Abstract
Almost a century ago, Alfred P. Sloan, president of General Motors, launched one of the first segmentation models in history. Aware that not all Americans bought cars in the same way, Sloan put all his efforts into segmenting the American automotive industry, and he achieved it. He was able to implement a price system according to segment, and so he found one of the keys to advancing the then omnipotent Ford.
From those first uproars to the present time, segmentation strategies have been refined and perfected, impelled by more and more complex markets and technological advances. However, the basic principals of segmentation have not varied much over time. After all, if by segmentation we mean dividing the market into different client groups with similar characteristics, to whom we direct a company’s products or services, the challenges of years ago are not much different than those of today. The big goal is not simply segmenting, but rather segmenting successfully. What do we mean by segmenting successfully? Basically, those strategies that allow us to detect and analyze opportunities that the market offers, discover untapped niches, getting to know the desires and tastes of consumers and, above all, making sales and marketing strategies, and all of a company’s activity, fit the reality of a market which, thanks to correct segmentation, the company can get to know.
In order for a segmentation strategy to be designed correctly, it must establish measurable clusters – that is to say, ones that are quantifiable in terms of purchase volume – , large enough to constitute an objective market, with the goal of making sales and marketing costs from segmentation profitable.
We would need to distinguish between segmentation of the potential market –perhaps the most extensive- and segmentation of the actual client portfolio. The difference between the two lies in the consumer’s degree of knowledge.
While potential market segmentation strategies are geared towards determining which groups of consumers we should aim our products or services, portfolio clients segmentation strategies are geared more towards establishing cross-selling, up-selling, and loyalization actions. In these cases, the behavioral criteria is basic: “ you will know them by their actions" says an old biblical expression. That is how it is with current clients: knowing what they do and why they do it allows the company to approach them with what they need at the moment they need it. [i]
The most commonly used segmentation models are usually based on the same criteria. Socio-demographic segmentation tries to unify client groups according to common characteristics, such as area of residence, sex, age, income level, profession, family composition, or others. Psycho-graphic segmentation attends more to lifestyles, activities, opinions and specific consumer interests, while behavioral segmentation, which we mentioned earlier, is based on a client’s purchasing behavioral characteristics.
For example, banks have a tendency towards clustering processes based on behavioral criteria that are very useful to them for approaching their consumers with specific financial products or services. A well-known Spanish financial institute, that is very involved in all sales channels, divides its mortgage customers into "The Best", "JASP" and "Stones". The first group includes people with money who are profitable, loyal, use the Internet, and consumer several products. “JASP" clients are less wealthy, and they have the profile of young people who use the Internet and have a low insurance level, as well as high mortgages over long periods of time. Finally, the “Stones” are those clients that are not connected to the Internet, who are of a mature age, not very loyal or profitable, with low income and mortgages. According to this distinctive segmentation, this well-known bank has decided to offer profitable deposits to its “Best” clients, attractive loans to its “JASP” clients, and only insurance policies to the “Stones”.
For a while now, the companies that are most effective are those that are combining two key factors: on one hand, the creation of segments focused on client value, and on the other hand, the accessibility of these segments. That is to say, the power to identify a segments individuals or groups, using a combination of previously mentioned models.
Evidently, the accessibility of segments, that is to say, being able to “label” the elements that compose it, is not always necessary, nor is it always possible; in these cases, we only need to know that a market segment exists and is attractive enough to launch sales and marketing actions that may render good results. In fact, it is only necessary to obtain meticulous knowledge of the clients that make up a segment when the company decides to carry out direct marketing actions.
In fact, far from knowing their clients in detail, many companies are opting for segmentation strategies based on self-selection: the market is studied in detail, the existence of different segments is looked at, but above all, it is the launching of the product or service that ends up naturally segmenting the consumer groups.
This type of strategy is being successfully applied by large companies in sectors such as wholesale and distribution. The main exponent of self-selection strategies are supermarket coupons (the consumer defines his or herself) and “low-tariff” airline flights: airline companies know that there is an important segment of clients who are conditioned by price, so much so that they limit themselves to big offers, which the user must identify; in this way the client selects his or herself and offers the provider all the information that would have been very difficult to obtain by other means.
