segmentation recognizes that attitudes drive and influence purchasing behavior and addresses this by grouping these audiences together to target them in a way that will appeal to them best.  Producing unique strategies for different clusters will allow you to better market your product, thus increasing the likelihood of a purchase.

Cluster analysis is usually used to discover and develop clusters of respondents with similar attitudes. Once a segmentation scheme has been identified, they are then examined for any other similar qualities, such as demographic or behavioral traits. Ultimately, each cluster is described according to both their demographic and attitudinal statements.

This type of segmentation requires an algorithm to find your target segment in future research studies by asking a series of attitudinal questions.  Note that this is not necessarily the best segmentation method if primary goal is to target an individual in a sales database, because describing a segment is not the same as reaching individuals.  

Targeted Segmentation 

Whereas the attitudinal segmentation looks at a person’s beliefs and needs, a targeted segmentation focuses on observable values.  Observable characteristics include things such as age, gender, category purchase behavior, product ownership and a plethora of other information.  

More specifically, three question types provide the foundation for a target segmentation:

  • Observable variables are information that can be observed for members of a population. These include things such as client database variables or information purchase from third-party data vendors (e.g. Experian, Dunn & Bradstreet), and demographic or firmographic data.
  • Target variables are behaviors we want to optimize such as product usage or intentions.
  •  Descriptive variables such as attitudes, media habits and product usage can help us build a picture of each segment.

This is often the most actionable approach to segmentation when you are looking to apply a segmentation to a database, because of the ability to develop strategies to identify and reach individuals in your target audience.  In addition, finding and targeting customers via targeted segmentation is often easier than an attitudinal approach because its segments are based on characteristics that are known or easily observed.

This technique uses a key target variable (such as purchase intent towards a product) as a basis for grouping and segments are found via CHAID analysis. 

More recently, companies are using a two-stage segmentation approach that combines both of these approaches.  This strategy can maximize the business relevance and organizational acceptance of the segmentation:

  1.  Attitudinal/Needs-Based Segmentation Development:

  •   Factor and Cluster analysis on battery of attitudes, needs, etc, to group respondents into similar attitudinal segments
  •  Determine segment attractiveness and which segment(s) to target

  2.  Segment Targeting:

  • Create reach strategies to find the target segment with observable variables:
  • CHAID analysis using segment membership as the target variable and observable variables such as demographics and/or firmographics as predictors
  • ROC Curves used to assess efficiency of reach strategy

Key Criteria for a Successful Segmentation

However you decide to approach segmentation, you are sure to get some exciting results.  As you embark on this process, keep in mind the following points to ensure the schema you choose will be a successful one for your organization:

  • It is possible to measure 
  • It has target segments that are large enough to earn profit
  •  It is stable enough that it does not vanish after some time
  •  It is possible to reach potential customers via organization's promotion and distribution channels.
  •  It is internally homogeneous (potential customers in the same segment prefer the same product qualities)
  •  It is externally heterogeneous that is heterogeneity between segments (potential customers from different segments have basically different quality preferences)
  •  It responds similarly to a market stimulus 
  • It can be cost-efficiently reached by market intervention 
  • It is useful in determining your marketing mix

Segmentation

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