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Das

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www.hbr.org

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The psychographic profiling
that passes for market
segmentation these days is a
Rediscovering Market
mostly wasteful diversion Segmentation

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from its original and true
purpose—discovering
customers whose behavior by Daniel Yankelovich and David Meer
can be changed or whose
needs are not being met.
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Included with this full-text Harvard Business Review article:


No

1 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work

2 Rediscovering Market Segmentation

12 Further Reading
A list of related materials, with annotations to guide further
Do

exploration of the article’s ideas and applications

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Rediscovering Market Segmentation

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The Idea in Brief The Idea in Practice

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Fifty-nine percent of recently surveyed To segment markets effectively, apply these tactics:
companies executed a major market-
• Identify a strategic decision that would Example:
segmentation initiative in the previous two
benefit from information about different A pet food manufacturer used conjoint
years. Yet only 14% derived real value from
customer segments. For instance, a fast- analysis to determine which features to in-
the exercise. What’s wrong with market
food company is considering developing clude on food packaging (such as a reseal-
segmentation?
healthier menu alternatives. A personal- able opening and a handle on 25-pound

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Segmentation typically focuses on con- care company wants to extend a soap bags). It segmented consumers according
sumer “types” (High-Tech Harry, Joe Six-Pack). brand into deodorants. to their degree of price sensitivity and de-
This categorization may help advertisers sire for convenience. It then redesigned its
• Determine which customers drive profits.
strengthen brand identity by developing packaging with added features that would
Understand what makes your best cus-
messages that speak to different consumer maintain existing customers and attract
tomers so profitable, then identify seg-
groups. But it doesn’t tell companies which new ones. And it jettisoned features
ments that share at least some of those
products or services consumers might actu- whose cost would have required charging
characteristics.
ally buy, so it can’t help firms decide which too high an overall price.
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new offerings to develop. Example:
• Segment in ways that make sense to se-
A luggage company finds that many peo-
To get more from segmentation, Yankel- nior management. Resist any urge to
ple who buy its highest-margin carry-on
ovich and Meer suggest several tactics. For flaunt your technical virtuosity by dissect-
bags are international flyers. It thus identi-
example, tailor your segmentation to a ing segments into ever finer slices con-
fies international travelers as a promising
strategic decision. (Do you want to reduce taining improbable combinations of
target segment.
customer defections? Extend a brand?) De- traits. Instead, define segments in ways
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fine segments based on consumers’ actual • Analyze actual and potential purchasing that make intuitive sense to senior man-
purchasing behavior (heaviness of use, behavior. Current behaviors (including agers. They’ll be more likely to accept your
brand switching) and their likely behavior. heaviness of use, brand switching, and research and to fund resulting initiatives.
And redefine segments as market condi- channel selection) can help you predict
• Revise your segmentation as market
COPYRIGHT © 2008 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

tions change. future behaviors using a statistical tech-


conditions change. Unlike personality
nique called conjoint analysis. Through
Apply such tactics, and you respond traits, which usually endure throughout
such analysis, you present consumers with
promptly to rapidly shifting market realities. life, consumers’ attitudes, needs, and be-
combinations of product features and ask
No

You gain insight into how to compete. And havior can change quickly with new mar-
them how willing they’d be to purchase
you extract maximum value from scarce ket conditions, so be willing to redraw
the product in question if particular at-
marketing resources. your segments to reflect new realities.
tributes were added or removed, or if the
price changed. You then segment based Example:
on your findings. At the dawn of the Web, many companies
segmented according to consumers’ de-
gree of online experience. “Early Adopters”
felt comfortable exploring the Web on their
own; “Newbies” sought extensive support.
Do

As newcomers became scarcer, companies


segmented using other criteria, such as
consumers’ concerns about online security
and interest in games or parental control
devices.

page 1
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The psychographic profiling that passes for market segmentation these

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days is a mostly wasteful diversion from its original and true purpose—

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discovering customers whose behavior can be changed or whose needs
are not being met.

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Rediscovering Market
Segmentation

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by Daniel Yankelovich and David Meer
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There are many different kinds of people, and • Traditional demographic traits such as
they display about as many different buying age, sex, education levels, and income no
patterns. That simple truth is well understood longer said enough to serve as a basis for
COPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

by those responsible for market research, marketing strategy.


product development, pricing, sales, and • Nondemographic traits such as values,
strategy. But they haven’t been getting much tastes, and preferences were more likely to
help from a venerable technique—market influence consumers’ purchases than their
No

segmentation—which, if properly applied, demographic traits were.


