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Market Segmentation                                                            By Jerry W. ThomasWhen the term “market seg...
sus cold, high-humidity areas versus dry areas, high-elevation    Demographic Segmentationversus low-elevation areas, and ...
questionnaire. Typically, verbatim comments            it produces more accurate answers. The Internetfrom consumers are u...
segmentation analysis. Many different methods can be used               that appeals to everyone, the heck with segmentati...
Nonmutually Exclusive                                       If you segment the market by psychographics,                  ...
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Market segmentation


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Market segmentation

  1. 1. Market Segmentation By Jerry W. ThomasWhen the term “market segmenta- Geographic Segmentation The purpose oftion” is used, most of us imme- This is perhaps the most common form of mar- segmentation isdiately think of psychographics, ket segmentation, wherein companies segment the concentra-lifestyles, values, behaviors, and the market by attacking a restricted geographic tion of marketing area. For example, corporations may choose to energy and forcemultivariate cluster analysis rou- market their brands in certain countries, but on the subdivi-tines. Market segmentation is a not in others. A brand could be sold only in one sion (or the mar-much broader concept, however, market, one state, or one region of the United States. Many restaurant chains focus on a ket segment) toand pervades the practice of busi- gain a competitive limited geographic area to achieve concentra-ness throughout the world. tion of force. Regional differences in consumer advantage within preferences exist, and this often provides a basis the segment. What is market segmentation? At its most basic for geographic specialization. For example, a level, the term “market segmentation” refers to company might choose to market its redeye subdividing a market along some commonal- gravy only in the southeastern U.S. Likewise, a ity, similarity, or kinship. That is, the mem- picante sauce might concentrate its distribution bers of a market segment share something in and advertising in the southwest. A chainsaw common. The purpose of segmentation is the company might only market its products in areas concentration of marketing energy and force with forests. Geographic segmentation can take on the subdivision (or the market segment) to many forms (urban versus rural, north versus gain a competitive advantage within the seg- south, seacoasts versus interior, warm areas ver- ment. It’s analogous to the military principle of“concentration of force” to overwhelm an enemy. Concentration of marketing energy (or force) is the essence of all marketing strategy, and mar- ket segmentation is the conceptual tool to help achieve this focus. Before discussing psycho- graphic or lifestyle segmentation (which is what most of us mean when using the term “segmenta- tion”), let’s review other types of market segmen- tation. Our focus is on consumer markets rather than business markets. Strategic Research  Analytics  Modeling  Optimization 1.817.640.6166 or 1.800. ANALYSIS • © 2007 Decision Analyst
  2. 2. sus cold, high-humidity areas versus dry areas, high-elevation Demographic Segmentationversus low-elevation areas, and so on). These examples also Gender, age, income, housing type, and education level arereveal that geographic segmentation is sometimes a surrogate common demographic variables. Some brands are targetedfor (or a means to) other types of segmentation. only to women, others only to men. Music downloads tend toDistribution Segmentation be targeted to the young, while hearing aids are targeted to the elderly. Education levels often define market segments. For Different markets can be reached through different channels instance, private elementary schools might define their target of distribution. For example, a company might segment the market as highly educated households containing women of“tick and flea collar” market by selling the product to super- childbearing age. Demographic segmentation almost always markets under one brand name, to mass merchandisers under plays some role in a segmentation strategy. another brand, to pet stores under another brand name, and to veterinarians under yet another brand name. This type Time Segmentation of distributional segmentation is common, especially among small companies that grant each channel a unique brand to Time segmentation is less common, but can be highly effec- gain distribution within that channel. Other examples of dis- tive. Some stores stay open later than others, or stay open on tributional segmentation would be an upscale line of clothing weekends. Some products are sold only at certain times of sold only in expensive department stores, or a hair shampoo the year (e.g., Christmas cards, fireworks). Chili is marketed sold only through upscale beauty salons. more aggressively in the fall, with the onset of cooler weather. Football is played in the fall, basketball in the winter andMedia Segmentation spring, and baseball in the spring and summer (or at least this used to be the pattern). The Olympics come along every fourWhile not common, media segmentation is sometimes a pos- years. Department stores sometimes schedule midnight pro-sibility. It is based on the fact that different media tend to motional events. The time dimension can be an interestingreach different audiences. If a brand pours all of its budget basis for segmentation. In addition to the foregoing, marketsinto one media, it can possibly dominate the segment of the can be segmented by hobbies, by political affiliation, by reli-market that listens to that radio station or reads that maga- gion, by special interest groups, by sports team loyalties, byzine. Media segmentation is most often practiced by compa- university attended, and hundreds of other variables. You arenies that have some control over the media and can