Versión en PDF Send this page Versión para imprimir
Segmenting is one of the oldest and unknown concepts in the business World. Almost a century ago, Alfred P. Sloan, the legendary president of the multinational General Motors, realized its importance and value. He initiated one of the first segmentation models in history.
Aware of the fact that not all Americans bought cars in the same way, Sloan put all his effort into segmenting the automobile market in the United States in order to adjust the offer to potential consumer groups. He was successful. One of the most outstanding directors of the American industry, he was able to implement a price system determined according to segments of the public. In this way, Sloan found one of the keys to getting ahead of the then omnipresent Ford Motor Company.
From then until the present day, segmentation strategies have been undergoing a process of refinement and perfection. However, the basic principles that govern this Marketing discipline have not varied much over time. If segmentation is still understood as dividing a market into different groups of customers with similar characteristics, at whom a company’s products or services will be aimed, then the challenges of years ago were not much different than those of today.
The work that Sloan applied to his potential market in order to distinguish the different consumer groups is basically the same that Daimler-Chrysler undertook in order to re-launch the Smart car, the small vehicle presented in 1998 and destined to become the urban vehicle of the upper-middle class. The segmentation mistakes were corrected when it was discovered that its strength was not in its exclusiveness, but rather in the detection of new spending behaviors, such as the appearance of a market segment attracted more to low fuel consumption, maneuverable, affordable, easy-to-park cars, than to highway driving.
The best-known segmentation methods have been arranged in tour large groups: geographical, demographic, psychographic, and behavioral. None of these concepts are closed or inalterable, but rather new combinations are constantly added to them, as well as cross strategies and variations that constantly enrich what is one of the most critical aspects of Marketing, and on which the success or failure of an organization depends a great deal.
For all these reasons, something that looks so simple on paper is extremely complex if one does not know where to begin and how to carry out a process like this. It is not the same to know a market in order to access new customers, as it is to try to delve beeper into the customer portfolio in order to, according to available internal information and the information obtained by crossing it with other external sources, discover how to increase profits per customer, detect the most profitable ones, and develop loyalization strategies that allow us to retain them and prevent their abandonment, or “churn”.
The type of customer will also significantly determine the segmentation process. Although the most common case is that of final consumers ("consumer market"), it is necessary to keep in mind that segmentation variables undergo changes when it comes to business to business (B2B) markets.
Therefore, the real challenge is not simply determining whether or not to segment, since the majority does, even if they are not aware of it. The true challenge is segmenting successfully. That is to say, not only identifying segments, but knowing how to manage them, establishing different marketing plans for each segment.
The isotonic drink Aquarius is a clear example of the correct identification of a hidden market niche that, once explored, reveals itself as a wide-spectrum market at the international level. The first drink with these characteristics, Gatorade, was developed by scientists at the University of Florida in order to replenish football players’ strength. When the product entered the professional and amateur athlete market, its popularity expanded quickly. Coca-Cola went beyond that. Because of a correct segmentation process, it saw that isotonic beverages did not have to be limited to the sports market. Many more people could benefit from them, and in fact, they saw that that need was unsatisfied. Coca-Cola packaged its Aquarius product in a can, and introduced it to the distribution channel, bringing it to the larger public. It found that the micro-niche of athletes was only part of a larger segment; that of consumers interested in healthy products. Today, Aquarius has even been able to oust traditional medicines from their position as the prescribed relief for gastro-intestinal maladies. Physicians prescribe Aquarius, thus discovering a new need that nobody had previously been able to identify.
There are many benefits to a correct segmentation strategy. In the first place, a company is able to identify their customers’ desires, which is absolutely necessary in order to design and present the final offer. This facilitates the group selection, or cluster – that is to say, an internally homogenous group, but different from the rest – with which a company will work, and, according to that, it is possible to optimize available resources with the goal of obtaining maximum efficiency and profitability from marketing actions. The concept of customer allocation enters here, that is to say, the intelligent assignment of sales and marketing resources to each one of the identified segments a company will work with.
