Overview

This guide explains the role of consumer segmentation in formulating and implementing an organization’s marketing strategy.

The key messages in this guide are:

• Segmentation has an impact on an organization’s structure, strategy, and profitability.
• Segmentation helps identify the target audience and position the product, leading to appropriate communication development.
• Effective segmentation allows for prioritization amongst identified target groups and guides the efficient allocation of marketing resources.

In this guide, you learn about the different ways in which consumer segmentation is used by an organization.

Sections:

What is consumer segmentation?

Consumer segmentation is at the core of an organization’s marketing strategy. With market segmentation a brand acknowledges that buyers of a product or service are not a homogenous group.

Every buyer has individual needs, preferences, resources, and behaviors. Because it is virtually impossible to cater to every individual consumer’s characteristics, marketers find it productive to group consumers together in market segments on the basis of common variables. Such grouping allows marketers to tailor a marketing mix for all consumers in a particular segment, thus using marketing resources more efficiently and effectively.

Segmentation creates discrete target markets and helps identify the core benefit of that market. This enables development of a unique brand proposition. In some cases, segmentation may also dictate organizational structures. For example, certain CPG companies like Procter & Gamble have been known to experiment with having separate marketing groups for women, teens, etc.

Segmentation allows an organization to satisfy the needs of its potential consumers better, thereby growing volume, profit, and market share. Segmentation studies can be used in various aspects such as strategy, targeting and positioning, etc.

Uses of segmentation

Strategic planning
Segmentation plays a key role in the planning process of an organization, influencing all functions and processes.Segmentation is so central to portfolio rationalization and new product development that often it is done before the strategic planning process begins.
With segmentation an organization can identify and target specific groups to achieve its long and short-term objectives by maximizing allocation of resources. Effective segmentation allows it to develop and execute alternative business and marketing strategies and vary pricing, communication strategy, promotion strategy, and distribution systems based on the selected target markets. It also provides direction to R&D in executing product variations, and to manufacturing in producing those variations. In addition, segmentation provides guidelines in terms of market development and potential areas for diversification.

Market potential assessment and refinement

Market segmentation serves as a basis for developing market size data for the category as a whole, for the brand, and for opportunities within the category. This helps identify volume and profit potential for current or emerging segments. Market potential assessment can be based on any of the following:

• Demographic stratification of data:
  Numerous demographic factors can serve as the basis for a business opportunity – age, gender, income, education,employment, housing size, location, etc. Demographic information is more easily accessible from secondary data sources compared to any other segmentation variable; it is also the easiest to measure.
• Product usage behavior:
  Category usage behavior can point to unique segments that offer opportunity. Among these behaviors are things such as frequency of use, quantity of use, time of use, usage pattern (co-usage, switching behaviour, loyalty). Unique usage behaviors are particularly powerful when combined with consumer needs or desired benefits.
• Psychographic characteristics of segments:
  This refers to segmenting the identified target audience on the basis of psychographic characteristics such as values, beliefs, desires, and attitudes. The psychographic data is particularly valuable when it can be placed in the context of behavioral or demographic data. Some studies provide the demographic profile of psychographic segments and vice-versa (for example, the PRIZM geo-demographic clusters which link US census data on a zip-code basis with lifestyle patterns).

Segmentation studies also help an organization refine market size estimates that may have undergone changes due to innovations in technology, structural changes in society or new trends

For example

During the seventies, in the South Asian market, lighteneing skin color was identified as an important consumer need segment that had not been exploited by any company. Market research revealed that consumers desiring a lighter skin tone were applying talcum powder to their face. Apart from being a key input in designing the marketing program, the talcum powder category was identified as the source of business for subsequent assessment of market potential.

The demographic profile of talc users (in terms of age, income, social class, geographic location, etc) was determined and used to size the need segment of fairness. Data on product usage pattern was then used to determine trial, repeat, and conversion rates.

However, as the category matured, brands started using psychographic parameters to segment the market, targeting the segments with specific communication and products.