would guide companies in tailoring their • Sound marketing strategy depended on
product and service offerings to the groups identifying segments that were potentially
most likely to purchase them. Instead, market receptive to a particular brand and product
segmentation has become narrowly focused category.
on the needs of advertising, which it serves The idea was to broaden the use of segmen-
mainly by populating commercials with tation so that it could inform not just adver-
characters that viewers can identify with— tising but also product innovation, pricing,
the marketing equivalent of central casting. choice of distribution channels, and the like.
Do

This is hardly the state of affairs we an- Yet today’s segmentations do very little of
ticipated 40 years ago when one of us in- this, even though markets and media are, if
troduced the concept of nondemographic anything, even more fragmented today than
segmentation in HBR as a corrective to the they were in 1964 and consumers even more
narrow reliance on purely demographic diverse and accustomed to following their
ways of grouping consumers. In 1964, in own tastes and impulses.
“New Criteria for Market Segmentation,” Segmentation can do vastly more than serve
Daniel Yankelovich asserted that: as a source of human types, which individually

harvard business review • february 2006 page 2


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or 617.783.7860
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Rediscovering Market Segmentation

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go by such colorful monikers as High-Tech breaking and widely desired, advertising did

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Harry and Joe Six-Pack and are known collec- not have to do much more than announce
tively by the term “psychographics.” Psycho- their existence and describe their dazzling
graphics may capture some truth about real features.
people’s lifestyles, attitudes, self-image, and By the early 1960s, however, consumers
aspirations, but it is very weak at predicting were becoming less predictable in their
what any of these people is likely to purchase buying habits: Many people without much

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in any given product category. It thus happens education had become affluent; others with
to be very poor at giving corporate decision sophisticated tastes had become very price
makers any idea of how to keep the customers conscious. As a result, tastes and purchasing
they have or gain new ones. patterns no longer neatly aligned with age
The failings of psychographics, however, and income, and purely demographic seg-
and the disappointments it has produced in mentations lost their ability to guide compa-
its users, should not cast doubt on the validity nies’ decisions.
of careful segmentation overall. Indeed, As time went on, product introductions

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marketers continue to rely on it, and line remained frequent, but they increasingly
executives increasingly demand segmenta- amounted to refinements of existing offerings
tions that the whole enterprise can put into that had originally answered real consumer
action. Because of the technique’s underlying needs but now merely catered to mild prefer-
validity, and managers’ continuing need for ences. With ever more trivial improvements
what it can do, there’s good reason to think to report on, and few ways to distinguish a
that segmentation’s drift from its original client’s product from the competition’s, ad-
purpose and potency can be halted. Good vertising grew boring and bored with itself.
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segmentations identify the groups most Gradually, the focus of creative departments
worth pursuing—the underserved, the dissat- shifted from the product to the consumer: If,
isfied, and those likely to make a first-time by the 1970s, products had become less dis-
purchase, for example. They are dynamic— tinctive, people seemed to be bursting with
they recognize that the first-time purchaser unprecedented variety.
may become underserved or dissatisfied if his One way companies found to convince
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or her situation changes. And they tell compa- particular groups of consumers that a product
nies what products to place before the most was perfect for them was to place in the ad-
susceptible consumers. vertising message a person whom they resem-
In this article, we’ll describe the elements bled or wished they did. Another way, which
of a smart segmentation strategy. We’ll ex- followed from the consumer orientation of
plain how segmentations meant to strengthen the first, was to emphasize the emotional
brand identity and make an emotional con- rather than the functional benefits products
nection with consumers differ from those offered—pride of ownership, increased status,
No

capable of telling a company which markets it sex appeal. Cake mixes to which a fresh egg
should enter and what goods to make. And had to be added, for example, may have
we’ll introduce a tool we call the “gravity of tasted no better than earlier versions contain-
decision spectrum,’’ which focuses on the ing powdered egg. But they sold well because
form of consumer behavior that should be the extra step allowed the preparer to feel she
of greatest interest to marketers—the rela- was fulfilling a wife’s traditional domestic
tionship of consumers to a product or product role. In contrast to breakthrough products—
category, not to their jobs, their friends, their such as an effective over-the-counter dan-
Daniel Yankelovich is chairman of family, or their community, all of which lay druff shampoo—that addressed intense
Do

Viewpoint Learning, a firm that pro- in the realm of psychographics. unmet needs, ordinary third-generation
motes problem solving through dia- products had to find customers who were
logue, and DYG, a market research firm The Drift into Nebulousness already and especially susceptible to their
that tracks social trends. He is based in The years after World War II were marked by allure. Since the attraction was based on
San Diego. David Meer (dmeer@ extraordinary innovations in consumer prod- things like status, it made sense to fashion
marakon.com) is a partner in the New ucts—transistor radios, disposable diapers, segments reflecting the personal character-
York office of Marakon Associates, an razor cartridges, pleasant-tasting sugarless istics and lifestyles of the target consumers.
international strategy consulting firm. colas, among them. For products so ground- As competitors increased the speed and skill

harvard business review • february 2006 page 3


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Rediscovering Market Segmentation

