CS4 Consumer segmentation process overview: Guide

Overview

This guide explains how a brand segments its target audience. The key messages are:

• Consumer segmentation is one of the most fundamental concepts in marketing.
• Segmentation enables firms to focus their limited resources on gaining and retaining targeted consumers.
• Consumer segmentation categorizes consumers according to their needs, thus allowing brands to target their initiatives at select groups, within the overall context of organizational capabilities and business interests.

In this guide, you learn the process of segmenting consumers based on their needs.

Sections:

Overview of the consumer segmentation process

The segmentation process consists of the following steps:

1. Set segmentation objectives
2. Develop segmentation hypothesis
3. Create segmentation research design to validate hypothesis
4. Response from vendor
5. Fieldwork
6. Data analysis and identification of segments
7. Validate results
8. Finalize consumer segments
9. Communicate segmentation and implications
10. Update consumer segments

1. Set segmentation objectives: Segmentation objectives are the starting point of the business and marketing plan because:
   • It helps determine the scope of the study
   • Identifies the need for the study and its business benefits.
   • Justifies the resources that will be invested in the segmentation process.

Segmentation objectives could relate to strategic/ market level decisions such as prioritizing profitable segments within existing markets, identifying new consumer groups for targeting, defining product strategy, improving effectiveness of marketing programs, etc. They could also relate to formulating channel/ distribution strategy. For direction on setting segmentation objectives, refer to the following documents: Consumer Segmentation Objectives: Guide & Template and How segmentation is used: Guide

2. Develop segmentation hypothesis: Based on the objectives defined, dimensions that are likely to be most relevant to the exercise (attitudinal, behavioral, demographic, needs-based, occasion-based, etc.) are evaluated and hypotheses developed. These hypotheses are then tested/ validated through research.

   The selected dimensions must be ones that influence and account for differences in purchase behavior exhibited by consumers. Previous consumer studies such as Usage & Attitude studies, point of sale data, and consumer panel data are good sources to help select dimensions and develop hypotheses.

   For more information, please refer to What is consumer segmentation: Guide and Types of consumer segmentation: Guide

3. Create segmentation research design to validate hypothesis: The Market Research Manager creates a Research Brief, identifying the information needs to test the hypothesis. After securing approval for the Brief from the appropriate manager, the Market Research Manager invites proposals for primary research from short-listed, qualified vendors. Refer to Data requirements for consumer segmentation for more information.

   Vendor selection is key to the research design. The vendor must either have sound experience in the category or an ongoing relationship with the brand.

4. Response from vendor: Based on available information, and time and budgetary constraints, the vendors respond with a study proposal, outlining the research design to be followed. The research design could be qualitative, quantitative or a mix of both, and has to be approved by the MR Manager and the brand team. Research design for consumer segmentation: Guide has more details on this process.
5. Fieldwork: The research agency develops the research instruments required for gathering data. Following approval from the Market Research Manager and the brand team, the fieldwork is initiated. Ideally, the Market Research Manager and the Brand Manager, along with other stakeholders such as the advertising agency, should attend some consumer interviews.
6. Data analysis and identification of segments: Once fieldwork is completed, the vendor presents results and initial analysis of the study. In the case of large studies, vendors often present initial findings so that changes can be incorporated to make the final output more useful. The Market Research Manager works with the vendor on the statistical techniques that will be used to identify consumer segments. Refer Statistical techniques for identifying consumer segments for details. This information is then reviewed jointly with the brand team to identify the consumer segments.
7. Validate results: The MR Manager and brand team review past consumer insights to determine if identified segments align with existing understanding of consumer behaviors and attitudes. At this stage, it may be necessary to undertake additional research for validation.

   This step is important because statistical techniques such as cluster analysis provide an outcome but not necessarily a rationale. Therefore, there should be a strong theoretical justification to validate the output. Alternatively, additional statistical analysis (for example, discriminant analysis) may be conducted to validate output. The process is repeated until the team is satisfied with the validation and can finalize the segments. Refer Validating consumer segments: Tips

8. Finalize consumer segments: Once the validation is satisfactorily completed, the Market Research Manager and the brand team together create profiles of identified consumer segments. Typically, each segment is given a distinct name to reflect its particular traits. Such names help in–
   • Articulating the differences in the segments.
   • Communicating the segments to other stakeholders.

   The profiling process also helps identify the knowledge gaps regarding the segments. These gaps should be entered into the IWIK database and incorporated into the learning plan.

9. Communicate segmentation and implications: The Brand Manager communicates the consumer segmentation to all stakeholders in the company, including senior management, Trade Marketing, Advertising Development, Promotions, Media, etc. Communicating consumer segments: Guide & Tips and Getting the most out of consumer segmentation: Tips have more information on this subject.
10. Update consumer segments: The Market Research Manager updates existing consumer segmentation models on a continuous basis to keep them current and relevant. The brand team must ensure that all plans and projections are based on the latest available data. Refer Updating Consumer Segments for details.

The consumer segmentation process: Example

Background

A large consumer packaged goods company was the producer of two popular cosmetics brands with products in multiple cosmetics categories, including foundation, nail, lipstick, and eye. The client's flagship brand had just lost its #1 position, after experiencing sluggish growth (1% CAGR) over the past few years, while its largest rival had been enjoying an 11% CAGR. In fact, the client's brand had become one of the slowest growing cosmetics brands in the mass channel.

The hypothesis

The company’s initial hypothesis was that its brand was strong with the teen segment, but women in their 20's were leaving the franchise to experiment with prestige brands, largely contributing to the decline in growth.

The objective

The company wanted to know how they could target and retain women in their 20’s.

The segmentation process

The company commissioned customized shopper research to understand how consumers bought cosmetics, mapping out the process in great detail. This revealed that, contrary to the company’s belief that television advertising was a key determinant in the purchase decision, most consumers decided on the brand while in the store, after browsing through the available choices. This led to the realization that the brand’s marketing efforts would best be leveraged at the point when the consumer is actually in the store.

A second research study was conducted to identify and prioritize consumer segments. The methodology was quantitative and the hypothesis focused on demographic segments. The process revealed that the young teen/point-of-entry consumer should be prioritized as the critical target segment to focus on since they found the brand image and associations especially appealing.

The client had initially believed that high school girls comprised this segment, when in fact the consumers were actually 10- and 11-year olds. The segmentation also revealed that many young mothers were returning to the brand due to time and money constraints, and that these women shared similar cosmetic brand needs and purchasing behaviors as their 10- and 11-year-old daughters. While the client's hypothesis about women in their 20's had been correct, the segmentation revealed that a strategy focusing on young teens and their mothers would be much more successful, as women in their 20's – who were making their own money for the first time – were highly motivated to seek out prestige brands.

Once the segments had been identified and validated, the Market Research Manager and brand team created profiles to help marketers who would be using the data to gain a deeper understanding of how and why the young teen/point-of-entry consumer buys cosmetics, and the role of mothers in the whole scenario.

Strategy implications

An activation strategy was created using key learnings about these segments' motivations and desired experience. The company created marketing programs that leveraged the influence of the young mother segment and shifted the marketing mix from predominantly TV advertising to investing in an in-store presence that would enable young teens to experience the brand (capitalizing on buying process learnings). In-store executions included mother-daughter makeover events, "fashion-led" product innovations, and redesigned wall units that provided testers/trial sizes for teens to experiment with.

Results

The brand regained both volume and share leadership, growing 25 percent in three years.