Targeting and positioning
Positioning decisions are integral to brand strategy. In order to be relevant, they need to be based on an understanding of the target segment in terms of demographics, psychographics, and behavioral data for your own as well as competing brands. The key to category share growth lies in understanding all the unique segments in the category and crafting brands and positionings that appeal to the major segments.

Segmentation also allows organizations to adapt their product offering to the changing preferences and patterns of consumer behavior over time. Organizations that serve different segments along a consumer’s life cycle can guide their consumers from stage to stage by always offering them a special solution for their particular needs. 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. Skin care cosmetics often offer special series for babies, teens, normal skin, and elder skin.

For example
Nintendo attracted adult users to its electronic games by creating a campaign that would appeal to potential adult game players by promising them “kid-like” fun – a notion that many adults find appealing.

Developing marketing plans and communication

Even if product features and brand identity are identical in all market segments, communication is geared to specific segments. Market segmentation provides the brand with an opportunity to stress criteria that are most relevant for each particular segment (for example, price vs. reliability vs. prestige).

Marketing mix elements like advertising, promotions, and retail strategy can be designed on the basis of segmentation. Consumer segmentation studies help understand whom to target, what to say, where to say, how to say it, etc

New product development

Identifying the specific needs of various segments enables development of new or improved products that better meet the needs of these consumer groups. If a product meets and exceeds a consumer’s expectations by adding superior value, consumers normally are willing to pay a higher price for that product. Thus, profit margins and profitability of the innovating organization increases.

For example

Bayer, makers of the One-A-Day vitamins, has developed a variety of products that are designed to appeal directly to different age and gender market segments in terms of their specific vitamin requirement.

The hotel industry has also used market segmentation to develop different chains for different target segments. Marriott operates the Fairfield Inns (for short stays) and Residence Inns (apartment-like accommodations for extended stays) for the value-conscious or budget traveler; Courtyard for the price-conscious business person; Marriott Hotels for full service business travelers; Marriott Resorts for leisure and vacation guests; Marriott Time Sharing for those seeking affordable resort ownership; and Marriott Senior Living environments for elderly people.

Media planning

Different sets of consumers have different ways of using, interacting, and valuing media. For example, while teenagers prefer interactive communication with brands, seniors seek more information from brands. Segmentation studies identify these differences and allow marketers to identify the most appropriate media vehicles to convey the brand message to the selected audience.

Almost all media vehicles – TV, radio, internet, newspapers, and magazines – use segmentation research to determine the characteristics of their audience and to publicize their findings in order to attract advertisers seeking a similar audience. This information is used by the media-planning agency for:

For example

Time Warner has created a separate division to market magazines to baby boomers. The magazines are ‘In Health’, ‘Parenting’, ‘Cooking Light’ and ‘Martha Stewart Living’. The titles match the interest areas of baby boomers.

‘Business Week’ targets different segments with special editions of its magazines. The media planner can choose from geographically-based editions – such as global, continental, regional, state and city versions of each issue – to meet the needs of the priority geo-demographic segments. The magazine also offers an industrial/ technology edition specifically for those in the manufacturing and mining industries, and an Elite edition targeting subscribers living in high-income zip codes and to senior management titles receiving the magazines at their offices.

Mode, a fashion magazine for the full-figured woman, has created clothing and advertising messages that stress the fashionability of its products, which are targeted to a market segment consisting of full- figured women.

Distribution strategy

Market segmentation data helps in developing a more focused distribution strategy. Effectively reaching the priority markets and allocating manpower and sales planning budgets accordingly eliminates wasteful expenditures. Identifying the geographical location of the target segments and their behavioral characteristics aids decisions on distribution strategy.

• Characteristics of geographical segments determine the prioritization of markets for extending distribution, stock management, and resource planning.
• Information on consumer purchase behavior can be used in selecting the most effective distribution channel and defining visual merchandising standards.

Marketing research design

Market segmentation data plays a secondary role in designing market research. It is used for sample-related decisions such as how to apportion the sample by behavior (users, non-users, users of competitive products) and by various characteristics such as demographics or attitudes (age, income, occupation, those preferring X,Y or Z , etc).