Market Segmentation
by
Jerry W. Thomas
When the term “market segmentation” is used, most of us immediately think of psychographics, lifestyles, values, behaviors, and multivariate
cluster analysis routines. Market segmentation is a much broader concept, however, and pervades the practice of business throughout the world.
What is market segmentation? At its most basic level, the term “market segmentation” refers to subdividing a market along some commonality, similarity, or kinship.
That is, the members of a market segment share something in common. The purpose of segmentation is the concentration of marketing energy and force on the subdivision (or the
market segment) to gain a competitive advantage within the segment. 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 market segmentation is the conceptual tool to help achieve this focus. Before
discussing psychographic or lifestyle segmentation (which is what most of us mean when using the term “segmentation”), let’s review other types of market segmentation. Our focus is on consumer markets rather than business markets.
Geographic Segmentation
This is perhaps the most common form of market segmentation, wherein companies segment the market by attacking a restricted geographic area. For example, corporations may choose
to market their brands in certain countries, but not in others. A brand could be sold only in one market, one state, or one region of the United States. Many restaurant chains
focus on a limited geographic area to achieve concentration of force. Regional differences in consumer preferences exist, and this often provides a basis for geographic
specialization. For example, a company might choose to market its redeye gravy only in the southeastern U.S. Likewise, a picante sauce might concentrate its distribution and
advertising in the southwest. A chainsaw company might only market its products in areas with forests. Geographic segmentation can take many forms (urban versus rural, north
versus south, seacoasts versus interior, warm areas versus cold, high-humidity areas versus dry areas, high-elevation versus low-elevation areas, and so on). These examples also
reveal that geographic segmentation is sometimes a surrogate for (or a means to) other types of segmentation.
Distribution Segmentation
Different markets can be reached through different channels of distribution. For example, a company might segment the “tick and flea collar” market by selling the
product to supermarkets under one brand name, to mass merchandisers under another brand, to pet stores under another brand name, and to veterinarians under yet another brand name.
This type of distributional segmentation is common, especially among small companies that grant each channel a unique brand to gain distribution within that channel. Other
examples of distributional segmentation would be an upscale line of clothing sold only in expensive department stores, or a hair shampoo sold only through upscale beauty salons.
Media Segmentation
While not common, media segmentation is sometimes a possibility. It is based on the fact that different media tend to reach different audiences. If a brand pours all of its
budget into one media, it can possibly dominate the segment of the market that listens to that radio station or reads that magazine. Media segmentation is most often practiced by
companies that have some control over the media and can somehow discourage competitors from using that media.
Price Segmentation
Price segmentation is common and widely practiced. Variation in household incomes creates an opportunity for segmenting some markets along a price dimension. If personal incomes
range from low to high, the reasoning goes, then a company should offer some cheap products, some medium-priced ones, and some expensive ones. This type of price segmentation is
well illustrated by the range of automotive brands marketed by General Motors historically. Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac varied in price (and status) along a clearly defined spectrum to appeal to successively higher income groups.
Demographic Segmentation
Gender, age, income, housing type, and education level are common demographic variables. Some brands are targeted only to women, others only to men. Music downloads tend to be
targeted to the young, while hearing aids are targeted to the elderly. Education levels often define market segments. For instance, private elementary schools might define their
target market as highly educated households containing women of childbearing age. Demographic segmentation almost always plays some role in a segmentation strategy.
Time Segmentation
Time segmentation is less common but can be highly effective. Some stores stay open later than others, or stay open on weekends. Some products are sold only at certain times
of the year (e.g., Christmas cards, turkeys, fireworks, cranberry sauce). Chili is marketed more aggressively in the fall, with the onset of cooler weather. Football is played in
the fall, basketball in the winter and spring, and baseball in the spring and summer (or at least this used to be the pattern). The Olympics come along every two years. Department
stores sometimes schedule midnight promotional events. The time dimension can be an interesting basis for segmentation. In addition to the foregoing, markets can be segmented by
hobbies, by political affiliation, by religion, by special interest groups, by sports team loyalties, by universities attended, and hundreds of other variables. You are only limited by your marketing imagination.