The generation of segments, or "clustering", must obey a series of fundamental principles. To begin with, the “clusters” must be measurable; that is to say, quantifiable in terms of purchase volume. Secondly, it is very important that they be accessible, which means that the customers that make up a segment must be identifiable in the potential market. As attractive as it might be, it is useless to identify a target audience if afterwards appropriate channels don’t exist to clearly identify the individuals on lists and access them in order to make an impact.
Apart from those previous quantitative parameters, there is also a need for the segments to be large enough to constitute a target market. The number of people who make up the segment and the income it can generate must justify the investment made in their identification and “conquest”.
| COMPANY | NICHES | MARKET SHARE |
| Hohner | Harmonicas | 85% |
| Tetra | Tropical fish food | 80% |
| Steiner Opt | Binoculars for military use | 80% |
| Loctite | Anaerobic adhesives | 80% |
| Babolat | Racket strings | 75% |
| Carl Hager | Incense wands | 70% |
| Swaroski | Crystal jewels | 67% |
| Cray Res. | Supercomputers | 66% |
| St. Jude Med. | Artificial cardiac valves | 60% |
| Uwatec | Snorkeling equipment | 60% |
One of the main problems companies face in terms of segmentation lies in the nature of the data. In the cases of geographical and demographical segmentation, we are dealing with easily quantifiable factors. In fact, the great majority can be obtained from public access sources such as the information published regularly by the National Institute of Statistics (INE) or the Center for Sociological Research (CIS). Other especially useful sources include the General Survey of Spending Habits, the General Study of Means (EGM), or consumer panels, which are regularly produced by AC Nielsen, TNS Sofres, IMS, IRI and others. However, despite the fact that these public sources constitute a valuable information reference, contact with the customer is unavoidable, since only by listening to them carefully can we claim to know them in-depth, a theory defended by the president of the Institute of E-commerce and Direct Marketing (ICEMD), professor Joost Van Nispen.
Experts signal two other aspects that must be kept in mind. The first one is the differentiation of clusters, that is, they should respond in a different and recognizable way to all elements of the marketing mix. The second one is the need for the segments to be “susceptible to action”, which means that they should allow us to appoint resources for launching specific marketing actions.
The companies that are achieving the greatest effectiveness are those that are able to combine two key factors: the creation of segments focused on customer value and the accessibility of said segments. This is the case with TPI, which bases its sales and Marketing strategies on the current and future value of its customers, as well as on the expected effectiveness of the potential market, establishing sales goals according to the segment and customer profile.
Once the principal determining factors have been settled upon in the potential market segmentation process, it is important to break down the steps that must be taken to carry out the process in the best way. Daemon Quest’s experience in the sector allows us to distinguish five phases:
As we’ve already mentioned, there are many, diverse segmentation methods. It is not common to use any single method, and in fact, it would be a grave mistake to do so. We can intuit that customer of a certain age range might be inclined to opt for a certain type of product, but we will never be sure that our offer is well-focused if we don’t consider other variables that will help us to specify our proposal more.
In geographical segmentation, the market is divided according to localization criteria. Depending on how much the market’s area of influence is expanded or reduced, we can distinguish between international, national, regional, or local markets, postal codes, census sections, neighborhoods, streets, parts of streets, buildings…
Despite the fact that the globalization of markets is leading to an increase in uniformity of tastes, values, and needs, geographical differences still have a notable influence on the processes of manufacturing, commercialization, and sales. In fact, some studies have affirmed that one of the factors that explain the existing digital breach between northern and southern Europe is due to the more benign climate in the latter countries, and to the fact that it is more inviting to spend time outside rather than inside connected to the Internet. Local conditioning factors usually clearly affect a product’s acceptance: It is clear that in countries where the culture is marked by outdoor life and extroversion –as is the case in Italy and Spain-, mobile phone sales are overwhelming. In our country, 15 million phones were sold last year alone…
As its name suggests, demographical segmentation uses factors related to measurable and identifiable aspects of people in an objective way: age, sex, race, religion, marital status, income, level of studies… All of these elements provide fundamental information, and some of them, when grouped, help discover something as practical as social class.
