‘Know your customer’ has always been the first rule of marketing – but in the vast and complex consumer landscape, how can you understand them all? And how do you decide which ones to target?
Market segmentation offers a powerful targeting approach that can be implemented by businesses big and small. Dividing the market up into groups of consumers with similar characteristics enables companies to identify the most appropriate audiences and understand how best to appeal to them.
The technique has driven the success of some of the best-known global brands. Combined with the use of sophisticated algorithms, segmentation has become even more powerful today, says Professor Sara Dolnicar of UQ Business School who has co-authored a new book on the subject.
“Market segmentation is at the heart of successful marketing,” says Sara. “Improving the match between the organisation’s strengths and consumer needs creates a long-term competitive advantage. It also gives a higher return on investment, because there is less effort wasted on consumers whose needs you could never satisfy.”
Marketing Segmentation Analysis, which is co-authored by fellow academics Professor Friedrich Leisch and Associate Professor Bettina Grün, guides marketing managers through the process.
The book describes two different approaches to segmentation. Companies can use ‘commonsense’ criteria such as age, gender or location, or start with an open mind and create new segments from scratch. This ‘data-driven approach’ depends on analysing consumer data to identify more complex patterns such as consumer spending habits, lifestyle or travel preferences. It also outlines the ten key steps in the process:
1. Decide if it’s worthwhile
Segmentation is a long-term commitment which requires an investment of time and resources. To reap the full benefits of segmentation, companies must be open to change – whether that is modifying their products or even restructuring the business around the needs of the market segments. Sara says, “the expected increase in sales must be sufficient to justify the expense involved in implementing the strategy. Organisations need to weigh up the advantages and disadvantages and decide whether or not to go ahead.”
2. Specify the ideal target
Successful segmentation requires marketing managers to work closely with data analysts, but they must steer the process at every stage. The first step is to identify what the ideal market segment would look like. Sara recommends using two sets of criteria.‘Knock-out criteria’ are the non-negotiable features a segment must have to make it worthwhile – for example, it must be big enough, match your strengths and you must be able to reach the members in some way. ‘Attractiveness criteria’ are nice-to-have features. The former will eliminate unsuitable segments while the latter can be used to rank the remaining segments and choose the most promising ones.
3. Collect data
Empirical data is the basis for all segmentation studies, and consideration needs to be given on the best way to obtain it. Surveys are the most common source for data collection, but they can be unreliable in reflecting behaviour. Make sure you also explore other possibilities, such as customer data from loyalty cards, or data from research studies and experiments.
You’ll also need to decide what type of information to collect. The most common criteria are geographic (the customer’s location), socio-demographic (age, gender, income, education), behavioural (such as how much they spend or where they buy from) and psychographic (lifestyle, interests or aspirations), though it will depend on the individual business. “The best is what works for your business at the least possible cost,” Sara advises.
4. Explore data
Once your data is collected, your analyst should carry out an initial exploration to spot any inconsistencies, check it is in the right order and format, and that the sample size is sufficient. If necessary, they should clean and pre-process it.
5. Extract segments
Consumers come in all shapes and sizes and their preferences can range across the full spectrum. If you are using a data-driven approach rather than ‘commonsense’ criteria, it can be difficult to pick out clear patterns. There are different data analysis techniques and algorithms to help you identify segments, though inevitably the methods you use will to some extent shape the results.
“Market segmentation analysis is exploratory and data analysts need guidance to make the most critical decisions, such as how many segments to extract,” says Sara. Once you have identified segments, conduct statistical tests to check their stability, then use the ‘knock-out’ criteria to screen them.
6. Create profiles
Once you have identified the most promising segments, the next step is to understand their characteristics. Profiling is not necessary if you are using ‘commonsense’ criteria, but with a data-driven approach, the characteristics of each segment are less obvious.
Good profiling is critical for correct interpretation of the results, which will provide the basis for strategic marketing decisions. However, complex sets of tables can be hard to understand, so it is worth spending extra time to produce good graphs or visualisations.
7. Describe segments
Once you have the profiles, you can then build a more in-depth picture by using the additional pieces of information you have about each consumer. These descriptions are critical to developing a customised marketing mix.
An example is an analysis of tourists who were questioned about their motives for travelling to Australia. The profile for one segment was that of people who cared about nature. The description also revealed that this group was more likely to volunteer for environmental organisations and were regular readers of National Geographic magazine. Again, visualisation techniques will make it easier to understand the audience. Try also ‘introducing’ each segment to other team members to test your knowledge.
8. Decide which segment to target
Now it is time to make the big decision. You will need to consider two key questions: which segments do you want to commit to? And how likely is it that they would choose you over and above your competitors? Tools such as a decision matrix provide a more structured way to evaluate the options. If you do decide to target more than one segment, ensure they are compatible with one another.
9. Design the marketing mix
Once you have chosen your segments, you will need to consider how best to position your product in each and reach out to them. The marketing mix provides a toolbox with the key components being the 4Ps – product, price, promotion and place. You may have to redesign or rebrand your existing range (Product), change your price or discount structures (Price), reconsider your distribution channels (Place) and develop new messages and ways to target the audience (Promotion). Analysis of each market segment can help you understand customers’ lifestyle choices and the benefits they are seeking, and inform advertising decisions.
10. Monitor and evaluate
Once you have invested so much in market segmentation, it is essential to check how well the strategy is working; you will need to decide how you will assess it. There should also be ongoing monitoring. Like any market, segments evolve as consumers become savvy, move on to different stages of their lifecycle and new products enter the market. One study of banking customers found that less than a third stayed in the same category for more than two years.
Sara Dolnicar adds: “Segmentation is a creative and ongoing process. In the age of big data, fresh information about consumers becomes available by the second. The ability to identify changes within segments and adapt to them will increasingly become a source of competitive advantage.”
Interested in learning how to implement this ten-step process? Enrol for our complimentary online Market Segmentation Analysis course today and improve how you meet your customers’ needs and gain competitive advantage in the market. You can also download a free PDF copy of the new book – Market Segmentation Analysis to target your customers more effectively.