Rediscovering Market Segmentation

Rediscovering Market Segmentation

Introduction
Market segmentation is helping to identify the target customers’ profiles and it influences the company at almost every phases. Besides segmentation can be change rapidly and we have to re-identify and/or rediscover it very often.

Literature
Market segmentation’s original and true purpose is discovering customers whose behavior can be changed or whose needs are not being met. There are many different kinds of people and they display about as many different buying patterns. That simple truth is well understood by those responsible for market research, product development, pricing, sales and strategy.

Traditional demographic traits such as age, sex, education levels, and income no longer said enough to serve as a basis for marketing strategy.
Nondemographic traits such as values, tastes, and preferences were more likely to influence consumers’ purchases than their demographic traits were.
Sound marketing strategy depended on identifying segments that were potentially receptive to a particular brand and product category.

The idea was to broaden the use of segmentation so that it could inform not just advertising but also product innovation, pricing, choice of distribution channels, and the like. Yet today’s segmentations do very little of this, even though markets and media are, if anything, even more fragmented today than they were in 1964 and consumers even more diverse and accustomed to following their own tastes and impulses.

Segmentation can do vastly more than serve as a source of human types, which individually go by such colorful monikers as High-Tech Harry and Joe Six-Pack and are known collectively by the term “psychographics.” Psychographics may capture some truth about real people’s lifestyles, attitudes, self-image, and aspirations, but it is very weak at predicting what any of these people is likely to purchase in any given product category. It thus happens to be very poor at giving corporate decision makers any idea of how to keep the customers they have or gain new ones.

Good segmentation is identify the groups most worth pursuing-the underserved, the dissatistied, and those likely to make a first-time purchase, for example. They are dynamic –they recognize that the first-time purchaser may become underserved or dissatisfied if his or her situation changes. And they tell companies what products to place before the most susceptible consumers.

Segmentations meant to strengthen brand identity and make an emotional connection with consumers differ from those capable of telling a company which markets it should enter and what goods to make. “Gravity of decision spectrum” is a tool which focuses on the form of consumer behavior that should be of greatest interest to merketers-the relationship of consumers to a product or product category, not to their jobs, their friends, their family, or their community, all of which lay in the realm of psychographics.

As time went on, gradually, the focus of creative departments shifted from the product to the consumer: If, by the 1970’s, products had become less distinctive, people seemed to be bursting with the unprecedented variety.

One way companies found to convince particular groups of consumers that a product was perfect for them was to place in the advertising message a person whom they resembled or wished they did. Another way, which followed from the consumer orientation of the first, was to emphasize the emotional rather than the functional benefits products offered – pride of the ownership, increased status, sex appeal.

Different Segmentations for Different Purposes

Psychographics, it should be said, proved to be effective at brand reinforcement and positioning. The Pepsi Generation campaign of decades ago, for example, did coalesce a wide assortment of consumers into a group that identified with the youth culture emerging at the time. But even though campaigns built on psychographics are good at moving viewers emotionally, the characteristics and attitudes that such ads invoke are simply not the drivers of commercial activity. Those tend to be things like purchasing history, product loyalty, and a propensity to trade up, all of which are informed by attitudes and values that lead consumers to view particular offerings differently. What's more, psychographic segmentations have done little to enlighten the companies that commission them about which markets to enter or what kinds of offers to make, how products should be taken to market, and how they should be priced. Despite its disappointing performance, market segmentation is still widely used.

If meaningful segmentations depend on finding patterns in your customers' actual buying behavior, then to construct one properly, you need to gather the relevant data. Depending on the question your exercise is ultimately aimed at answering, you would want information about, say, which benefits and features matter to your customers. Or which customers are willing to pay higher prices or demand lower ones. Or the relative advantages and disadvantages customers identify in your existing offerings. You'll also need data on emerging social, economic, and technological trends that may alter purchasing and usage patterns.
Armed with such data, you can then fashion segments that are both revealing and applicable.

Such segments will:
• Reflect the company's strategy;
• Indicate where sources of revenue or profit may lie;
• Identify consumers' values, attitudes, and beliefs as they relate specifically to product or service offerings;
• Focus on actual customer behavior;
• Make sense to top executives;
• Accommodate or anticipate changes in markets or consumer behavior.