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with which they could copy or reengineer the Values and Lifestyles (VALS) program,

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products, the functional dimension of existing a commercial research service, which was
offerings became less compelling. Ironically, soon retained by scores of consumer product
by the mid-1970s, belief in the power of imag- companies and advertising agencies. VALS
ery to stimulate sales of dull items may have drew heavily on frameworks developed by
begun to take pressure off product developers Harvard sociologist David Riesman, coauthor
to come up with products and services dis- of The Lonely Crowd, and Brandeis psycholo-

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playing genuinely innovative technology and gist Abraham Maslow, who posited the now
fresh design, thus aggravating the problem. well-known hierarchy of needs. VALS classi-
Two concurrent developments gave this new fied individuals according to nine enduring
emphasis on the consumer’s self-conception, psychological types. An individual consumer’s
emotions, and personality an extra measure behavior, the theory went, could in turn be
of rigor. Social scientists began to apply their explained by his or her correspondence to
modes of analysis to business problems, and one of those types. VALS and similar models
business executives, confused by the fragmen- soon turned psychographics into the most

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tation of the mass audience and the speed accepted mode of segmentation. Not surpris-
with which tastes were changing, welcomed ingly, it was embraced by advertising depart-
their insights. Using attitudinal indicators ments and agencies, which appreciated a
similar to those elicited by personality tests, certifiably scientific technique whose stock-
psychologists carved out marketing segments in-trade was inventing characters, just as they
based on their members’ shared worldview. themselves had been doing for some time.
Those early segments were populated with the Psychographics, it should be said, proved to
Inner-Directed, Traditionalists, Hedonists, and be effective at brand reinforcement and posi-
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the like. tioning. The Pepsi Generation campaign of
In 1978, Arnold Mitchell and his colleagues decades ago, for example, did coalesce a wide
at the Stanford Research Institute launched assortment of consumers into a group that

Different Segmentations for Different Purposes


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Psychographic segmentations can be used to create advertising that will influence consumers to think warmly about a particular brand. But
they’re not as well suited for other purposes. You would need a different kind of nondemographic segmentation to investigate, for instance,
what kinds of products to make. Here we set out the different characteristics of these two types of segmentation exercises.

Segmentations to develop advertising Segmentations to develop new products


No

Populations Users of the product or service to be Users of related products or services that already
studied advertised meet similar needs; partners such as distributors
and retailers

Data sources Attitude surveys Purchase and usage data on consumers,


supplemented by surveys; analyses of consumers’
tapped
finances and channel preferences
Do

Analytical Statistical analysis of survey results Analysis of customers (both in the field and in the
tools used laboratory) who remain loyal and those who switch
to competing offerings

Outputs Segments that differ in their responses to Segments that differ in their purchasing power,
a given message goals, aspirations, and behavior

harvard business review • february 2006 page 4


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or 617.783.7860
For the exclusive use of R. Das
Rediscovering Market Segmentation

t
identified with the youth culture emerging The segmentation’s many oversights included

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at the time. But even though campaigns built a failure to identify buyers of older homes
on psychographics are good at moving viewers in affluent neighborhoods who, the firm’s
emotionally, the characteristics and attitudes own anecdotal experience suggested, would
that such ads invoke are simply not the driv- probably be the most likely purchasers of
ers of commercial activity. Those tend to be such a system.
things like purchasing history, product loy- The fact is that even the most memorable

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alty, and a propensity to trade up, all of which advertising, if based on a crudely drawn
are informed by attitudes and values that segmentation, will do little to spur sales or
lead consumers to view particular offerings garner market share. The recent “Catfight’’
differently. What’s more, psychographic seg- campaign for Miller Lite, for example, featur-
mentations have done little to enlighten the ing mud-wrestling supermodels, certainly
companies that commission them about which made an impression on the young, male
markets to enter or what kinds of offers to segment it was intended to reach, but sales of
make, how products should be taken to that brand of beer did not increase. As it hap-