The conjunction of all these factors allows us to put geomarketing techniques into practice. Using geomarketing, it is possible to visualize the areas where the potential market exists and compare the company’s assets to those of the competition using drafts, maps, or digital cartography. In this way, we can detect the areas in which our segments are left unattended to, those in which our presence is poorly situated, or the areas in which the competition has gained a dominant position that affects our market. Available income, age, and gender are three of the most commonly used segmentation elements. In a market in which generational and sex differences are increasingly marked, companies have discovered that adopting their products or services to young people or adults, women or men, largely determines the success or failure of an initiative.
The controversial Axe deodorants has opted for an aggressive strategy aimed at its younger male clientele, using messages that have been accused of sexism, but which nonetheless have achieved a remarkable level of success among the audience they were geared at. With a different focus, the fact that women have the most influence on the decision in purchasing a vehicle has lead more and more brands to gear their advertising campaigns towards the feminine segment, not only making them the stars of their advertisements, but also designing cars with them in mind. Some recent examples include the Nissan Micra, or the new Volkswagen Beetle, which even includes a small vase next to the steering wheel.
Some demographical factors have become especially important in the last few months. For example, in Spain, the immigration phenomenon has revealed a previously unknown consumer market with enormous potential to many companies. Unappreciated until recently because their income level was below that of the segments considered most profitable, some companies are now taking advantage of the specific characteristics of certain communities and ethnic groups in order to design new proposals focused directly on specific groups.
According to data from the INE (National Institute of Statistics), closet o 3 million immigrants live in Spain, although “unofficial” data puts the foreign population at 5 million. So it’s no surprise that big distribution companies such as Carrefour, Eroski and Alcampo have announced the availability of products geared towards Islamic consumers, prepared according to the commands of the Koran.
Going a step beyond that, some Spanish banking entities, such as BBVA, Santander Central Hispano, or Caja Madrid have even designed not only products and promotions for immigrants, but have also supplied offices with multi-national personnel in order to better serve this customer segment.
In the case of psychographic segmentation, the analyzed factors allow us to divide buyers according to parameters such as values, lifestyle, or the diverse characteristics associated with the consumers’ personalities.
The area of values has taken on special importance. The availability of information and the extensiveness of supply have led the great majority of consumers to become more aware of the benefits and harm that business practices cause, acting accordingly when they disagree with them.Defense of the environment, respect for social rights, and the rejection of animal cruelty have been successfully used by numerous countries in order to approach their potential audience. For example, Iberdrola has become the first energy company in Spain to commercialize what is labeled “green energy”; that is to say, energy that comes entirely from 100% renewable sources.
The last classic segmentation method, behavioral, analyzes the relationship that is established between the consumer and the product. To do that, the entire transactional trail must be analyzed using Data Mining techniques, which allow us to figure out how to the consumer behaves towards the product.
For some experts, the first factor in segmentation is the benefits the customer expects to obtain from the products or services. For example, in the digital music market, potential music placer buyers don’t look for the same thing from this type of device. The great majority are interested in the players because they allow them to store and listen to a large quantity of music on a small device. However, other consumers appreciate multi-function in the devices, in which they can store all types of files and listen to the radio.
In terms of behavioral segmentation, other useful processes are distinguished, such as RFM (Recency, Frequency, Monetary Value) or others in which the market fragmentation criteria is the “moment”; diverse products and services are launched at very specific times of the year, taking advantage of holidays, celebrations, or the traditions of a specific society. A clear example in Europe is Christmas, but there are other, more interesting cases.
