How to use segmentation effectively

Laurie Young Warc Best Practice August 2011

Title: Author(s): Source: Issue:

How to use segmentation effectively Laurie Young Warc Best Practice August 2011

How to use segmentation effectively

Laurie Young

Go to: EXECUTIVE SUMMARY Go to: WHERE TO START? Go to: ESSENTIALS Go to: REMINDER CHECKLIST Go to: LEADING CASE STUDIES Go to: REFERENCES & FURTHER READING

EXECUTIVE SUMMARY Customer segmentation is one of the fundamental building blocks of marketing. It is hard to imagine creating effective communications, innovative offers or successful brands without it. So, senior marketers frequently need to challenge outmoded or ill-conceived segmentation strategies before they can do anything. Segmentation is based on the fact that human beings tend to behave like tribes, with group similarities, and therefore buyers can be clustered around common, identifiable traits. By customising a brand's offer to meet those traits, suppliers can gain competitive advantage and save costs by prioritizing the most attractive segments. Unfortunately, potential segments can be complex, hard to access, and awkward to reconcile with existing ways of targeting buyers in sales, customer service or media scheduling. To deliver genuinely competitive benefits, effective segmentations need to be individually crafted, at some expense. They must be long-term, applicable across different activities, forwardlooking, sustainable and strategic. Once developed, there are several ways to check that they are effective but the key test is when the company's leaders have agreed not to serve sections of the market. Only then is segmentation really affecting company operations. Some thinkers argue that traditional segmentation approaches have been superseded by technology. They emphasize the
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increased personalisation of goods and services in a digital age, arguing that companies must increasingly respond to each individual buyer's needs, and do so, where possible, by using real time data and interaction. Yet, this is not entirely new. High-end industries have always taken this approach (in tailored clothing, custom cars or personal banking, for example). Technology is now allowing customisation to move into mass markets, enabling the likes of Amazon and Zappos to unite scale and customisation. At the time of writing, however, many organisations are reporting failures in the implementation of CRM systems designed to support such granular profiling and marketing. There is also little evidence that buyers have ceased to follow trends or display group mentalities. This paper, therefore, takes the view that numerous businesses are creating profits through the careful identification of valuable segments and the positioning of brands, products or services toward those segments. Insights built on deep knowledge of groups of human beings have always been a source of competitive advantage. They remain so today. WHERE TO START? The best way to start is probably by jettisoning any groupings of customers which have been used mainly for the internal convenience of the business. For instance, a number of companies simply group their customers around the products and services they buy. This is wrong, restrictive and self-serving. In reality, there is no such thing as a market for mortgages or personal computers. There are only human beings who buy things and they have a multiplicity of different needs, contexts, wants and aspirations. Marketers must start with a desire to understand those human beings. Whether the supplier is operating in a business-to-consumer or business-to-business environment, it is important to consider the characteristics of the people targeted. These characteristics may relate to the benefits buyers expect from their purchase, their use of media, attitudes to the category or preferences for different retail and distribution channels. Properly done, segmentation can prefigure the future intentions of buyers. Moreover, although human beings can be unpredictable, difficult and irrational, they tend to group naturally. In the real world, markets segment themselves. ESSENTIALS i. How to construct a segmentation strategy Although this is so fundamental to marketing, there is no recognised process to develop an effective segmentation. Some commission research agencies to look for identifiable clusters in customer data. Others use the creative teams of their advertising agencies to unearth crucial insights. In fact, several of the famous segmentation strategies of the past (like "YUPPIES") were created by agencies. One academic who studied market planning processes very closely, Professor Malcolm McDonald (see McDonald, M. 1998) identified some common steps, shown in the diagram below.

