Overview

This guide provides an overview of consumer segmentation and explains its significance.

The key messages in this guide are:
• Consumer segmentation is the first step in developing a brand’s marketing strategy, and impacts the entire organization.
• Product relevance is critical for effective consumer segmentation.
• Segmentation findings must be successfully integrated into the marketing strategy. This task is more difficult in mature markets and in the case of global brands.

In this guide, you learn:

• Consumer segmentation and its importance.
• The advantages of using segmentation as the foundation of brand marketing strategy
• Common constraints to integrating segmentation study findings in the marketing strategy and how to overcome them.

Sections:

Integrating segmentation into marketing programs –Tips

What is consumer segmentation?

Consumer segmentation is the basis for understanding consumer orientation and differentiation. It is the process of dividing a market into groups or segments of customers with similar needs or characteristics, who are likely to exhibit similar purchase behavior. Market segmentation acknowledges that different 'types' of buyers may require different products or marketing approaches/ marketing mixes.

Whereas a mass marketing approach treats the market as a whole and provides one version of the product and one marketing mix for all buyers in the market, segmentation enables the business to target different groups of buyers by adapting its product and marketing mix to suit each targeted segment. Market segments must be formed such that differences between buyers within each segment are as small as possible, yet are viable to target.

Several variables may be used for market segmentation. They comprise easy-to-determine demographic factors as well as harder-to-discern variables on user behavior or customer preferences. In addition, there are differences between consumers (B2C) and customers (B2B). The most commonly used variables for consumer segmentation include:

Criteria for effective segmentation

For segmentation study findings to be effective, marketers must choose variables that are relevant for segmenting the market for a particular product. The basic rule is to focus on a limited number of important variables and avoid splitting the market into too many small, non-distinct segments. Philip Kotler mentions five criteria for an effective segmentation:

• Measurable: One must be able to determine the values of the variables used for segmentation. This is especially important for demographic and geographic variables.
• Relevant: The size and profit potential of a market segment have to be large enough to justify separate marketing activities for this segment.
• Accessible: The segment has to be accessible for the organization in terms of distribution and communication channels.
• Distinguishable: The market segments have to be sufficiently diverse to respond differently to different marketing mixes so that the brand can draw advantage from that.
• Durable: The segments should be relatively stable over time to minimize costs of frequent changes.

A sound market segmentation is one that is internally homogeneous and externally heterogeneous.

Importance of consumer segmentation

Market segmentation is an important element of every marketing strategy. It is the basis for developing the positioning and targeting strategy for any brand, which, in turn, determines the marketing mix.

A segment-orientated marketing approach generally offers a range of advantages for businesses as well as customers. These include:

Consumers change their preferences and patterns of behavior over time. Segmentation allows marketers to understand these changes and develop products and services that fulfill the need of a consumer at that particular stage. For example, many car manufacturers offer a product range that caters to the needs of all phases of a consumer life cycle: first car for early teens, fun-car for young professionals, family car for young families, etc. Segmentation also allows an organization to satisfy a variety of consumer needs through a limited product range by using different forms, bundles, incentives, and promotional activities.

Segmentation supports the development of niche strategies, allowing marketing activities to focus on the most attractive market segments. Market leadership in selected segments improves the competitive position of the whole organization in its relationship with suppliers, channel partners, and customers, besides strengthening the brand and ensuring profitability.

Segmentation allows an organization to approach consumer groups individually through targeted marketing activity. By segmenting markets, organizations can create their own ‘niche products’ to attract additional customer groups.

The identification of unique consumer needs through segmentation enables a planned development of new or improved products that better meet the wishes of these consumer groups by offering distinctive products and delivering superior value.

Segmentation enables marketers to communicate effectively with the target market by identifying those criteria that are most relevant for each particular segment (for example, price vs. reliability vs. prestige).

Constraints of consumer segmentation

Challenges in consumer segmentation are directly linked to the difficulties in mapping the variables associated with consumer attitude, behavior, and perceptions. These variables are not constant over time – their impact varies with differences in the product category; and their inter-relationship needs to be assessed for every marketing situation. Discussed below are some key constraints affecting effective integration of consumer segmentation into the marketing strategy and how they can be tackled.

High degree of fragmentation

A high degree of fragmentation in mature categories leads to the creation of niche segments with low business potential, higher marketing spends, lower profit margins, and limited differentiation. The challenge is to re-think segmentation differently from competitors to meet consumer needs that are not being met by existing product offerings. One frequently used option is to create segments by attitudes rather than behavior or demography. For example, while Johnson’s Baby Shampoo is primarily targeted at babies, it’s positioning of ‘no more tears’ (exceptional mildness) also appeals to adults who want to use a gentle shampoo.

While segmenting mature markets remember these points:

• The business potential of the segment must be greater than the cost to reach and communicate with the segment.
• Media options enable one to reach the target consumers in the new segment

Segmenting for global brands

Brands operating at a global scale must identify and segment their target markets on universal parameters. A global positioning and targeting strategy (as a result of a global segmentation study) will result in economies of scale and savings in communication research and advertising materials development. To ensure effective global segmentation –

• The segmentation study design must cover multiple countries and consumers to determine the consumer segments, and at the same time to identify differences in their profile.
• There must be centralized business and brand strategy planning that targets the global consumer segment, with variations in the marketing program to suit local differences in segment profile.

This has been successfully implemented by brands such as Gillette with its global ‘The Best a Man Can Be’ and Lux “Beauty Soap of the Stars” or Axe through its ‘Axe effect” campaign.

Keeping segmentation schemes relevant over a period of time

Consumer behavior, perceptions, and attitudes change over time. Certain consumer segments may become obsolete over time while others may grow rapidly due to changes in the environment.

Changes in consumer behavior patterns are more rapid than changes in values and attitudes. Certain categories – such as technology-based categories where changes are very rapid and product – are more sensitive to changing consumer behavior.

To ensure relevance over a period of time:

• Avoid forming segments based on factors that change fast (like fads); instead use factors like values that stay relevant for a longer time.
• Conduct periodic research to update the consumer segment profiles and track changes in behavior and perceptions.
• Constantly evolve the brand strategy to address the changing needs of consumer segments.

Integrating segmentation into marketing programs - Tips

Integrating findings of the segmentation study into the marketing program may require practical steps that make it more relevant and effective.

Using only an attitude-based segment profile may make it difficult to target a segment through media. Hence, attitudinal segmentation should usually be combined with at least one physical factor like demography or behavior to be able to locate the target consumer.

Consumer segmentation is a great tool, but it's not an all-purpose one. It needs to be supported by additional research or user analysis, especially in the case of product development. For example, while market segmentation information might suggest that a particular e-commerce site appeals to the needs of consumers on a tight budget, additional information is needed on how to design the site to meet the needs of those consumers.

While segmentation studies may create many possibilities for targeting and positioning, the ones that reflect the organization’s capabilities must be leveraged, providing a competitive advantage