Marketing

Segmentation and personalised marketing

Segmentation is the process of slicing up the ‘mass market’ for a particular product or service into a number of different segments, each one consisting of consumers with slightly different needs

Segmentation is the process of dividing a product or service's "mass market" into a number of distinct segments, each of which consists of consumers with slightly different needs. Personalised marketing is an extreme form of segmentation in which the goal is to create a one-of-a-kind product offering for each customer.

When to use it

● To match your various product offerings to the needs of different consumer segments.
● To identify market segments whose needs are not currently being met adequately.
● To charge a higher price for a product or service because it is better suited to the needs of a specific segment or individual.

Origins

The concept of market segmentation was developed in the 1930s by economists such as Edward Chamberlin, who proposed aligning products with consumer needs and desires. At the same time, General Motors was conducting the first high-profile segmentation experiments. Ford Motor Company had previously dominated the auto industry with its one-size-fits-all Model T Ford. General Motors, under CEO Alfred P. Sloan, devised a radical new business model, offering "a car for every person and purpose". By the 1930s, General Motors had established five distinct brands, with Cadillac at the top, Buick, Oldsmobile, Oakland (later Pontiac), and Chevrolet at the bottom. This segmentation model was extremely successful, assisting GM to become the world's largest automaker for much of the postwar period.

Wendell Smith developed the theoretical concepts of market segmentation. 'Market segmentation involves viewing a heterogeneous market as a number of smaller homogeneous markets in response to differing preferences, attributable to consumers' desires for more precise satisfaction of their varying wants,' he stated in 1956. Wind and Cardozo defined a segment in 1974 as "a group of present and potential customers who share some common characteristic that is relevant in explaining their response to a supplier's marketing stimuli."

The concept of personalised marketing emerged in the 1990s, owing in large part to the massive amounts of information that businesses could obtain about their customers. Internet software, for example, enables businesses to identify where customers sign in from, keep records of their customers' transactions with them, and use 'cookies' (small software modules stored on a PC or laptop) to learn about consumers' other shopping interests. This data has enormous value because it allows businesses to tailor their offerings to each customer. Similar concepts, such as one-to-one marketing and mass customization, have also been proposed.

What it is

The goal of segmentation analysis is to identify the most appealing segments of a company's potential customer base by comparing the size, growth, and profitability of the segments. Firms can then choose which segments to address and thus focus their advertising and promotional efforts more accurately and profitably once meaningful segments have been identified.

Market segmentation works when the following conditions are in place:

● It is possible to clearly identify a segment.
● You can measure its size (and whether it is large enough to be worth targeting).
● The segment is accessible through your promotional efforts.
● The segment fits with your firm’s priorities and capabilities.

There are numerous methods for identifying market segments. Most businesses consider geography (where customers live), demography (their age, gender, or ethnicity), income and education levels, voting habits, and other factors. These are 'proxy' measures that aid in the classification of people into like-minded groups, with the assumption that such people will then behave similarly. Such proxy measures were the best bet in the days before the internet. However, with the advent of the internet and the 'big data' era, it is now possible to collect extremely detailed information about how people behave online and in their purchasing decisions. This has enabled far more precise segmentation, even down to the level of individual tailoring. Amazon, for example, sends you personalized recommendations based on previous purchases, Yahoo! allows you to customize the elements of your home page, and Dell allows you to configure the components of your computer before it is assembled.

How to use it

The basic methodology for market segmentation is well established:

● Define your market – for example, retail (individual) banking in the UK.
●Collect any and all data you can get your hands on in order to identify the key dimensions of this market. This includes obvious information such as age, gender, family size, and geography, as well as important (but sometimes difficult to obtain) data such as education and income levels, home ownership, voting patterns, and so on. Sometimes this is data collected from existing customers, but be cautious because you also want information about non-customers who may become customers.
● Analyze your data using a 'clustering' methodology to identify subsets of the overall market with similar characteristics. You can, for example, almost always segment your market by income level and identify high-, medium-, and low-end customers based on their ability to pay.

This, however, may not be the most important factor. For example, if you are selling a digital product, customer age and education level may be more important.
● Identify and name the segments you have identified based on this analysis, and then develop a strategy for addressing each segment. You can choose to focus solely on one segment, or you can develop offerings for each segment.

The same logic applies to personalized marketing, but the analytical work is so time-consuming that it is all done by computer. Tesco, for example, was the first to offer a 'club card' that tracked every single purchase made by an individual. Tesco created a computer system (via its affiliate, Dunhumby) that analyzed all of this data and provided customers with special offers based on their previous purchasing patterns. If you had previously purchased a large quantity of breakfast cereal, for example, you might be able to get a half-price deal on a new Kellogg's product offering.

Top practical tip

Market segmentation is such a well-established technique that it almost works against itself. In other words, if all businesses use the same approach to segmenting their customers, they will all compete in the same way. For example, the car industry has very well-defined segments based on the size of the car, how sporty it is, and so on.

So the most important practical tip is to be creative in how you define segments in the hope of finding a slightly different way to divide up your customers. In the automobile industry, for example, the'sports utility vehicle' segment did not exist until 20 years ago, and the company that developed the first car for this segment did extremely well.

Top pitfall

Segmentation has limitations because it must be implemented correctly. Some segments are too small to be worth serving, while others are overcrowded with existing products and should be avoided. It is also very easy to over-segment a market by creating more product categories than the market can support. In such cases, customers are confused and may not purchase any of your products.

Finally, segmentation is difficult in completely new markets because you don't know how consumers will act. Their actual buyer behavior does not always correspond to what market research predicted. In general, segmentation is more useful in established markets than in new ones.