Market Segmentation: Benefits, Methodological Approaches, Specific Statistical Techniques and Business Outcomes

Articles abound on the subject of market segmentation: Benefits, methodological approaches, specific statistical techniques, business outcomes, and so forth. An immeasurable but undoubtedly larger number still of articles extols the virtues of consumer segmentation without including any supporting details: It works. It is critically important. This is just known. But why? Are the truisms true? Indeed they are. And still, precious little is explained about the risks, to budget and brand, of attempting to address customers as an undifferentiated mass. This article attempts to explain some of those specific risks.

Brand alienation. A successful consumer segmentation will reveal the factors of greatest importance to each of your respective segments. For instance, in many segmentations, at least one consumer cluster emerges that is considerably less price-sensitive than the others. This may be a particularly affluent group of consumers, or simply a group so dedicated to a particular product or service as to render price a non-issue. Marketing materials for this group should clearly be tailored to engage them on a basis other than price.

The risk of marketing in an undifferentiated fashion to this group is the risk of creating an unfavorable impression about your brand: An advertisement with few images or feature listings but prominently displayed prices and “Sale” announcements will not engage this group. This is clearly undesired, but it is not the worst part. The real risk is that your brand may be thereafter associated among this segment with “cheaper” or “more common” products. Perhaps not a terrible outcome, normally, but within this particular segment, it may serve to alienate your brand.

As an example, consider that certain designer labels and jewelry producers consistently exclude price from almost all communications about their brand. Why? Because if you have to ask, you likely cannot afford it, and this exclusivity appeals to a certain subset of the population. The price of an advertised item may be sublimely low, a remarkable value, but the fact that the price is advertised precludes the item, and thereby the brand, from their consideration. An extreme example, but it makes the point.

The risk of brand alienation via unsegmented marketing is related to a phenomenon known as first impression failure. Continuing the example above, suppose that the first of your company’s advertisements seen by the price-insensitive segment is a Sale ad, and serves to alienate your brand, but the second ad they see is about your product’s features, with no mention of price. Is it too late? It may be. A mass of psychological research supports the notion that humans use “cognitive shortcuts” to avoid having to assimilate and reevaluate information, in world where we are bombarded with information. Most of us do not reevaluate our understanding of the McDonald’s or Nike brand every time we see one of their advertisements; our perceptions about these brands are firmly set through previous exposure. Similarly, in our example, the price-insensitive consumers’ perceptions about your brand may already be set. They may already have decided that your brand is not one they are interested in, and may have become “immune” in certain respects to subsequent information about it. You may therefore only have one chance to make an impression that is not brand-alienating. The approach you take in doing so can be valuably informed by consumer segmentation data, which can facilitate differentiated impression-management strategies.

Wasted marketing spend. Unsegmented marketing can be a considerably expensive approach. If you are currently using television, radio, newspaper, or flier advertisements, estimate the math. What percentage of your ads reach any audience (consider newspapers unread, fliers discarded without a glance, etc.)? Then, what percentage of the noticed ads actually reaches your target market? If you are selling primarily to 24-34 year-olds, and only 28% of the readership of the paper you advertise in falls within this range, you are paying at least 72% too much for the ads. Then, estimate the percentage of those you do reach who will actually act on the ad (by visiting your website or store, or otherwise contacting your company). From there, estimate the percentage of these individuals who actually purchase your product or service. Following this path demonstrates the typically minuscule rate of effectiveness that traditional unsegmented advertising provides.

How could segmentation remedy this? In the example above, a market segmentation may have revealed that three of the most profitable of your five consumer segments do not consider unsolicited advertisements (in this case, fliers) in their purchase decisions, and while a fourth segment may consider them, they rely more heavily on Internet reports. Knowing this, would you adjust the weight of fliers in your marketing strategy?

Poor channel selection (or, “The medium is the message”). At the risk of misappropriating McLuhan’s phrase here, consider that the form of your marketing may say more about your brand than its content. Without discussing specific material, if I were to tell you that Company A advertises primarily via YouTube video, and Company B primarily via community newsletter, what assumptions might you make about each company? What assumptions is your company encouraging about its brand through its marketing formats? Is each subgroup within your customer base experiencing the format most likely to engage them?

