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6.3. Segmentation Process

Market segmentation is the means by which a company seeks to gain a differential advantage over its competitors. A methodology is required to achieve market segmentation. Markets usually fall into natural groups or segments, which include customers who exhibit broadly similar needs. These segments form separate markets in themselves and can often be of considerable size. Taken to its extreme, each individual consumer is a unique market segment, as all people differ in their requirements. However, it is clearly uneconomical to make unique products to meet the needs of individuals, except in the most exceptional of circumstances. Consequently, products are made to appeal to groups of customers who share approximately the same needs. The universally accepted criteria of what constitutes a viable market segment are as follows:

Segments should be of an adequate size to provide the company with the desired ROI;
The members of each segment should share a high degree of similarity in their requirements, yet be distinct from the rest of the market;
The criteria for describing segments must be relevant to the purchase situation; and
Segments must be reachable by means of communication channels, distribution channels, or both.

While these criteria may seem obvious, market segmentation is one of the most difficult marketing concepts to put into practice. Yet, without effective segmentation, the company is susceptible to the ‘me too’ condition, where it offers the potential customer much the same product as any other company, which is likely to be the lowest priced article. This can be ruinous to profits, unless the company happens to have lower costs, and hence higher margins, than its competitors.

There are basically three stages to market segmentation, all of which have to be completed if any progress is to be made. In the first stage, the company takes a detailed look at the way its market operates, and identifies how customer decisions are made about competing products or services. Successful segmentation is based on a detailed understanding of decision-makers and their requirements. The second stage is essentially a manifestation of the way customers actually behave in the market place and consists of answering the question, ‘Who is buying what?’ The third stage seeks to resolve the issue of ‘Why do they buy what they buy?’, and then to search for market segments based on this analysis of identified needs.

The segmentation process consists of two phases:

Market Mapping - A useful way of tackling the complex issue of market segmentation is to start by drawing a ‘market map’ as a precursor to a more detailed examination of ‘who buys what’. A market map portrays the distribution, or supply and value chains that link the supplier and the ultimate consumer, or end user. It takes into account the various buying mechanisms found in the market, including the part played by ‘influencers’. In general, if an organization’s products or services go through the same channels to similar end users, then one composite market map can be drawn. If, however, some products or services go through totally different channels and/or to totally different markets, then more than one market map must be produced. It is very important that the market map tracks the organization’s products/services, along with those of its competitors, all the way down the supply chain to the end user, even though the organization may not in fact sell to the end user directly.

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The market map should also include, where appropriate, the inherent purchasing procedures, such as committees, authorizations, sealed bids and so on. The market map also assumes that all the final users who appear beyond ‘Purchase Procedure’ are subject to the same purchasing route. If this is not the case, ensure that your market map reflects the reality. For example, all the departments in a company may use mail, but the advertising department may ‘purchase’ its mail through their direct mail agency and therefore bypass the normal purchase procedures. Most market maps will have at least two principal components:

The channel; and
Consumers (final or end users).

Who buys and what they buy

Who buys - A useful method for dealing with this step in the market segmentation process is to refer to the market map and, at each point where leverage is exhibited, attempt to describe the characteristics of the customers who belong to that point. The analysis may consist of a single characteristic or a combination of features, depending on the market concerned.

Such customer analyses aim to identify the shared attributes within customer groups, which can then be used to guide the development of effective communication strategies. No matter how clever we may be in isolating segments, unless we can find some common ground upon which to base our promotional activities and methods of information exchange, our marketing efforts will be to no avail. The use of demographic descriptors can be helpful in identifying commonalities. For consumer markets, these include age, sex, education, stage in the family life-cycle, and socio-economic group (A, B, C1, C2, D, E).

What they buy - In respect of what is bought, the value of the market map should now become apparent. Market mapping is about representing, diagrammatically, the actual structure of markets in terms of volume, value, the physical characteristics of products, the place of purchase, the frequency of purchase, the price paid, and so on. Outlining the market’s construction serves to indicate whether any groups of products (or outlets, or price categories and so on) are growing, static or declining; in other words, where there may be opportunities or obstacles.

Having determined the market's make-up, the next task is to list all relevant competitive products/services, whether or not you manufacture them. It is important to unbundle all the components of each purchase to ensure that the list of ‘what is bought’ is comprehensive. The listing of purchases particular to a market should consider the following product/service features:

Applications;
Physical characteristics;
Where they are bought;
How they are bought; and
When they are bought.

As part of this step of listing ‘what they buy’, and without attempting to link it with the earlier step of listing ‘who buys’, list all the channels through which the listed range of products/services are bought.

The list of supply channels (where bought) might include: direct/mail order, distributor, department store, national chain, regional chain, local independent retailer, tied retailer, supermarket, wholesaler, mass distributor, specialist supplier, street stall, via a buying group, through a buying club, door-to-door, local/highstreet/ out-of-town shop, and so on. It is also necessary to draw up a list of the different frequencies of purchase (when bought). Then draw up a separate list covering the different methods of purchase (how bought - credit card, charge card, cash, direct debit, standing order, credit terms, Switch, outright purchase, lease-hire, lease-purchase, negotiated price, sealed bid and so on) and, if applicable, the different purchasing organizations and procedures (centralized or decentralized; structure and distribution of power in the decision-making unit (DMU), which could apply equally to a household or to a business) observed in the market.

The next step in the market segmentation process is to build a representative model of the market by recording all the unique combinations of ‘what is bought’ and to identify for each of these ‘micro-segments’ the different customer characteristics associated with them, or ‘who’ buys. This step often produces a large number of micro-segments, each of which should have a volume or value figure attached. These micro-segments can be reduced in number by distinguishing important from unimportant features, and then removing the latter Some preliminary screening at this stage is vital in order to reduce this long list of micro-segments to manageable proportions.

Why they buy

The third stage of analysing customer behaviour is to gain an understanding of why customers behave the way they do in order that we can better sell to them.

Benefit analysis

The most useful and practical way of explaining customer behavior has been found to be that of benefit analysis, or the identification of the benefits customers seek in buying a product/service. For example, customer choice may be based on utility (product), economy (price), convenience and availability (place), emotion (promotion), or a combination (trade-off) of all these.

Differential benefits

While it is important for an organization to go through this process of benefit analysis, it is vital that, in doing so, differential benefits are identified. Differential benefits are those benefits that are not provided by competitors and that offer the greatest prospect of a competitive edge over them. If a company cannot identify any differential benefits, then either it is offering a product/service that is identical to the offerings of competitors (which is unlikely), or it has not done the benefit analysis thoroughly enough. Differential benefits hold the key to success – which will only follow where the differential benefits are in fact desired by target customers.

Cluster analysis

The final step in the third stage (‘why they buy’) is the culmination of all previous steps in the segmentation process: to look for clusters of segments that share the same, or similar, needs and to apply to them the organization’s minimum volume/value criteria in order to determine their viability.

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