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market, and how they should be priced. pens, there is a segment of light-beer drinkers
Despite its disappointing performance, that would gravitate to Miller Lite if only
market segmentation is still widely used. In its members knew it had fewer carbohydrates
2004, for example, when Marakon Associates than Bud Light. How do we know? A Miller
and the Economist Intelligence Unit surveyed campaign that told them so did indeed in-
200 senior executives of large companies, 59% crease sales.
of them reported that they had conducted
a major segmentation exercise during the The Way Back
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The Miller Lite ads previous two years. Yet the evidence suggests If meaningful segmentations depend on find-
it’s not a very effective tool: Only 14% of the ing patterns in your customers’ actual buying
featuring mud-wrestling executives said they derived real value from behavior, then to construct one properly, you
the exercise. need to gather the relevant data. Depending
supermodels certainly What happens when a company attempts on the question your exercise is ultimately
impressed the young, to apply a segmentation appropriate for aimed at answering, you would want informa-
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developing ad campaigns to product develop- tion about, say, which benefits and features
male segment they were ment or pricing decisions? Consider the ex- matter to your customers. Or which customers
intended to reach, but perience of a company we’ll call HomeAirCo, are willing to pay higher prices or demand
a leading manufacturer and installer of home lower ones. Or the relative advantages and
sales did not increase. heating and cooling systems. The chief mar- disadvantages customers identify in your exist-
keting officer, after less than a year in that ing offerings. You’ll also need data on emerg-
position, commissioned a respected consumer ing social, economic, and technological trends
research company skilled in statistical analysis that may alter purchasing and usage patterns.
No

to conduct an expensive segmentation study Many companies capture this information


with input from HomeAirCo’s advertising routinely. If yours does not, you can use quali-
agency. The agency was able to create an tative research to explore underlying motives
entertaining campaign featuring characters and needs propelling current purchases and
based on five typologies faithfully reflecting use quantitative research to understand com-
the interests and viewing habits of the mem- petitive strengths and vulnerabilities. You
bers of each segment. One, for example, can reexamine the sales data you already have
portrayed a Traditionalist male trying to work to reveal the hidden patterns in customers’
on his own heating system and botching it behavior. And you can retain trend-tracking
Do

while his wife nagged him to call HomeAirCo; services.


another showed a woman doing yoga in Armed with such data, you can then fashion
an ideal environment because she had a segments that are both revealing and applica-
HomeAirCo system. But every segment had ble. Such segments will:
the same number of HomeAirCo customers • Reflect the company’s strategy;
in it, leaving the firm at a loss to know • Indicate where sources of revenue or profit
which groups would be most likely to want to may lie;
upgrade their temperature control systems. • Identify consumers’ values, attitudes, and

harvard business review • february 2006 page 5


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or 617.783.7860
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Rediscovering Market Segmentation

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beliefs as they relate specifically to product or according to the level of employee that served

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service offerings; them—relationship manager, senior branch
• Focus on actual customer behavior; personnel, or junior branch personnel—
• Make sense to top executives; which mostly depended on customer assets
• Accommodate or anticipate changes in and income. Relationship managers had the
markets or consumer behavior. most profitable customers, and so forth. How-
Let’s consider each aspect in turn. ever, the bank knew next to nothing about

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What are we trying to do? When companies what might distinguish one relationship-
change marketing chiefs, a new segmentation manager customer from another.
is rarely far behind. The new CMO often uses The bank decided to go beyond what it
a segmentation exercise as a way to put his or knew about its existing customer base and
her stamp on the business. Unfortunately, few acquire market research on the lifetime value
marketing chiefs know or have thought about of wealthy prospects. The research was of
which of their company’s strategic decisions three types:
would benefit from the guidance of a segmen- • Demographic (age, occupation, assets, and

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tation. For a traditional brokerage house, for so on);
instance, the main strategic challenge might • Behavioral (which services customers
be how to reduce customer defections to already used, how many institutions they did
discount brokers. For a personal-care products business with, how many transactions they
company, it might be how to extend a strong made in a month);
soap brand into deodorants. And for a fast- • Attitudinal (financial sophistication, time
food chain, it might be whether to come up spent on investments, risk tolerance).
with healthier menu alternatives. Segmenta- The segmentation that resulted differed
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tions designed to shed light on these questions markedly from its predecessor. Every compo-
won’t try to explore the personalities of cus- nent of the three broad drivers of profitability
tomers; they will try to identify groups of contributed to an understanding of lifetime
potentially interested or susceptible cus- value. For instance, the new segments identi-
tomers sufficiently numerous and lucrative fied, such as Young Families, revealed high
to justify pursuit. Subsequent strategic moves variations in profitability even in the existing
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will, of course, call for new and different high-profit segment. Equipped with this infor-
segmentations. mation, the bank was more willing to embark
Which customers drive profits? To be valid, on the expensive task of tailoring offerings to
a segmentation must identify groups that mat- potential clients, since it had greater confi-
ter to a company’s financial performance. To dence that the effort would turn out to be
start, companies can rank their own customers economically worthwhile. Three segments it
by profitability so as to concentrate the right discovered—On Their Way, Established Fami-
amount of attention on them. But to grow rev- lies, and Retirement Planners—contributed
No

