Segmentation Analysis & Strategy

"It is not possible to develop marketing strategies for every consumer- the smart marketer attempts to identify groups of consumers with similar needs and preferences needs and that respond similarly to marketing actions". Segmentation is indispensable for Micro-Marketing Strategies.

Generic  Segmentation Strategy

• Segment market into meaningful and measurable segments based on needs, behavior or demographics

• Evaluate Segment profitability using simple Cost-Benefit analysis (cost of servicing segment vs. Revenue potential)

• Allocate marketing resources for each segment based on profitability and Target segments using multiple marketing tactics

• Customize product or service s portfolio to align with needs of each target segment

• Evaluate segment and overall performance and growth and realign above steps accordingly

Segmentation has many objectives and purposes. For Product Development and Innovation, segmentation allows identification of differences in customer preferences that can be leveraged to enhance customer experience. For Marketing, segmentation allows the identification of differences in purchase behavior of large subgroups of customers that can be targeted separately to enhance response. It also allows the identification of the most profitable customers and their characteristics. This information can be utilized in acquiring more of this profitable subset. For Risk Management, segmentation is utilized to identify subsets of customer population that have a riskier profile and a heightened risk of default (for financial Services products).

Types of Segmentation Strategies

1. Geographic Segmentation: Instead of treating the overall geographic market area as one integral whole, delineate into markets based on consumer differences, supply chain and distribution factors and consumption patterns. This is the most common type of segmentation almost all firms engage in because it is the easiest to implement. The drawback is that it assumes that consumers are homogenous within a geographic segment, you just need to find the appropriate delineation. This is not neccessarily true, as geographic mobility increases and with increasing urbanization and proliferation of online retailing, there may not be such a thing as a geographic segment.

2. Value or Price Based Segmentation: This segmentation strategy tries to identify consumer groups based on buying power. This is most common while developing product portfolio- firms try to fine tune products and services based on differences in buying power of target market. This is more common in automotive and durable goods sector.

3. Demographic Segmentation: This is also another popular segmentation strategy, where differences in demographics are leveraged to develop products and services and marketing strategies leveraging demographic differences within target market. For instance Baby Boomer, Gen X, Gen Y are all Demographic segmentation strategies

4. Psychographic Segmentation: Psychographic or Lifestyle segmentation leverages consumer attitudes, behaviors, values and beliefs to cluster into groups based on commonalities. This is becoming more and more important with the proliferation of social networks (online and offline) and media diversity. Consumers are increasingly being polarized into different belief networks that influence not only their lifestyles but also consumption behavior. The critical requirement to execute an effective Psychographic segmentation strategy is the collection of representative data through appropriate surveys and focus groups using an acceptable sample size.

To Segment or Not To Segment?

Market segmentation allows managers to better serve the needs of a diverse consumer population, but a segmented market can also very quickly become a 'fragmented' market. How far should you go in segmenting your consumer market?

Managers need to determine:

• If the target segment is big enough to support customized strategies.

• Are there sufficient resources to pursue individual segments and does the estimated return justify the outlay?

• How can the segment be reached with a Marketing program?

There are different sophisticated statistical methods of segmentation, for Product Development and Marketing, Classification & regression Trees and Cluster Analysis are more popular. For Risk Management, CHAID Analysis (Chi Square Automatic Interaction Detection) is more the industry standard. Data for segmentation consists of customer-level cross-sectional data (Age, Income, Family Size, Marital Status, Number of Children, Zip Code etc. This data can be obtained from Customer Databases if one has been maintained, or from data vendors like Claritas or Acxiom and governmental Agencies like the Census Bureau.

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