Psychographic or Lifestyle Segmentation
Lastly, we come to psychographic (or lifestyle) segmentation, based upon multivariate analyses of consumer attitudes, values, behaviors, emotions, perceptions, beliefs, and
interests. Psychographic segmentation is a legitimate way to segment a market, if we can identify the proper segmentation variables (or lifestyle statements, words, pictures, etc.).
Qualitative research techniques (focus groups, depth interviews, ethnography) become invaluable at this stage. Qualitative research provides the insight, the conceptual knowledge,
and the consumer’s exact language necessary to design the segmentation questionnaire. Typically, verbatim comments from consumers are used to build batteries of
psychographic or lifestyle statements (these two terms are used interchangeably). A large representative sample of consumers (generally, 1,000 or more) are then asked
about the degree to which they agree or disagree with each statement. For example, if you were designing a market segmentation questionnaire for an airline, you might conduct a
series of depth interviews to help design the questionnaire. You probably would include a behavioral section (frequency of flying, how purchased tickets, who traveled with, cities
flown to, where sat, airlines flown, money spent on airline tickets, etc.). You would include a major section on attitudes toward air travel (motivations for air travel, fears
related to air travel, positive emotions of flying, attitudes about airline employees, checking luggage, buying tickets, and so forth). You would also want to include a section
on perceptions of the different airlines; that is, their “brand images.” You could go further and add a section on media consumption, or personal values,
as well. It is at this point that you realize the questionnaire is too long, and you have to make some hard decisions about what questions or statements to include.
The method of data collection is very important, because the questionnaire is so long (often 45 to 90 minutes in length). The telephone is not recommended for segmentation
studies because of questionnaire length. Moreover, the various rating scales and attitudinal statements are difficult to communicate by phone, and the resulting phone data tends
to be “insensitive” and rife with “noise.” In-person interviews or Internet-based interviews, or even mail surveys, are much better. Rating scales and
attitudinal statements can be seen and fully comprehended by respondents. Seeing is much better than hearing, and it produces more accurate answers. The Internet is especially
valuable for segmentation studies, since respondents can take the survey at a time of their own choosing, when they can give it their full, undivided attention. A mail survey
offers some of the same advantages, but without the questionnaire controls, checks, and safeguards built into an Internet survey.
Analytical Methods
Most segmentation analyses are based upon various types of “cluster analysis,” a set of well-defined statistical procedures that group people according to the
proximity of their ratings. Unfortunately, cluster analysis (regardless of its many types and forms) has inherent limitations and seldom yields coherent market segments. Cluster
analysis routines ignore the pattern of respondent ratings and rely primarily upon the proximity of respondent ratings. Too often this leads to clusters, or market segments, that
don’t seem to make much sense when crosstabulated against the original segmentation variables. Another limitation of clustering approaches is that all statements are treated
as equal; whereas, in truth, some statements might be much more important than others in explaining consumer behavior in a particular product category.
A better way to achieve a good psychographic segmentation is to first identify the statements that are more important (i.e., the statements that tend to explain or cause
specific consumer behaviors). Correlation analysis and regression can be used for this purpose. Factor analysis is also a powerful technique to identify the statements and groups
of statements that account for much of the variance in the attitudinal data set. Directly and indirectly, these techniques can help you identify the most important statements (i.e.,
attitudes, perceptions, values). Then, these statements become the inputs to the final segmentation analysis. Many different methods can be used to “cluster” or group
the statements at this point. The final step is to attach a segment code to each market segment identified and then crosstab all of the questionnaire variables by the segments.
You must then study the segments and the attitudes/statements that make up each segment to make sure they make sense and hang together. If the segmentation results don’t
make sense, then you have to go back, change some of your assumptions or methods, rerun the analysis, and repeat the crosstab exercise to apply the “common sense” validity check.
Common Mistakes In Market Segmentation
Segmentation studies tend to be large and complicated, so it’s easy for errors and mistakes to be made. Some of the most common mistakes:
- Segmenting a segment. For example, someone might want to segment the market for widgets among 18- to 24-year-olds who live in Vermont and buy brand
XYZ. As is evident, the client is asking that a tiny sliver of the market be segmented. True, this tiny sliver can be segmented, but rarely are the resulting segments of any
value, because they are just too small. General rule: segment the whole market, including all age groups. The market should be broadly defined for a segmentation analysis to be
most effective. In other words, don’t preordain the results by sampling restrictions.