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Most client-side marketers start with an idea of the groupings in their market; with a hypothesis. This might be created by examining customer buying behaviour or it might be the intuitive conclusions of experienced managers. It might even be based on an opinion that a clever segmentation from somewhere else might be used as a starting point (perhaps one published by a social observer or one from the past). During this initial exercise, marketers ought to identify common issues around which the different groups will behave. These segmentation dimensions or variables can be scaled using some simple, judgemental criteria. For example, if the category under examination was coffee, the exercise could seek to use dimensions such as the particular benefits sought by consuming the product, and the impact on attitudes and consumption of variables such as mood, need state, social situation and time of the day. By contrast, in the consumer electronics sector more focus might be placed on distinguishing technological literacy. In B2B markets, the variables would be quite different. This initial planning can be quite easily tested by using data on the behaviour of existing customers. Why invest in new research when the company has customer knowledge easily and freely available? If this crude test suggests that the segmentation dimensions might work and that clusters might appear, then serious research is called for. Successful companies normally invest in a two-step process which uses in-depth, qualitative techniques to pursue and tease out trends; backed by quantitative techniques to confirm that they are representative of the whole market. If not, then it is back to the drawing board. If the research identifies potential segments then these should be tested using marketing programmes which represent, as far as possible, the rough and tumble of the real marketplace. Only then should the segment be compared to those used in the past by others. They can give real insight into how to develop and implement effective segmentation-based campaigns. Different segmentation methods include: Demographics and socioeconomics: Grouping people according to physical characteristics (age, sex) or circumstances (income, occupation or education). Examples include BT's Freestyle 700 Family in the UK and Big Pond Broadband's campaign for Australian retirees, The Power of Belonging. Life stage: This group's buyers according to the phase they have reached in their life such as "married", "home building"
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or "retired". They might become "freedom seekers", "dropouts" or "traditionalists". It is common in financial services as, demonstrated by the Halifax's UK Student Current Accounts campaign. Psychographics: The grouping of people according to various personal characteristics such as personality, interests or values. The US Effie-winning MINI CarFun Footprint campaign shows this approach in action. Related to psychographics is Lifestyle: Grouping customers by a common approach to life. Toyota's US campaign, Are you Venza? used this approach to a segment of African American consumers. Behavioural or attitudinal: Grouping according to a particular history of behaviour or attitudes, which may affect product and category usage, price sensitivity, and other variables. These include purchasing and media preferences and habits in areas such as smoking, drinking and other public policy fields. Public sector and campaigning organisations often build strategies on behavioural and attitudinal data. Geographic/location: Grouping people according to their country of birth or area of residence. This can focus on the region, population density and climate. It can involve county, town or even street. Benefits sought: The grouping of people according to the advantages they are seeking from the product or service. For instance, as early as the 1960's, Russell Haley (Haley, 1968) published segmentation for the toothpaste market based on this approach. Customers were in the "sensory" segment (seeking flavour or product appearance) or the "sociable" segment (seeking brightness of teeth) or the "worriers" (seeking decay prevention). More recently, Air New Zealand employed a needs based segmentation for long haul travellers. Tribal: A specific example of behavioural segmentation which groups customers according to the social groups or cultures with which they identify. Context: Proposed by Professor Paul Fifield in the early 1990s (Fifield, 1992), this method groups customers according to the context in which they use a product or service. In contrast to these consumer approaches, business-to-business segmentation types have included: industry sector, organisation style, organisational structure and company or industry maturity. ii. Agreeing a segmentation. Segmentation should shape more than just marketing. Indeed, if the marketing department adopts a sophisticated segmentation strategy that the rest of the organisation ignores, then serious damage can be done. So, marketers should create a full investment and implementation plan to support their proposed segmentation. As part of the implementation of this plan, everyone in the organisation will eventually need to be familiar with the new segments and the implications for their particular activity. This initiative is likely to involve some return on investment analysis, political lobbying and effective internal communication. Such real world implementation issues are the reason that many sensible and well-worked segmentation concepts fail to take hold. It is, therefore, vital there is an agreement amongst stakeholders from the outset on what the criteria for a successful segmentation should be. These include:

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Homogeneity: Can the members of a segment be shown to act in the same way? Size and profitability: Is the prioritized segment big and profitable enough? Distinctiveness: Are the segments sufficiently different? Universality: Will this segmentation work across many/all of the organisation's territories? Stability: Will the clusters be reasonably stable over time? Usability: Are the clusters usable in terms of our current marketing processes (especially in media and creative)? Accessibility: Is it possible to reach this segment? Attractiveness/relevance: Would customers want to identify with this segment?

