Lesson 1, Topic 1
In Progress

Market Segmentation


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The market is heterogeneous, and every customer is unique. That is why marketing always starts with segmentation and targeting. Based on market understanding, companies can design strategies and tactics to take on the market. The more micro the segmentation, the more the marketing approach will resonate, but the harder the execution will be.

The segmentation approach itself has evolved since it was conceptualized in the 1950s. There are four methods to conduct a market segmentation: geographic, demographic, psychographic, and behavioural.

Four Methods of Segmentation

Marketers always start with geographic segmentation, which is to divide the market by countries, regions, cities, and locations. Once they realize that geographic segments are too broad, they add demographic variables: age, gender, occupation, and socio- economic class. “Young, middle-class women living in Illinois” or “affluent New York Baby Boomers” are examples of segment names with geographic-demographic variables.

On the one hand, geographic and demographic segmentation methods are top-down and thus very easy to understand. More importantly, they are actionable. Companies know exactly where to find and how to identify the segments. On the other hand, the segments are less meaningful as people with the same demo- graphic profile and who live in the same locations might have different purchase preferences and behaviour. Moreover, they are relatively static, which means that one customer can only be classified in one segment across all products. In reality, the customer decision journey differs by category and lifecycle.

As market research becomes common, marketers use a more bottom-up approach. Instead of breaking down the market, they cluster customers with similar preferences and behaviour into groups according to their responses to survey questions. Despite bottom- up, the grouping is exhaustive, which means every single customer in the population gets into a segment. Well-known methods include psychographic and behavioural segmentation.

In psychographic segmentation, customers are clustered based on their personal beliefs and values as well as interests and motivation. Resulting segment names are usually self-explanatory, such as “social climber” or “experiencer.” A psycho- graphic segment also demonstrates an attitude toward a specific product or service feature, for example, “quality-oriented” or “cost-conscious.” The psychographic segmentation provides a good proxy for purchase behaviour. One’s values and attitudes are the drivers of their decision making.

An even more accurate method is behavioural segmentation, as it retrospectively groups customers based on actual past behaviour. The behavioural segments may include names that reflect purchase frequency and amount, such as “frequent flyer” and “top spender.” It can also show customer loyalty and depth of interaction with names such as “loyal fan” or “brand switcher” or “first-time buyer.”

The techniques are highly meaningful as the segments precisely reflect clusters of customers with different needs. That way, marketers can tailor their strategies to each group. Psychographic and behavioural segmentation, however, is less actionable.

Segments with names such as “adventure addict” or “bargain hunter” are only useful to design advertising creative or pull marketing. In push marketing, however, it is harder for salespeople and other frontline staff to identify these segments when they meet the customers.

Segmentation should be top-down and bottom-up. In other words, it should be both meaningful and actionable. Thus, it should combine all four variables: geographic, demographic, psychographic, and behavioural. With psychographic and behavioural segmentation, marketers can cluster customers into meaningful groups and then add the geographic and demographic profile to each segment to make it actionable.

Geographic

Perhaps the simplest of all segmentation strategies, this is quite simply the location of the individuals being analysed. Businesses that have regional retail outlets will have some focus on this but it can also prove a useful tool to understand where to target your marketing. That could be outdoor or press advertising but from a digital perspective it may inform your geo-targeting or data selection for your strategy. The disadvantage is quite simply that this is very basic and tells you next to nothing about the individuals themselves.

Demographic

A very common form of segmentation, demographics includes factors such as age, race, gender, education, employment, income and economic status. It is therefore an area of segmentation that gives a reflection of the characteristics of a group of people. Demographic segmentation is used by governments and a very broad range of organizations as it can answer questions such as ‘Who can afford to buy my product?’ and ‘Will this group of consumers be the right age range for my product?’

The disadvantage of this type of segmentation is that there is a large assumption that people with similar characteristics will behave similarly, which is far from the truth. If someone is a French, 45-year-old factory worker who has had a poor education will they behave the same way as all their colleagues in the factory who are of roughly the same age? No. They will have different passions, hobbies and much more. To understand this in more detail we need to understand behavioural segmentation.

Behavioural

Behavioural segmentation is becoming increasingly possible. It has historically been difficult to understand consumer behaviour but in the big data world we are able to understand consumers a lot more, especially those in the digital space. This method groups consumers by buying patterns and usage behaviours. This is an excellent way of talking to individuals in a way that is highly likely to resonate with them. It is useful when talking about specific products or use occasions.

Behavioural does not of course give such a black-and-white view as demographic segmentation and therefore is not an exact science. For example, behaviour can change with your lifestyle. Divorce, children and retirement are key examples of when life changes could result in behaviour changes. It is therefore vital to be working with data that is up to date. With behavioural segmentation you have the advantage of being highly relevant to your audience whilst also running the risk of missing the mark completely.

Psychographic

Psychographic segmentation sounds exceptionally complex but it is simply an understanding of a consumer’s lifestyle. This includes studying activities, opinions, beliefs and interests. Understanding these elements can, similarly to behavioural segmentation, result in messaging and products that truly resonate with the individuals. For example, individuals may be environmentalists, Buddhists, bodybuilders or movie lovers (or any combination of these). Creating segments on this basis creates a more ‘real’ view of the individuals than geographic or demographic segmentation ever could.

Psychographic segmentation is based on the theory that the choices that people make when purchasing goods or services are reflections of their lifestyle preferences or socio-economic class. The socio-economic scale ranges from the affluent and highly educated at the top to the uneducated and unskilled at the bottom.

Personas

By pulling together the above forms of segmentation you can create personas, as per the example shown in figure below. These are effectively descriptions of your segments. Most businesses will create between five and ten of these, as too few results in large groups that are too generic and too many can result in segments that are too small or overcomplicate the targeting approach.


The example is a persona that can be useful for a digital marketing agency or a digital marketing automation software company looking to acquire new clients. It lays out the profile of the fictionalized prospect and, most importantly, what matters to him. Thus, the persona can be useful in designing the right marketing strategy.

Segmenting and profiling customers has been a staple for marketers. But the rise of big data opens up new possibilities for marketers to collect new types of market data and perform micro-segmentation (see Figure 8.1). Customer database and market surveys are no longer the only sources of customer information. Media data, social data, web data, point-of-sale (POS) data, Internet of Things (IoT) data, and engagement data can all enrich the profiles of the customers. The challenge for companies is to create a data ecosystem that integrates all these data.

Once the data ecosystem is set up, marketers can enhance their existing marketing segmentation practice in two ways:

  1. Big data empowers marketers to segment the market into the most granular unit: an individual customer. Marketers can essentially create a real persona for each customer. Based on it, companies can then execute one-to-one or segments-of- one marketing, tailoring their offerings and campaigns to each customer. And thanks to enormous computing power, there is no limit to how detailed the persona can be and how many customers can be profiled.
  2. Segmentation becomes more dynamic with big data, which allows marketers to change strategy on the fly. Companies can track a customer’s movement from one segment to another in real-time, depending on the different contexts. An air traveller, for instance, may prefer business-class seats for a business trip while choosing an economy class for his leisure travel. Marketers can also track if a marketing intervention has managed to shift a brand-switcher into a loyal customer.

It is important to note that despite the enhancement, traditional segmentation is still beneficial. It facilitates simple market understanding. Putting a descriptive label on a customer group helps marketers wrap their heads around the market. It cannot be achieved with too many segments of one since human computational power is not as strong as a computer’s. The easy-to-understand labeling is also helpful to mobilize people within the organization toward the overall brand vision.