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Dissecting Market Segmentation

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Dissecting Market Segmentation

“Everyone from Australia is stupid.”

It’s a glaring statement and it’s wrong. It is incorrect because it assumes that everyone in Australia is stupid. It makes a further assumption: that everyone in Australia is exactly the same. Obviously nobody, in their right mind, would ever utter or accept such a statement.

Yet when we turn to market segmentation, most companies make these kinds of idiotic assumptions on a daily basis. Market segmentation is one of the fundamental components in a strong marketing strategy. Most companies accept the fact that different people want different things and that, therefore, they should have different segments in their marketing plan.

The problem becomes apparent when we explore the criteria that most companies use to segment their market. Take a look at the names of the different segments in your company’s market-segmentation pie chart. Chances are you will discover segments that are divided by age, by gender, by social class or, if you work in B2B, by turnover and SIC code. Dividing up the market by a combination of these factors is simple, cheap and it looks effective. Unfortunately, it rarely works.

You do not segment a market because the people in the segments are different.

You segment a market because the people in the segments want different things. By segmenting a market by age or gender or geography or social class, we make the same crass assumptions as those exhibited in my opening statement. To assume, for example, that all 18 to 34 male ABC1s want the same things is ridiculous, yet assumptions such as this underpin the vast majority of market segmentation strategies.

If we are segmenting a market because we believe different people have different needs, then the correct place to begin is by determining those needs. Market research should allow us to understand what our customers want but also allow us to use this data to segment the market. Quantitative research such as a survey or conjoint analysis that is conducted on a representative sample will reveal the different needs in the market. We can then group together the customers with similar needs and give them a suitable name.

The first sure sign that a company knows what it is doing with segmentation is when you hear names such as ‘Trendy Casualists’ or ‘Morning Munchers’ because these segments are based on behavior, not on irrelevant characteristics such as age or gender. The clever bit is to ask customers for demographic data too. Then, once we have identified and named our behavioral segments, we can determine whether the customers in each segment share demographic characteristics. For example, maybe most ‘Morning Munchers’ are women between the ages of 25 and 35 who work full time. We can use this demographic data in our marketing mix decisions.

By focusing on needs rather than customers, we can enhance the efficacy of our marketing segmentation and this, in turn, will ensure a greater probability of eventual success when we actually enter that market.

I should know, I’m from Australia.

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1 Comment

Tobias Singer on October 14th, 2008 said

All very true. I have worked for a company that has been using lifestyle as their main segmentation criteria. This has proven to be a great basis for their marketing decisions

But you are right when you say you still need demographics to reach your target group (unfortunately the morning munchers don’t meet on a weekly basis). I think many marketers have a problem distinguishing between using demographics to DESCRIBE and to IDENTIFY a target group.

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