But, above all, does this segmentation make so much sense to the organisation's leadership that they are prepared to decline or turn off those parts of the market who are not the intended customer groups? Executives are rarely able to say no but that is the essence of effective, segmented marketing. iii. How to apply segmentation. If the segmentation passes these criteria, it will need to be applied to the following functional areas: i. Communications: all communications to people who form part of the segment need to be increasingly customised to their understanding, needs and likely responses. This applies to the choice of media and communications channels, brand positioning and creative components of any campaigns. Response mechanisms need to be set up which will allow communications to be increasingly customised to these segments. ii. Brand: a brand is such a multifaceted entity that it will appeal differently to different groups of people. It will need to be progressively adjusted to each segment's perceptions. In some cases, it will be sensible for a brand owner to position different brands at different segments. iii. Products, services & innovation: each of the company's offers should be adjusted to the needs of its main segments. Even the innovation process itself might vary according to each segment. For some segments, new ideas might arise from careful, targeted research, whereas in others, they might come from "co-creation" with customers. iv. Pricing: as the firm's offers become progressively adjusted to each segment's need, marketers will find that they understand the mix of features and price tolerances more precisely. It will turn pricing from an accounting into a market based exercise. v. Customer care: the markets will need to adjust bland customer service operations (like guarantees, call centres or product replacement mechanisms) toward the more precise expectations of segments. Good service influences repurchase intent and that, in turn, depends on how customer service meets expectations. Segmentation is a major tool in understanding the intended customers' expectations. The company cannot provide excellent service without it. vi. Operational communications: there are a range of communications which companies supply to customers which tend to be outside the vision of the marketing function. These include: contracts, invoices and product operations manuals. Segmentation allows the firm to adjust these more precisely for intended customers. REMINDER CHECKLIST i. Is the current method of categorising customer really market-based or is it for the convenience of internal management? ii. Have you reviewed successful types of segmentation of the past and, with the knowledge of your own customers, created a hypothesis to research? iii. Have you agreed the criteria for a successful segmentation?
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iv. Do you understand and agree with the segmentation dimensions used? v. Have you scored the dimensions and tested them with existing customers? vi. Have you planned for research and test marketing programmes? vii. Have you devised an investment strategy to present to the firm's leadership and sell to the organisation as whole? LEADING CASE STUDIES MINI Carfun Footprint Effie Worldwide, Silver, North America Effies 2010 This case study explains how MINI set out to target the environmentally-concerned segment of its audience that had been considering buying rivals such as the Toyota Prius. During the period covered here, MINI grew its sales despite in a declining industry. The Power of Belonging Advertising Federation of Australia, Gold, Australian Effie Awards, 2010 Telstra Big Pond set out to target retirees and empty nesters with a highly emotional campaign which maintained the brand's leadership position in the Australian broadband market. Flying With the Simpsons: An Award Winning Research Paper That Helped Air New Zealand Reinvent the Long Haul Air Travel Horst Feldhaeuser and Hudson Smales, ESOMAR, Asia Pacific, Melbourne, 2011 This detailed research paper outlines a needs-based segmentation which was then developed into a communications and service programme for a high value customer segment. Toyota Venza: Are You Venza? ARF Ogilvy Awards, Silver, Multicultural, 2011 The automotive brand owner set out to lure African-Americans by selling its brand as a lifestyle choice in tune with this segment of its audience. BT Freestyle 700 Family Design Business Association, Bronze, Design Effectiveness Awards, 2010 This unusual design-led case study highlights the role played by product design in capturing a segment of the fixed line customer base namely, pensioners. Nestle Fruita Vitals: Fruit Fuel Khalid Naseem and Ainee Kalim, Warc Prize for Asian Strategy, Entrant, 2011 ThiscasestudydescribeshowNestlachievedambitiousgrowthtargetsinPakistanforitspackaged-juices by radically repositioning its brand, targeting a lifestyle market segment and creating the Fruita Vitals sub-brand. REFERENCES & FURTHER READING
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John E G Bateson & Douglas K Hoffman, Managing Services Marketing. Thomson Learning, 1999. Les Binet & Sarah Carter, Mythbuster: the realities of segmentation. Admap October 2010. J Clark, Jones J, E Romanou & M Harrison, Segments, Hugs and rock n' roll. Market Research Society Annual conference 2009. Paul Fifield, Marketing Strategy: How to Prepare It-How to Implement It. Butterworth Heinemann 1992, 1998 (2nd edition). RI Haley, Benefit Segmentation: A Decision-Oriented Tool. Journal of Marketing, July 1968, pp30-35 M McDonald & I Dunbar, Market Segmentation: How to do it, How to profit from it. MacMillan, 1998. Roland T Rust, Anthony J Zahorik, Timothy L Keiningham, Service Marketing. Harper Collins, 1996. B Sternthal & A M Tybout, Segmentation and targeting. Kellog on marketing." 2001 J Stienstra, The myth of segmentation. ESOMAR Congress, Sept 2010. MichaelTuma,ReinholdDecker,SrenScholz,A survey of the challenges and pitfalls of cluster analysis application in market segmentation. Int journal of market research , Vol 53, no3 2011 Tupot M. L. & Stock T. What's next for segmentation? Admap Feb 2010

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ABOUT THE AUTHOR Laurie Young is a businessman who likes to write. During his career he has held senior marketing positions at BT, Unisys and PricewaterhouseCoopers, and built and sold an agency. He has published around a million words, is the author of The Marketer's Handbook, John Wiley & Sons, 2011, (view on Amazon.com), and writes frequently for Market Leader magazine.

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