Strategic Market Segmentation is a set of techniques used for the purpose of “slicing up” a relatively wide market sector into identifiable and targetable subsets of customers. Depending on the purpose of the segmentation, these customers (or end users, audiences, etc.) are separated into groups by common characteristics, needs, or psychographic profiles. These new, more specific sub-sets allow the marketer to better target these individuals through refined messaging, resulting in a higher chance of success and invariably done so more profitably. Better marketing ROI, clearer advertising copy, a more logical marketing plan, a more focused PR team, and faster adoption of a product or service are just some of the benefits of proper and accurate market segmentation. Done right, strategic market segmentation can be a powerful tool. Mishandled, however, and it could be ruinous if applied to your marketing programs. Follow these guidelines to put yourself in the “successful segmentor” segment of marketers.
- begin by using a segmentation viability checklist
- be sure you have the team and budget to succeed
- use best practices when collecting and processing the data
- strive for psychographics over demographics
- be flexible and dynamic in your segmentation schemas
- be vague in your segmentation projects
- ignore your proprietary data
- let the tools and stats take over the program
- go primetime before testing the early results
- use segmentations just for selling
Not all companies can perform segmentation, and not all markets lend themselves to this task easily. Your segmentation project needs to be meaningful and actionable. As you set up your criteria and segmentation project plan, be sure you can answer “yes” to these four initial questions, in order to determine your ability to have success with the project in the first place:
- Can you measure the variables used in your segmentation population(s)?
- Are the pertinent resulting segments stable enough to conduct marketing programs around them (and will they be stable for long enough)?
- It is possible to reach your potential segment(s) via your organization's channels, capabilities, and budget constraints?
- Will knowing your segmentation make a difference in your marketing efforts?
You need to have the talent and money for the project. Don’t get stuck with a lack of talent or realize too late that you’re strapped for dollars to complete the project successfully. Too many segmentation projects fail as a result of simple project management failures. Who is your quant person? Who is providing the strategic marketing input so the goals and interim results hold water? Do you have executive sponsorship or can you get it?
You’ve probably heard the old adage, “you are what you eat.” The same goes for segmentation methodology. Make sure you “ingest” the best data in the most efficient way (using the best analytical processing tool for the job). “Clean” your data before you process it – apply the proper statistical techniques and use eye-catching visualization to present the results to your boss or client. More important than understanding a clustering analysis, latent class analysis, or ensemble approach is knowing when to use which technique to solve the problem at hand.
Demographics are basic: age, gender, income, geography, etc. Psychographics are more valuable to the marketer. They show us how people think, behave, and view the world. A key reason segmentation projects fail is that only demographic variables are used. For example, not all working men aged 45-54 who earn a high income are in the market for a new sport coat. Indeed, they may never wear a sport coat. But if you know they have a positive attitude toward Nordstrom and Brooks Brothers or a history of purchasing at these stores, your likelihood of success with these potential customers goes way up.
A major research firm (which we will not name) has created a segmentation of the U.S. population’s attitudes toward technology with eight different segments. All of this company’s research is rallied around this one segmentation schema. While this is easy for their many researchers to master and coordinate their reports for mass production, it gets stale quickly. Segmentations should be different for new purposes and will most likely be different for different companies. Even within a company, segmentations will vary for each department. Accounts payables cares about ability to pay, sales cares about how best to sell, customer support cares about the various venues of communication with customers, etc. The ultimate goal for marketers, although rarely achieved, should be a unique segmentation for each new customer-centric objective that needs to be met.
What is your objective, specifically? Segmenting to simply understand your customers or prospects better isn’t often a goal that is concrete enough to be useful. The more specific the segmentation criteria, the more useful your segmentation will be in creating effective actions and results. For example, determining which types of customers will buy your product is a good goal, but it’s vague. A more practical objective initially might be to segment across Facebook visitors to determine the best advertising message to entice a specific click-action toward buying.
Segmenting by age or gender is obvious, which means your competitors are doing it too. Use any viable proprietary data you have as segmentation variables when you can. Progressive Insurance, for example, uses its proprietary data on driving behavior to segment its user base and offer new insurance products. Most commonly, proprietary data means website activity data which often means “Big Data.” Big Data has been all the rage lately, but how do you best use it? Score and sort your web users by the most valuable activities on your site. Google, Yahoo, and Facebook, for example, all regularly use their proprietary Web history and data to create whole new business lines or to justify large acquisitions of startups.
Too many segmentation programs get overrun by the software tools selection process, stalled by IT expenses, or beaten back by the intimidating of the statistical approaches. Choose the simplest tool to address the project — unless you are in a Big Data paradigm, Excel or Google Analytics can probably serve as your segmentation tool. If you work for a big company, your IT is probably backed up with a long project queue. Evaluate whether or not you really need them. And while a K-means algorithm argument vs. a Random Forests approach might sound like an exciting debate among your quants on the project team, don’t let the beauty of the mathematics overshadow the real beauty of the segmentation results.
So, the results of your data mining and reporting are done and you have a set of cross-tabulated, uniquely identifiable sub-segments. Maybe you’ve identified a group you could designate as “wealthy, spending, loyalists” and it seems like you’ve found the proverbial gold mine. Be sure though that you haven’t found fool’s gold! Do a small test or two to verify the segment is real. Maybe this new segment has a fourth variable you haven’t accounted for that inhibits them from acting on a purchase. You won’t know until you test. If the test pans out, then consider the gold as bullion and ramp up the marketing programs around the results of your segmentation efforts.
Most people immediately associate segmentation with the sole purpose of selling more products or selling with better ROI. But why stop there? Segmentation for other purposes such as customer retention can be equally beneficial. Is the customer worth keeping, or do they tap resources so much they are serviced at a loss? Is the customer at risk (thanks to your segmentation) of canceling their service so preemptive action can be taken? Once you get into the swing of smart segmentation, you’ll want to segment your prospects and customers throughout their marketing lifecycle and account for your findings in all of your customer-facing programs. And your company will be better off for it.
Market segmentation is a tried-and-true tactic employed by the best organizations. It is hard to conceive of a successful marketing campaign without at least some form of segmentation serving as the basis for the campaign’s programs. Thousands of companies are launched every year with the primary purpose of filling an underserved market segment. Yet market segmentation is still both an art and a science. Follow the advice provided in this article to have success with your segmentations, and thus success with your marketing, which in turn can mean success with your company and career.