Unfortunately, few marketing chiefs know or have thought about which of their company's strategic decisions would benefit from the guidance of a segmentation. Segmentations designed to shed light on these questions won't try to explore the personalities of customers; they will try to identify groups of potentially interested or susceptible customers sufficiently numerous and lucrative to justify pursuit. Subsequent strategic moves will, of course, call for new and different segmentations.

Which customers drive profits? Companies can rank their own customers by profitability so as to concentrate the right amount of attention on them. But to grow revenues, a company should understand what makes its best customers as profitable as they are and then seek new customers who share at least a couple of those characteristics.

What are my customers actually doing? While relevant attitudes, values, and expressed preferences can bring color and insight to a segmentation, they lack the predictive power of actual purchase behavior, such as heaviness of use, brand switching, and retail-format or channel selection. If you want to understand how a consumer would respond to products or features that have not yet been introduced, you can elicit the next best thing to actual behavior by creating laboratory simulations to which special analytic techniques can be applied. One of them, called "conjoint analysis," involves presenting consumers with combinations of features. It then asks the consumers how willing they would be to purchase the product in question if particular attributes were added or removed, or if the price changed.

Will this segmentation make sense to senior management? Modern marketing practitioners view their field as outward facing -- that is, focused on listening and communicating to consumers and markets. In fact, marketing may do itself harm by failing to make itself understood by its internal constituency: senior management. As marketing has become more scientific and specialized, its practitioners have increasingly turned to advanced statistical techniques for dissecting segments into ever finer slices containing improbable combinations of traits. The masters of these techniques are often tempted to flaunt their technical virtuosity instead of defining segments that make intuitive sense to senior managers. If the segments seem inconsistent with managers' long experience, and managers cannot grasp how they were derived, the research they yield is unlikely to be accepted and applied.

Can our segmentation register change? Segmentations should be part of an ongoing search for answers to important business questions as they arise. Consequently, effective segmentations are dynamic -- in two senses. First, they concentrate on consumers' needs, attitudes, and behavior, which can change quickly, rather than on personality traits, which usually endure throughout a person's life. Second, they are reshaped by market conditions, such as fluctuating economics, emerging consumer niches, and new technologies, which in today's world are evolving more rapidly than ever. In short, effective segmentations focus on just one or two issues, and they need to be redrawn as soon as they have lost their relevance.

The Gravity of Decision Spectrum: The most common error marketers commit is applying segmentations designed to shed light on one kind of issue to some other purpose for which they were not designed. But which kinds of segmentations are best for which purposes? We suggest marketers begin by evaluating the expectations consumers bring to a particular kind of transaction. These can be located on our gravity of decision spectrum, which will tell you how deeply you need to probe consumers' motives, concerns, and even psyches.

Some decisions people make, such as trying a new brand of toilet paper or applying for a credit card, are relatively inconsequential. If the product is unsatisfactory, at worst a small amount of money has been wasted and a bit of inconvenience incurred. But decisions such as buying a home or choosing a cancer treatment have momentous significance given their potential for benefit or harm and the expense associated with them.

At the shallow end of the spectrum, consumers are seeking products and services they think will save them time, effort, and money. So segmentations for items such as toiletries and snacks try to measure things like the price sensitivity, habits, and impulsiveness of the target consumer. Segmentations for big-ticket purchases like cars and electronic devices, in the middle of the spectrum, test how concerned consumers are about quality, design, complexity, and the status a product might confer. At the deepest end, consumers' emotional investment is great, and their core values are engaged. Those values are often in conflict with market values, and segmentations need to expose these tensions. Health care is the archetypal high-gravity issue. The exhibit, "What Is at Stake?" maps out the differences in business decisions, consumer decisions, and approaches to segmentation that emerge as the gravity of a consumer's buying decision increases.

What Is at Stake?

Segmentation initiatives have generally been disappointing to the companies launching them. Their failures have mostly taken three forms. The first is excessive interest in consumers' identities, which has distracted marketers from the product features that matter most to current and potential customers of particular brands and categories. The second is too little emphasis on actual consumer behavior, which definitively reveals their attitudes and helps predict business outcomes. And the third is undue absorption in the technical details of devising segmentations, which estranges marketers from the decision makers on whose support their initiatives depend.

by Daniel Yankelovich & David Meer
Harvard Business Review / Feb 2006

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