enues, a company should understand what almost no profit, even though they accounted
makes its best customers as profitable as they for half the customer base. Yet many of the
are and then seek new customers who share at individuals who fell into those segments had
least a couple of those characteristics. For been assigned to relationship managers. The
instance, a luggage company whose soft but bank acted quickly to reduce the cost of
durable carry-on bags earn its highest margins servicing those people by reassigning them to
might notice that the majority of the people more junior branch personnel, to call centers,
who buy the bags are international flyers. It or to the Web.
would therefore pursue other international Which attitudes matter to the buying deci-
Do

travelers as potential customers. sion? Even though segmenting customers


To understand how important this question according to immutable personality traits
is, consider the experience of one leading rarely bears much fruit, there is a place for
bank with a large wealth management busi- examining people’s lifestyles, attitudes, self-
ness. The bank had become concerned that its image, and aspirations. They should be ex-
overall business was suffering from low rates plored, as the bank did, in a context that is
of growth and a stagnant market share. Its directly related to the product or service
existing segmentation sorted customers under study. Unlike purely psychographic

harvard business review • february 2006 page 6


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or 617.783.7860
For the exclusive use of R. Das
Rediscovering Market Segmentation

t
segments, these characteristics can be ex- flaunt their technical virtuosity instead of

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pected to change along with the customers’ defining segments that make intuitive sense
values and environment. to senior managers. If the segments seem in-
What are my customers actually doing? consistent with managers’ long experience,
While relevant attitudes, values, and expressed and managers cannot grasp how they were
preferences can bring color and insight to a derived, the research they yield is unlikely to
segmentation, they lack the predictive power be accepted and applied.

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of actual purchase behavior, such as heaviness One financial services company found this
of use, brand switching, and retail-format or out the hard way. The firm, which develops in-
channel selection. If you want to understand vestment products sold by third-party invest-
how a consumer would respond to products or ment advisers, wanted a bigger role for itself in
features that have not yet been introduced, asset management, a service usually confined
you can elicit the next best thing to actual be- to wealthy investors. So it created a full-service
havior by creating laboratory simulations to offering designed to accommodate smaller
which special analytic techniques can be investors. The challenge the company faced

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applied. One of them, called “conjoint analysis,” was to find out which kinds of advisers would
involves presenting consumers with combina- be most likely to recommend the service to
tions of features. It then asks the consumers this new category of clients. Unfortunately,
how willing they would be to purchase the the advisers’ existing classifications—national
product in question if particular attributes broker/dealer, regional broker/dealer, bank
were added or removed, or if the price officer, and independent—revealed differences
changed. in recommendation patterns too minor to be
Here’s an example of how it works: A pet meaningful.
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food manufacturer gave consumers an oppor- The company therefore decided to segment
tunity to design their ideal pet food container. its investment advisers in a more meaningful
The consumers in the test saw on their com- way—according to the kinds of recommenda-
puter screens a generic package to which they tions they made to their clients. At first, the
could drag and drop features they valued, such firm took an approach that was statistically
as a resealable opening and a handle attached powerful but highly complex. It developed
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to the 25-pound size. They were next asked profiles of typical investors based on their age,
how much more they would pay for products assets, risk tolerance, and the like. Then in a
containing different combinations of such survey it asked the advisers to select a mix of
features. The consumers were then segmented investments suited to each customer profile.
according to their degree of price sensitivity The statistical analysis teased out the underly-
and desire for convenience. On this basis, the ing investment style of each adviser and then
company could redesign its packaging with grouped together those with like patterns.
added features that would maintain existing Some advisers, for example, rarely recom-
No

customers and attract new ones. It could also mended individually traded stocks, while
jettison features whose cost would have re- others made stocks the foundation of their
quired charging too high an overall price. clients’ portfolios.
Will this segmentation make sense to se- Although the segmentation was mathemat-
nior management? Modern marketing practi- ically sound, management did not trust its
tioners view their field as outward facing—that findings. For one thing, the segmentation
is, focused on listening and communicating relied heavily on whether advisers received
to consumers and markets. In fact, marketing fees or commissions, a distinction the statisti-
may do itself harm by failing to make itself cal analysis determined was important. Since
Do

understood by its internal constituency: the new product was to be fee based, how-
senior management. As marketing has be- ever, the commission-based segments would
come more scientific and specialized, its be largely irrelevant. So the senior managers
practitioners have increasingly turned to could not understand why a segmentation
advanced statistical techniques for dissecting along those lines had been made. Perhaps
segments into ever finer slices containing im- they would have accepted the study if they
probable combinations of traits. The masters had been able to understand how its conclu-
of these techniques are often tempted to sions had been reached. But the study’s reliance

harvard business review • february 2006 page 7


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or 617.783.7860
For the exclusive use of R. Das
Rediscovering Market Segmentation

t
on esoteric statistical procedures foreclosed tomers that can inform all subsequent market-