A customer is a changing being. He or she is not the same at every time of their life. Single women without a steady partner show specific, identifiable behavior, but the minute they begin a relationship, the possibility of them deciding to have children increase. In that case, habits change radically. Using a strategic segmentation map, it is possible to locate the different segments a company can aim for and take into account the different variables that exist in terms of more effective Marketing decision-making. For example, in the case of a large hardware store, the purchasing process is decisively influenced by factors such as whether or not customers are in the middle of moving house, getting married, or expecting a child.
The level of loyalty to a product also facilitates market segmentation. The rise of brand names and their association with icons that represent the consumer’s social status – the phenomenon known as brand brand-name bias– have displaced the product itself and its practical benefits from the value scale the customer looks for in the company.
The speed of acceptance of products or services is very linked to consumer behavior. According to this acceptance, it is possible to determine new segments, such as "early adopters" (the first ones to incorporate a specific advance or innovation), "followers"
(who follow the trend without being pioneers), “laggards" (the most lazy and resistant to advances), etc.
When taking the different segmentation models into account and using them together, it is possible to detect new segments and new market niches that have the specific characteristics of a society.
Some market analysis mechanisms and tools have been able to detect and classify new niches. Therefore, the VALS (Value Attitudes and Life Styles) system has been applying psychology techniques since the 1980’s in order to analyze and predicts consumer tastes and preferences. According to the methodology used in VALS, eight segments can be distinguished: "innovators", "thinkers", "achievers", "experiencers", "believers", "strivers", "makers" and "survivors". Each one of them represents very specific consumer groups, characterized by different ideals, achievements, and expressive mechanisms.
When concepts are mixed and put together, new groups of potential customers surface. “Metrosexuals” are an example of this: heterosexual men, concerned with their image, interested in fashion and cosmetics, and culturally sensitive.
Before metrosexuals, western societies saw the advent of “yuppies” and, later, those known as BoBos, "Bohemian Bourgeois", a new group of bourgeois with high purchasing power and an alternative profile, committed to the environment and removed from the traditional ways of life of the upper classes.
It has not been only socio-cultural trends that have made these new markets blossom. “NYLON’s” move between London and New York. They are people who live permanently on transatlantic flights between the two cities for work reasons. "DINKIES" (Double Income No Kids) have become common in the United Status and Europe. They are couples in which both partners work but do not have kids, which allows them a lifestyle that is very different from families with children. Other family models have surfaced too, such as "LATs" (Live Apart Together), who are couples who live separately.
| DENOMINATION | MEANING |
| Yuppies | Young Urban Professionals: young urban executives, concerned with money and not very committed to culture and environment. |
| BoBos | Bohemian Bourgeois: elite urban people with high purchasing power, committed to the environment and far from the "conservatism" of other groups with a similar income |
| Nylon | New York-London: professionals of high importance who split their time between New York and London. |
| Lats | Live Apart Together: couples who, despite being together, live apart voluntarily. |
| Dinkies | Double Income No Kids: usually urban couples with a high professional and income level, without kids. |
Behavioral criteria are fundamental when it comes to interpreting the appearance of new segments with common characteristics. The constant appearance of new “urban tribes”, the migration of theoretically juvenile behavior to segments of an older age- such as the videogame phenomenon-, and the growing power of previously hidden segments – children have become an authentic lobby that influences a family’s spending behavior- are some examples of how Marketing professionals must be permanently alert to the sociological variations in their potential market.
Segmentation processes have experienced a notable evolution in recent decades that has happened parallel to the transformation of markets. There has been a shift from strategies based on the product to "customer centric organizations “, and the peculiarities of these organizations have also influenced the way of organizing marketing actions and, therefore, the way of choosing and determining "final markets".
For much of the 20th century, Mass Marketing reduced the practice of segmenting to nothing. The best example was Henry Ford, who changed the car into a "commodity" within everybody’s reach, whatever their status or preferences were. That strategy of “coffee for everybody” is no longer valid, as Telefonica has understood and applied with the launching of diverse ADSL models, while a few years ago we were all forced to navigate at the same speed.