A more sophisticated consideration would ask whether and how the variety of marketing formats is aligned with the variety of consumer groups they are designed to target. In an unsegmented market, it is virtually impossible to know whether your marketing mix is appropriate, given how the groups in your consumer base source their information about products or services. The problem is more in-depth than matching ad formats to age, for instance. There are cross-considerations which are addressable only through a deeper understanding of your customers: Which format-and-message combinations are most likely to attract the most profitable segments? Format X may be most likely to attract Segment A, but Segment A may require a wealth of information, not images, so an alternate Format must be chosen; which is the next best choice? Uninformed marketing mix decisions can (and so often do) lead to outcomes as cautioned above, including wasted marketing spend and brand alienation, among others.

A note should be added here, to preempt any mention of Google AdWords, Facebook Ads, or similar pay-per-result marketing tactics as replacements for proper marketing strategies: These services are invaluable; there is no doubt. A marketing discussion would be incomplete without mention of them. This said, it is important to recognize that these services are tools, not approaches in themselves; they are vehicles for the delivery of marketing strategies. Consumer segmented marketing, in its simplest description, aims to convey the right message to the right customer at the right time, and tools such as those noted above can help to facilitate this. However, a poorly crafted or improperly directed message, while it may reach customers through these mediums, will not result in the desired outcome.

Over-simplified value considerations (and resultant over- or under-allocation of marketing spend). Part of any respectable consumer segmentation is an assessment of customer value, and any respectable marketing strategy incorporates this. The simplest argument for this is the scenario wherein 22% of your customers are responsible for 74% of your revenue. Would you want to focus your marketing efforts more heavily on this group? Of course.

However, customer valuations can quickly become complex. Which of the following is more valuable? Brand-loyal customers who buy infrequently and tell many others about the brand, or those who buy frequently, spend considerably each time, but tell no one about the brand? Such assessments can become quite involved.

Marketers have traditionally used a framework called RFM analysis to assess customer value. The RFM acronym stands for Recency, Frequency, and Monetary value. Assigning quantitative categories within each of these factors, and examining their intersection, can provide a crude assessment of customer value. However, as a technique for evaluating all but the most straightforward of value ranges, RFM analysis has fallen into disrepute. It is considered by many market research professionals a rather primitive tool for such a complex problem. More sophisticated methodologies, such as cluster analysis and latent class modeling, provide more appropriate ways of incorporating value considerations in consumer segment identification.

Regardless of approach, customer value should factor into any marketing strategy, and unless you can market on a one-to-one basis according to value (virtually no business can), a methodologically sound segmentation incorporating a value calculation is the next best thing. The risk, otherwise, is clear: Over-spending on your least valuable segments, and under-spending on your most valuable segments.

Missed market opportunities. This is perhaps a lesser-known risk. Depending on the objectives of a segmentation study, either a key goal or a rewarding byproduct of the procedure is the identification of a unique need or an under-served customer segment. Your company may already be well-positioned to offer a timely service or release a highly desired product related to your existing line, but this knowledge will not likely present itself through continued status quo retail and marketing efforts. Only by investing resources in a more thorough understanding of your customer base will these sorts of opportunities become available.

Finally, in considering the role of consumer segmentation in your marketing strategy, recall that customers are not customers; they are people. They are like most of us: Time-crunched, finance-crunched, and already committed to existing routines and purchase consideration processes. Convincing them to change those modes of being requires a deep understanding of their needs, desires, resources, behaviors, and attitudes. This may sound daunting; you may be inclined to throw up your hands and continue on as before. While this level of understanding would be virtually impossible to respond to on a one-to-one basis, even if it were obtainable, this path is not futile. Segmentation facilitates a movement toward this ideal, and with appropriate methodological sophistication can provide a deeper understanding of increasingly smaller groups of consumers. Managed correctly, this deeper understanding can breed a broader engagement with your brand.

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