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that possibility. If nothing else, the managers ing decisions. In our view, segmentations
charged with applying the study’s findings should be part of an ongoing search for an-
worried that they would lack answers for swers to important business questions as they
top management in the event the segmen- arise. Consequently, effective segmentations
tation failed. are dynamic—in two senses. First, they con-
The in-house marketing science team and centrate on consumers’ needs, attitudes, and

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the consulting firm assisting it decided to re- behavior, which can change quickly, rather
cast the segmentation using simple criteria, than on personality traits, which usually en-
not statistics. First, the advisers were grouped dure throughout a person’s life. Second, they
on the basis of the average net worth of their are reshaped by market conditions, such as
clients. And then they were grouped according fluctuating economics, emerging consumer
to whether their clients’ investments were niches, and new technologies, which in today’s
actively managed. The result was four seg- world are evolving more rapidly than ever. In
ments rated on two dimensions. We list them short, effective segmentations focus on just

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here by internal title in descending order of one or two issues, and they need to be redrawn
client wealth and portfolio activity. as soon as they have lost their relevance.
• Active Investors (high-net-worth clients, At the dawn of the World Wide Web, for
strong reliance on actively managed invest- example, a common segmentation criterion
ments such as stocks and bonds); was the extent of a person’s online experi-
• Upscale Coaches (high-net-worth clients, ence. Early Adopters felt comfortable explor-
little reliance on actively managed invest- ing the Web on their own; Newbies, or recent
ments); adopters, sought high levels of support. As
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Effective segmentations • Mass-Market Coaches (low-net-worth cli- newcomers became scarcer, the focus shifted
ents, strong reliance on actively managed to an emerging group of users, Transactors,
focus on just one or two investments); for whom concern about sharing personal
• Product-Oriented (low-net-worth clients, information, including credit card numbers,
issues, and they need to little reliance on actively managed invest- was no obstacle to transacting business on-
be redrawn as soon as ments). line. Now that few people are worried about
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The Upscale Coaches, it turned out, were the such things, many of today’s segmentations
they have lost their most liable to consider the new asset-management tend to orient themselves around intrinsically
relevance. product. The Mass-Market Coaches also Net-based services and functions such as
showed some potential. The segments brack- games, parental control devices, and file shar-
eting those two had almost no potential. In ing, each involving a set of separately measur-
subsequent interviews, the Active Investors able interests and concerns.
confessed they viewed the company develop-
ing the new product as a competitor offering The Gravity of Decision Spectrum
No

a service uncomfortably close to their own. The most common error marketers commit is
The Product-Oriented segment had the oppo- applying segmentations designed to shed light
site objection: Their clients were not inter- on one kind of issue to some other purpose
ested in having anyone actively manage their for which they were not designed. But which
assets. But the new product could comple- kinds of segmentations are best for which
ment the service that the two middle groups purposes? We suggest marketers begin by
provided without threatening to replace it. In evaluating the expectations consumers bring
other words, the more passive managers of to a particular kind of transaction. These can
high-net-worth clients and the more active be located on our gravity of decision spectrum,
Do

managers of low-net-worth clients were which will tell you how deeply you need to
found to be the two groups worth targeting, probe consumers’ motives, concerns, and
a conclusion management understood and even psyches.
unhesitatingly accepted. Some decisions people make, such as trying
Can our segmentation register change? a new brand of toilet paper or applying for a
Segmentations are viewed by too many of credit card, are relatively inconsequential. If
their sponsors as onetime, go-for-broke efforts the product is unsatisfactory, at worst a small
to provide a comprehensive portrait of cus- amount of money has been wasted and a bit

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of inconvenience incurred. But decisions such emotional investment is great, and their core

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as buying a home or choosing a cancer treat- values are engaged. Those values are often in
ment have momentous significance given conflict with market values, and segmenta-
their potential for benefit or harm and the tions need to expose these tensions. Health
expense associated with them. care is the archetypal high-gravity issue. The
At the shallow end of the spectrum, con- exhibit, “What Is at Stake?” maps out the
sumers are seeking products and services they differences in business decisions, consumer

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think will save them time, effort, and money. decisions, and approaches to segmentation
So segmentations for items such as toiletries that emerge as the gravity of a consumer’s
and snacks try to measure things like the buying decision increases.
price sensitivity, habits, and impulsiveness What follows are three illustrations repre-
of the target consumer. Segmentations for senting three points along the spectrum. Of
big-ticket purchases like cars and electronic course, many gradations exist between them.
devices, in the middle of the spectrum, test The shallow end. A manufacturer of men’s
how concerned consumers are about quality, shaving products faced a dilemma: how to

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design, complexity, and the status a product spur fast growth when the firm already
might confer. At the deepest end, consumers’ dominated the most profitable subcategory—

What Is at Stake?
Knowing how important a product or service is to your customers will help you decide which of their expectations are most likely to reveal their
op
willingness to purchase your product. If your products are purely functional, you will probably want to investigate such garden-variety factors
as the price sensitivity and brand loyalty of potential purchasers. But if such purchasers are facing life-altering choices, you will want to inquire
into their most deeply held beliefs.