The growing internationalization of markets, the importance of local cultures in a global environment, and the increase in supply led to the natural fragmentation of the consumer base, which has justified the application of new Marketing strategies based on increasingly in-depth segmentation models.
The minimization of competition is what has led mainly small companies to be the first to opt for niche marketing and micro-marketing, in which segmentation generates very specific and perfectly differentiated "clusters". In order to be successful in this environment, however, it is necessary to develop “guerilla marketing” activities, the original concept established by the professors Jay Conrad Levison and Seth Godin, which defends “alternative and imaginative” methods to conquer the customer. It is clear that when the number of competitors is reduced to a minimum, the possibilities of gaining maximum profit from the customer base skyrocket, although the problem of specialization lies in the risk of falling into a lack of profitability or volume of income.
Opting for exhaustive segmentation is usually associated with the luxury sector and relatively small businesses. But there are other examples. A multinational like Adidas generates a good part of its income from sports materials associated with disciplines that have a greater base of practitioners, such as soccer or track and field. However, it opts for niches such as boxing or Greco-Roman wrestling, which are much smaller markets, but where the possibility of acting as a near monopoly is greater.
While it is the company that takes the initiative in analyzing and classifying its potential markets in the segmentation processes we have seen, the opposite relationship can be detected in certain business models. Can an offer segment directly? The answer is yes.
The employment and expansion of new technologies has made it possible to give instruments to consumers in order to identify themselves to the companies. For example, the Internet has become the perfect tool for gathering consumer information. Using specific promotions, numerous companies carry out campaigns with which they obtain key information about their consumers.
In many cases the companies eliminate the barriers to customers and, by offering an affordable and easily accessible service or product, they can see the market’s response and how it self-selects when given an offer. This is what happens with "low-tariff" flights; the low-price companies don’t try to offer the most exquisite service, but rather the most economical, and they have discovered that in terms of flying, there is a very important segment that values price above comfort. The massive customer obtainment response has allowed ING Direct to find out which segment is most interested by their offer: people without time to go to their offices, who only want to have the money available at all times and receive something in return, without being charged commission. With this data, ING has been able to more accurately focus its latest Marketing campaign, because it could aim it exactly at that customer profile.
Extreme segmentation arises in "one-to-one marketing", which will be the object of later analysis. Here, the personalization of the offer goes so far as to offer the individual exactly what they want. The Internet has allowed this objective to become a reality. Amazon, Dell, Bankinter, or Infojobs in Spain are only some of the examples that prove it.
We have seen how segmentation processes, when carried out properly with the correct focus, provide a vision very close to reality. But we must be careful; it is important to stress that it is only an approximate vision, approaching reality; it is not reality itself. In any case, the analysis, classification, and profiling of potential markets must obey specific strategies based on the customer.
It is pointless to develop a Marketing plan on the basis of a product we must find a place for among consumers if we don’t know whether the bases for its commercialization exist. The availability of methods and precise market description processes, as well as the use of new technologies for cross treatment of data with the goal of discovering hidden markets for strategic decision-making makes segmentation today a necessary process.
Segmentation strategies must always be accompanied by more extensive and well-designed corporative strategies that involve the entire company. The big goal in the end is not having just any customer in our portfolio, but rather being able to achieve a selective obtainment in order to have a portfolio of highly profitable customers, free from “mercenary” customers. So, the key to success lies in how the company is able to interpret the results it has obtained, summarize them adequately in a scorecard by segments (Marketing Scorecard), make the most appropriate decisions based on them, and, above all, gearing the entire organization towards them. The solution always lies in dedicating the best resources to the best customers.
First publication in marketing and clients strategy
It is one of the reigning companies in terms of personalization… “Create your Own...
The customer is a company’s scarcest and most valuable resource. It is the only thing that...
