Using Market Segmentation to Understand Your Customers

The goal of any market research is to provide actionable information concerning your/your client’s organization’s customers, operating environment, and marketing mix to help make better decisions. Market research spending can therefore be considered a risk-reduction investment, and each project should be clearly defined by decision making criteria. Segmentation research can be used to support decisions around identifying and selecting target customers of opportunity.

Conducting segmentation research will prevent an organization from failing to understand the differences among customers and, as a result, marketing to them all the same way. It is important to note that that the research should be carefully completed so customers aren’t segmented on the wrong dimensions for the decisions to be made, and that there may be several different types of segments required for multiple marketing decisions. There is no ONE segment of customers – there are several – because not all customers have identical needs.

Segmentation Methodologies

Two common methodologies for conducting segmentation research include A Priori (predefined) and Post-Hoc (derived). A Priori segments the market using known criteria such as preferred brand, quantity consumed, etc. (possibly collected via online panel tracking studies or random representative quota samples) that is preselected by the researcher. Other characteristics like demographics and psychographics are used to describe the segments. The objective is to understand the size of each segment and then to profile each segment using the descriptors. Post-Hoc segmentation is derived; segments are developed by clustering respondents into homogenous groups based on their profiles on relevant variables (e.g., desired benefits, perceptions, attitudes, purchase behavior, etc.). The cluster segments are then described by demographic and psychographic characteristics like in A Priori. The difference is that in the A Priori strategy the segments are predefined, whereas in Post-Hoc they are discovered through a cluster analysis. You could also adapt a hybrid approach using both methodologies.  A Priori is relatively low-cost research, while Post-Hoc can be much more elaborate and expensive.

Segmentation Research Process

Regardless of the methodology used, Segmentation Research has three main steps:

  1. Market Segmentation: identify bases for segmenting the market; develop profiles of resulting segments
  2. Market Targeting: develop measure of segment attractiveness (i.e., do you want to actually target/sell to the segment?); select the target segments
  3. Market Positioning: develop positioning for each target segment; develop the marketing mix for each target segment

Using a Post-Hoc methodology, for example, extensive qualitative research may be first conducted if the organization needs to understand more about purchase behavior, including why consumers purchased certain brands and not others. This qualitative research, combined with the organization’s own understanding of the market, will serve to compile an exhaustive list of product features and benefits that consumers might seek. Next, an online survey is written and fielded, asking respondents to use a rating scale to indicate the importance of those potential features and benefits when choosing a brand. The survey should also ask about certain behaviors relevant to the product/category, brand and media preferences, and various personality, lifestyle, and demographic characteristics. After fielding, the collected data is analyzed by grouping respondents by how similarly they answered the questions about each benefit’s importance (i.e., cluster analysis, often using factor scores). Several distinct patterns, or groups, will be found. The groups are then compared on the remaining survey questions (often through discriminant analysis or crosstabs) to see if/how they differed in other ways that may be useful to your organization when designing, advertising, and marketing the product.

Segmentation Strategies

There are several strategic approaches to satisfying the needs of customer segments. Undifferentiated marketing takes a one-size-fits-all approach, trying to be “everything to everyone” (e.g., municipal water service). Concentrated marketing focusses all on one segment (e.g., luxury car brand). An organization can choose to have Multiple target markets and treat each differently (e.g., PepsiCo and their assorted brands/offerings). A Hybrid approach provides one product to several segments (e.g., Warner Brothers Movies). Atomized marketing segments customers on a very small scale, often down to the individual level (e.g., Amazon, defense lawyer).

The Takeaway

After selecting your methodology (A Priori, Post-Hoc, hybrid), there are several segmentation strategies you can utilize. Segmentation research can be used for several lines of decision making including decisions concerning designing new products, setting prices, advertising, distribution, etc., but one study is unlikely to address all these decisions. Therefore, before starting any segmentation project it is critical to understand how the results will be used. You should work closely with key stakeholders throughout the project to ensure the analysis produces segments that will help your client/organization make better marketing decisions. Identifying key customer segments will help your organization focus its marketing efforts and effectively communicate with and satisfy consumers.

ABOUT THE AUTHOR: Stacey Penczak
With an insatiable appetite for literature, Stacey can often be found curled up with her cats, swooning over her latest fantasy or historical fiction obsession. When she’s not managing research projects for AYTM, this yoga enthusiast and NJ native delights in baking (& eating!) desserts, finger painting with oils, practicing archery in her backyard, and exploring the nearby riverbanks year-round.