Issues the business Consumers’ concerns What the segmentation


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wants to address should try to find out

Shallowest • Whether to make small • How relevant and • Buying and usage behavior
improvements to existing believable new-product Willingness to pay a small
decisions •
products claims are premium for higher quality
• How to select targets of • How to evaluate a given • Degree of brand loyalty
a media campaign product
• Whether to change prices • Whether to switch
No

products

• How to position the brand • Whether to visit a clinic • Whether the consumers being
Middle-of-the-
• Which segments to pursue about a medical condition studied are do-it-yourself or
spectrum do-it-for-me types
• Whether to change the product • Whether to switch one’s
decisions
fundamentally brand of car • Consumers’ needs (better
• Whether to replace an service, convenience,
• Whether to develop an entirely
enterprise software system functionality)
new product
• Their social status,
Do

self-image, and lifestyle

• Whether to revise the business • Choosing a course of • Core values and beliefs
Deepest
model in response to powerful medical treatment related to the buying
decisions social forces changing how decision
• Deciding where to live
people live their lives

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Rediscovering Market Segmentation

t
shaving systems (a razor handle plus replace- nology. They sought greater power and

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able blades). Fearing it would cannibalize faster acceleration at the Prius’s price point.
sales of its own shaving systems, the company Moreover, in the late 1990s, U.S. drivers
shied away from disposable shavers, an obvi- were mostly unconcerned about fuel con-
ous area to enter. But under pressure from sumption, an economic issue for some but
senior management, the razor-and-blade busi- not an environmental one.
ness unit commissioned a new segmentation Because even relatively inexpensive cars are

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to find out whether there really was any basis large expenditures for most households and
for its fears. the cars people drive strongly influence their
Shavers are a small-ticket item. Though men image in their own and others’ eyes, some ex-
naturally want to look neat and clean, most do ploration of consumers’ emotions and values
not agonize over which technology or brand to was warranted. Accordingly, when Toyota did
choose, since all produce more or less the same so, the carmaker discovered that about 10% of
result. Men’s main concerns traditionally have car buyers not only liked the car’s design and
been the comfort and closeness of the shave, accepted its performance but also were pleased

yo
how easy the razor is to use (which often deter- that it was less harmful to the environment
mines whether people favor a system or a than other cars. Although a Prius would be an
disposable), and the price. adventurous purchase, in certain communities
Accordingly, to determine whether a new it might even be an admired one because of
product would cannibalize existing ones, a the values it represented. If the small group
first segmentation used detailed household of potential purchasers could be reached
purchase records to put customers into one of efficiently rather than through an expensive
three classifications: those who buy systems media campaign, Toyota could make money
op
exclusively, those who buy disposables exclu- on the car. As it turned out, the best prospects
sively, and those who switch between the were contacted via the Internet, and the Prius
two. To management’s surprise, the switching easily met its first-year sales and profit targets.
segment was very small, suggesting that the The deep end. Continuing care retirement
company could introduce a more expensive communities (CCRCs) are residential facilities
disposable razor without taking business for healthy and affluent retirees. Such a com-
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away from its systems. munity typically includes single-family houses,


The next question was whether enough dis- duplexes, or flats where residents live before
posables users, who are thought of as looking graduating into assisted-living or nursing care,
for a low-cost way to shave, would buy a both of which are available on the same cam-
higher-quality but more expensive device. A pus. Sponsored by both nonprofit and for-
second segmentation, therefore, sought to profit institutions such as Hyatt, CCRCs have
judge price sensitivity in order to reveal cus- quintupled in number in the past 15 years.
tomers’ propensity to trade up. As suspected, CCRCs are expensive. Seniors pay a hefty
No

many men were not interested in a better dis- entry fee—from $125,000 to over $400,000
posable that cost more. However, the research (depending on the size and geographical loca-
did expose a modest level of emotional invest- tion of the dwelling they choose) usually after
ment in the product on the part of young selling the family home. Still, residents do not
men who had girlfriends or were on the dat- own their unit and thus do not build equity. A
ing scene. For them, how their skin felt to the major component of the fee is an insurance
touch was almost as important as how they policy that covers the cost of assisted living
looked. Consequently, they would be willing and skilled nursing care if the resident’s
to pay more for that smooth feel. Equipped health declines. Residents also pay a monthly
Do