- Overlooking the “universals.” Many attitudinal statements in the questionnaire will not show up in the final segments, because they tend
to be the same across all segments. Statements that everyone agrees with, or everyone disagrees with (we call them “universals”) cannot explain much in the multivariate
analyses. Variables have to move up and down for the multivariate analysis to work. The highest rated variables, and the lowest rated, are likely to fall out of the multivariate
analyses. However, you should always look at these universal statements. Any one of them might be the basis for a positioning or a strategy that would appeal to everyone. If you
find something unique that appeals to everyone, the heck with segmentation. Go for the whole hog.
- Creating too many segments. There is a practical limit to the size of segments that companies can effectively target. If you create more than four
or five market segments, you run the risk that the resulting segments will be too small to target, at least by mass media. This is not always true, but it is a good rule of thumb.
- Targeting all segments. So you have carefully subdivided your target market into five mutually exclusive psychographic segments, and your boss tells
you to develop a marketing plan to attack each segment. If all of your marketing is direct mail, and you can identify the addresses that belong to each segment, then you can attack
all segments (assuming your product is relevant to all segments). But, if you use broadcast media in marketing your product, it is very difficult to target multiple segments
because of media “spillover.” What you say to one segment will be muddled and confused by the different messages targeted to other segments.
- Confusing the results. Segmentation studies are large and complicated, with enormous amounts of data. It is easy to get lost in this treasure trove
of answers and come up with confusing and baffling results.
- Overlooking the basics. The dazzle and glitter of the advanced, rocket-science multivariate analyses attract everyone’s attention.
No one ever opens up the crosstabs and looks at the answers to the hundreds of questions asked. Often, hidden in plain view in the plain old crosstabs are tremendous
findings that could form the basis for new or improved marketing strategies, advertising campaigns, or new products. Rarely does anyone analyze this basic data, however.
- Targeting people instead of dollars. A market segment might represent a large percentage of the population, but a small part of the
market. Always look at the dollar potential of market segments, not just the number of people in the segments.
Nonmutually Exclusive Segments
Virtually all segmentation work, historically, has been based upon the assumption of mutually exclusive market segments. The mutually exclusive model, however, does not always
apply to psychographic or lifestyle segmentation (since most of us hold many overlapping and/or conflicting beliefs and attitudes). Therefore, it is wise to develop two distinctly
different segmentation solutions: one based upon mutually exclusive segments and one based upon overlapping segments. Both of these segmentation “solutions” should be
crosstabulated by the original questionnaire variables to identify which type of solution yields the most meaningful (and actionable) market segments.
Final Thoughts on Marketing Segmentation
The concept of market segmentation is sound. It’s a way to apply greater marketing energy or force to a subset of the market. A great deal of money is wasted on
psychographic segmentations that never lead to any marketing actions. If you segment the market by psychographics, there are several essential uses of the segmentation: first,
target your brand to the largest segment with relevant brand fit (or even target two closely related segments) by media advertising and message. That
is, the advertising message is the way to reach the psychographic segment (rarely can a psychographic segment be defined by demographics or geography). Second, segmentation can
provide the guide rails for brand positioning. That is, positioning assumes, or takes place in relation to, a target market segment; you are positioning your brand in relation to
a market segment. Third, the segmentation can define opportunities for new products targeted to each psychographic segment. That is, the market segments can be a template for new
product development. For example, if you find that 15% of the U.S. population belongs to a “safety first” segment when it comes to buying cars, then you can design and
build the safest car in the world to target this segment. So psychographic segmentation’s greatest value lies in positioning, targeting via advertising message, and defining
new product opportunities. Go forth and segment.
Copyright © 2007 by Decision Analyst, Inc.
This article may not be copied, published, or used in any way without written permission of Decision Analyst.
About the Author
Jerry W. Thomas (jthomas@decisionanalyst.com) is President/CEO of Dallas-Fort Worth based Decision Analyst. He may be reached
at 1-800-262-5974 or 1-817-640-6166.
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