somehow only limited by your marketing imagination.discourage competitors from using that media. Psychographic or LifestylePrice Segmentation SegmentationPrice segmentation is common and widely practiced. Varia- Lastly, we come to psychographic (or lifestyle) segmentation,tion in household incomes creates an opportunity for seg- based upon multivariate analyses of consumer attitudes, val-menting some markets along a price dimension. If personal ues, behaviors, emotions, perceptions, beliefs, and interests.incomes range from low to high, the reasoning goes, then a Psychographic segmentation is a legitimate way to segment acompany should offer some cheap products, some medium- market, if we can identify the proper segmentation variablespriced ones, and some expensive ones. This type of price (or lifestyle statements, words, pictures, etc.). Qualitativesegmentation is well illustrated by the range of automotive research techniques (focus groups, depth interviews, ethnog-brands marketed by General Motors, historically. Chevrolet, raphy) become invaluable at this stage. Qualitative researchPontiac, Oldsmobile, Buick, and Cadillac varied in price (and provides the insight, the conceptual knowledge, and the con-status) along a clearly defined spectrum to appeal to succes- sumer’s exact language necessary to design the segmentationsively higher income groups. Decision Analyst
  3. 3. questionnaire. Typically, verbatim comments it produces more accurate answers. The Internetfrom consumers are used to build batteries of is especially valuable for segmentation studies, Verbatim com-psychographic or lifestyle statements (these two since respondents can take the survey at a time ments from con-terms are used interchangeably). A large repre- of their own choosing, when they can give it sumers are usedsentative sample of consumers (generally, 1,000 their full, undivided attention. A mail survey to build batteriesor more) are then asked about the degree to offers some of the same advantages, but without of psychographicwhich they agree or disagree with each statement. the questionnaire controls, checks, and safe- or lifestyle state- guards built into an Internet survey.For example, if you were designing a market ments (these twosegmentation questionnaire for an airline, you Analytical Methods terms are usedmight conduct a series of depth interviews to interchangeably)help design the questionnaire. You probably Most segmentation analyses are based uponwould include a behaviorial section (frequency various types of “cluster analysis,” a set of well-of flying, how purchase tickets, who travel with, defined statistical procedures that group peoplecities flown to, where sit, airlines flown, money according to the proximity of their ratings.spent on airline tickets, etc.). You would include Unfortunately, cluster analysis (regardless of itsa major section on attitudes toward air travel many types and forms) has inherent limitations(motivations for air travel, fears related to air and seldom yields coherent market, positive emotions of flying, attitudes Cluster analysis routines ignore the pattern ofabout airline employees, checking luggage, buy- respondent ratings and rely primarily upon theing tickets, and so forth). You would also want proximity of respondent ratings. Too often, thisto include a section on perceptions of the differ- leads to clusters, or market segments, that don’tent airlines; that is, their “brand images.” You seem to make much sense when crosstabulatedcould go further and add a section on media against the original segmentation variables.consumption, or personal values as well. It is Another limitation of clustering approaches isat this point that you realize the questionnaire that all statements are treated as equal; whereas,is too long, and you have to make some hard in truth, some statements might be much moredecisions about what questions or statements to important than others in explaining consumerinclude. behavior in a particular product category. The method of data collection is very important, A better way to achieve a good psychographic because the questionnaire is so long (often 45 segmentation is to first identify the statements to 90 minutes in length). The telephone is not that are more important (i.e., the statements recommended for segmentation studies because that tend to explain or cause specific consumer of questionnaire length. Moreover, the various behaviors). Correlation analysis and regression rating scales and attitudinal statements are diffi- can be used for this purpose. Factor analysis is cult to communicate by phone, and the resulting also a powerful technique to identify the state- phone data tends to be “insensitive” and rife with ments and groups of statements that account“noise.” In-person interviews, or Internet-based for much of the variance in the attitudinal data interviews, or even mail surveys, are much bet- set. Directly, and indirectly, these techniques ter. Rating scales and attitudinal statements can help you identify the most important state- can be seen and fully comprehended by respon- ments (i.e., attitudes, perceptions, values). Then dents. Seeing is much better than hearing, and these statements become the inputs to the final Market Segmentation