with that insight, the company launched a fee covering meals, housekeeping, utilities,
very high-margin disposable, which garnered and other amenities. Even though a typical
a solid and sustained market share without continuing care retirement community returns
hurting its sister brands. 90% of the initial fee when a resident moves
In the middle. In 1997, Toyota introduced a out or dies, the individual or estate suffers a
quirky internal combustion–electric hybrid significant financial sacrifice, given the rate of
vehicle to great success in its home market. appreciation of today’s real estate market.
But Americans were wary of the new tech- What, then, explains the demand for

harvard business review • february 2006 page 10


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or 617.783.7860
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Rediscovering Market Segmentation

t
CCRCs? The answer was revealed by a seg- from the product features that matter most to

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mentation oriented around changing family current and potential customers of particular
values. Published comments of CCRC resi- brands and categories. The second is too little
dents and industry experts indicate that the emphasis on actual consumer behavior, which
segment of seniors attracted to this option is definitively reveals their attitudes and helps
seeking to avoid dependence on family and predict business outcomes. And the third is
longtime friends, who in earlier decades undue absorption in the technical details of

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would have looked after them. Two key val- devising segmentations, which estranges mar-
ues characterize this segment: keters from the decision makers on whose
• The desire for autonomy—to avoid being a support their initiatives depend.
burden on their loved ones; We believe that organizations able to over-
• The willingness to embrace, in lieu of the come these three weaknesses will be able to
security and warmth of having family and respond more quickly and effectively to rap-
friends nearby, life in a quasi-institutional idly changing market conditions, develop
setting among strangers. insights into where and how to compete, and

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This segmentation obviously operates at gain maximum benefit from scarce marketing
the deepest level of the gravity of decision resources. Nondemographic segmentation
framework. It tells the retirement industry began more than 40 years ago as a way to
that adding Alzheimer’s care to the package focus on the differences among customers that
offered would appeal to the large numbers of matter the most strategically. Since for more
the elderly who worry about becoming a bur- than half of that span, it has not managed to
den and that proximity to or affiliation with a do so, we hope that the rediscovery we are
university would add to the sense of commu- proposing here can make up for lost time and,
op
nity valued in CCRCs. over the next 40 years, at last fulfill segmenta-
••• tion’s original purpose.
Segmentation initiatives have generally been
disappointing to the companies launching Reprint R0602G
them. Their failures have mostly taken three To order, see the next page
forms. The first is excessive interest in consum- or call 800-988-0886 or 617-783-7500
or go to www.hbr.org
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ers’ identities, which has distracted marketers


No
Do

harvard business review • february 2006 page 11


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or 617.783.7860
For the exclusive use of R. Das

t
Rediscovering Market Segmentation

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Further Reading

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ARTICLES
New Criteria for Market Segmentation The Customer Has Escaped
by Daniel Yankelovich by Paul F. Nunes and Frank V. Cespedes
Harvard Business Review Harvard Business Review
March 1964 November 2003
Product no. 64213 Product no. R0311G

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It was in this classic article that Daniel Yankel- The authors affirm the importance of under-
ovich first made the case for segmentation standing actual purchasing behavior and
based on criteria other than demographic updating consumer segments as buying
categories. The author selects ten examples of patterns change. For example, the way con-
consumer and industrial products and exam- sumers use distribution channels is changing.
ines how they are affected by seven types They’re increasingly selecting high-touch
of nondemographic segmentation: 1) how channels (such as phoning a travel agent) to
buyers define value, 2) how susceptible they gather information and then using low-touch
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are to changing their minds, 3) how they channels (online ticket buying) to make the
define the product’s purpose, 4) what kind of actual purchase far more cheaply. This behav-
product styling their prefer, 5) how they view ior leaves companies with “stranded assets,”
change and technological progress, 6) what such as highly trained but underused sales-
individualized needs they want to fulfill, and 7) people. To avoid this costly scenario, com-
how confident they are in their ability to panies should stop designing distribution
choose among different offerings. channels to capture targeted demographic
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segments. Instead, they should design


channels to reflect different segments—such
as shoppers who purchase from the same
places repeatedly; those who “channel surf”
extensively before buying at the lowest possi-
ble price; and those who gather information
in many channels and then buy in their favorite
No

channel, regardless of price.

To Order
Do

For Harvard Business Review reprints and


subscriptions, call 800-988-0886 or
617-783-7500. Go to www.hbr.org

For customized and quantity orders of


Harvard Business Review article reprints,
call 617-783-7626, or e-mail
customizations@hbsp.harvard.edu

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