As we mentioned earlier, in the majority of cases it is recommendable to base segmentation strategies on a good combination of client value determination and accessibility. Companies that are capable of grouping and detecting their high-value clients (CMV), the clients with the most potential for a future in the company (CMP), and those that are practically unprofitable (“below zero”), and companies that are capable of refining segment identification to the greatest possible degree, are achieving high levels of accuracy and cost optimization, adapting their marketing, sales, price, and service strategies to each one of these clusters.
Other variable such as "scoring" techniques, by which consumer characteristics are associated to value groups, are also obtaining notable results. “Scoring” models, by which the client will be weighed, allow us to measure the consumer’s purchase probability or their possibility of abandoning and going to the competition. The accuracy rate of segmentation strategies based on “scoring” models is 75%, while techniques based on sales team criteria have an accuracy rate of 32%[ii].
Profiling techniques are being implemented alongside scoring models in recent times. These techniques allow us to know the client’s desires and needs in detail. Models based on profiling have enormous advantages, such as exhaustive market and consumer knowledge. However, some experts warn of the risk of establishing segments that are too narrow, which do not include an objective market and threaten to be unprofitable.
Although some segmentation models seem to be garnering better results than others, it would be incorrect to assume that success is associated with use of one system or another. That is why we assert that the best formula is that which takes into account the combination of three “classic” models – socio-demographic, behavioral, and value-, with the greatest quality of information and the most appropriate strategic actions for the results obtained.
The achievements or failures of a segmentation strategy are not as associated with the grouping techniques used, as they are with how appropriate these techniques are to the company’s interests. In other words, if the segmentation models are appropriate, but the business, sales, and marketing actions that derive from them are erroneous, it will have been pointless to segment accurately. When we talk about segmentation, we always have to add the term “strategic” to it, because without a doubt, we are talking about one of the cornerstones of marketing. There are many companies that, having segmented with complete rigor, go on to apply inappropriate corporate or sales actions, which render all previous work useless. The opposite example is just as valid: All resources and the best campaigns are worthless if the previous segmentation was not well done.
In this sense, aligning is the key word. Segmentation strategies must always be aligned to more extensive and well-designed corporate strategies that involve the entire company, from the first employee to the last, and that allow us to establish marketing plans for each segment. The big objective is not having just any client in our portfolio, but rather being able to make a selective obtainment that forms a highly profitable client portfolio and frees us from mercenary clients. The key to success then, is how the company is able to interpret the results they’ve obtained, making the most appropriate decisions based on the results, and above all, aiming the entire organization towards them. The solution always lies in dedicating the best resources to the best clients.
Telefonica Publicity and Information (TPI) has close to 400.000 portfolio clients, one million companies in their potential market, and a complex sales network made up of more than 500 sales reps and various telemarketing platforms. Aware that they have one of the largest and best business databases in Spain, and systems that have allowed them to store all their client’s information in an organized and systematic way, TPI has been able to develop a marketing segmentation strategy that currently puts them at the head of directory companies that use these techniques. The company has based its sales and marketing strategies on the current and future value of its clients and on the expected effectiveness of the potential market.
For example, this model allows the company to detect that 15 % of "potential gold " clients, to whom TPI will assign various in-person visits, specific product packs, or attractive discount policies, to mention a few actions.
Another example is the configuration of a client group at high risk of abandonment and with high strategic value for the company, for whom specific sales and communications strategies have been designed.
In more global terms, by using this strategy, TPI has been able to distribute company sales objectives by client –sales reps use this segmentation strategy as a guide, and they are compensated according to their considerations-, determine company sales strategies, and rationalize client discount policies.
In this organization turn towards segmentation strategy, communication has been key. Alongside the launching and development of this system, TPI began a “bottom-up” communications plan, meant to involve the entire organization in the goals derived from segmentation strategies. In this way, TPI is going from an organization focused on the product to an organization focused on client value.
TPI’s new challenge: adapting these strategies to the transformation of the company, which has gone from being mono-product to being multi-product, with all the cross-selling, up-selling, and loyalization opportunities this change affords, and which TPI has already begun to take advantage of.
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[i] Principles of Marketing. Philip Kotler &f Gary Armstrong
[ii]Segmentation Report 2003. Daemon Quest.