  4. 4. segmentation analysis. Many different methods can be used that appeals to everyone, the heck with segmentation. Goto “cluster” or group the statements at this point. The final for the whole hog.step is to attach a segment code to each market segmentidentified and then crosstab all of the questionnaire variables 3. Creating too many segments. There is a practical limit toby the segments. You must then study the segments, and the the size of segments that companies can effectively target.attitudes/statements that make up each segment, to make If you create more than four or five market segments, yousure they make sense and hang together. If the segmentation run the risk that the resulting segments will be too smallresults don’t make sense, then you have to go back, change to target, at least by mass media. This is not always true,some of your assumptions or methods, rerun the analysis, but it is a good rule of thumb.and repeat the crosstab exercise to apply the “common sense” 4. Targeting all segments. So you have carefully subdividedvalidity check. your target market into five mutually exclusive psycho- graphic segments, and your boss tells you to develop aCommon Mistakes marketing plan to attack each segment. If all of your mar-Segmentation studies tend to be large and complicated, so it’s keting is direct mail, and you can identify the addresseseasy for errors and mistakes to be made. Some of the most that belong to each segment, then you can attack all seg-common mistakes: ments (assuming your product is relevant to all segments). But if you use broadcast media in marketing your product,1. Segmenting a segment. For example, someone might it is very difficult to target multiple segments, because of want to segment the market for widgets among 18- to 24- media “spillover.” What you say to one segment will be year-olds who live in Vermont and buy brand XYZ. As is muddled and confused by the different messages targeted evident, the client is asking that a tiny sliver of the market to other segments. be segmented. True, this tiny sliver can be segented, but rarely are the resulting segments of any value, because 5. Confusing the results. Segmentation studies are large and they are just too small. General rule: segment the whole complicated, with enormous amounts of data. It is easy to market, including all age groups. The market should be get lost in this treasure trove of answers and come up with broadly defined for a segmentation analysis to be most confusing and baffling results. effective. In other words, don’t preordain the results by 6. Overlooking the basics. The dazzle and glitter of the sampling restrictions. advanced, rocket-science multivariate analyses attract2. Overlooking the “universals.” Many attitudinal state- everyone’s attention. No one ever opens up the crosstabs ments in the questionnaire will not show up in the final and looks at the answers to the hundreds of questions segments, because they tend to be the same across all seg- asked. Often, hidden in plain view in the plain old cross- ments. Statements that everyone agrees with or everyone tabs are tremendous findings that could form the basis for disagrees with (we call them “universals”), cannot explain new or improved marketing strategies, advertising cam- much in the multivariate analyses. Variables have to move paigns, or new products. Rarely does anyone analyze this up and down for the multivariate analysis to work. The basic data, however. highest-rated variables, and the lowest-rated, are likely to 7. Targeting people instead of dollars. A market segment fall out of the multivariate analyses. However, you should might represent a large percentage of the population, but a always look at these universal statements. Any one of small part of the market. Always look at the dollar poten- them might be the basis for a positioning or a strategy that tial of market segments, not just the number of people in would appeal to everyone. If you find something unique the segments. Decision Analyst
  5. 5. Nonmutually Exclusive If you segment the market by psychographics, Often, hidden inSegments there are several essential uses of the segmenta- plain view in the tion: first, target your brand to the largest seg-Virtually all segmentation work, historically, plain old cross- ment with relevant brand fit (or even target twohas been based upon the assumption of mutu- tabs are tremen- closely related segments) by media advertisingally exclusive market segments. The mutually dous findings that and message. That is, the advertising messageexclusive model, however, does not always apply is the way to reach the psychographic segment could form theto psychographic or lifestyle segmentation (since (rarely can a psychographic segment be defined basis for new ormost of us hold many overlapping and/or con- by demographics or geography). Second, seg- improved market-flicting beliefs and attitudes). Therefore, it is mentation can provide the guiderails for brandwise to develop two distinctly different segmen- ing strategies, positioning. That is, positioning assumes, ortation solutions: one based upon mutually exclu- advertising cam- takes place in relation to, a target market seg-sive segments and one based upon overlapping paigns, or new ment; you are positioning your brand in relationsegments. Both of these segmentation “solu- products. to a market segment. Third, the segmentationtions” should be crosstabulated by the original can define opportunites for new products tar-questionnaire variables to identify which type of geted to each psychographic segment. That is,solution yields the most meaningful (and action- the market segments can be a template for newable) market segments. product development. For example, if you find that 15% of the U.S. population belongs to aFinal Thoughts “safety first” segment when it comes to buyingThe concept of market segmentation is sound. cars, then you can design and build the safest carIt’s a way to apply greater marketing energy or in the world to target this segment. So psycho-force to a subset of the market. A great deal of graphic segmentation’s greatest value lies in posi-money is wasted on psychographic segmenta- tioning, targeting via advertising message, andtions that never lead to any marketing actions. defining new product opportunities. Go forth and segment. About the Author Jerry W. Thomas is the President/CEO of Decision Analyst. The author may be reached by email at or by phone at 1-800-262-5974 or 1-817-640-6166. Decision Analyst is a leading international marketing research and analytical consulting firm. The com- pany specializes in advertising testing, strategy research, new product ideation, new product research, and advanced modeling for marketing-decision optimization. 604 Avenue H East • Arlington, TX 76011-3100, USAStrategic Research  Analytics  Modeling  Optimization 1.817.640.6166 or 1.800. ANALYSIS •© 2007 Decision Analyst