Market Segmentation

Objective of Market Segmentation

Market segmentation is the process of dividing a market into groups, where the members of each group have similar requirements.  This allows marketing plans to be developed specifically for each of the groups. By recognising that the requirements of the market are not homogeneous, one can secure competitive advantage by designing packages targeted for each group.

Clearly there are many ways in which a market can be grouped, which will include by; Sector, Age of company, Age of buying decision-maker, Geography etc. Although these are valid groups they do not address the key question which is “Why is this service being bought?” or to put this in a marketing context, “What benefits are sought?”.

To work this point, if we group (segment) the market by the buying age of the decision-maker, although we will have an accurate piece of analysis, we will not necessarily know how to form the offer to attract this segment of the market.

Benefits Defined:

“Customers buy Benefits not Products”. The classic example of this is the Black & Decker Drill, no one wants a drill (product), what they want is a hole (benefit).

Companies that concentrate on products rather than benefits can be defined as suffering from “Marketing Myopia”. In his definitive work Theodore Levitt summarised the need for a benefit led approach.

Benefits based segmentation approaches the question from the perspective; If we find what benefits people seek, we can then group them accordingly. Then a method must be found to identify the external characteristics that can be used to define the members of the group.

Quote from Theodore Levitt ; “If you’re not thinking segments, you are not thinking marketing”

Moving Target

Segmentation research must be ongoing. It is important to realise that the balance of the segments will change over time and possibly the benefits sought may change as well. Therefore as in all marketing related issues, the understanding of segments will be an on going issue, and changes in how the segments are to be attacked should have continual impacts on the strategies adopted.

Pointer to Segments; SIC92 and Employee Band

One of the consequences of benefits based segmentation is that identifying customers who will have a particular set of benefit requirements may be difficult. Where as (say) an age of decision-maker based segmentation this would be very simple.

An example of segment analysis recently completed involved collecting information on the benefits sought by customers and undertaking benefits based clustering, which was interpolated in a matrix of Standard Industrial Classification 1992 (SIC92) against company size as measured by employee head count. This matrix was then populated with the benefits based segmentation results. This resulted in a different level of result coincidence in each of the matrix elements, but results gave a strong benefit based segmentation of the customers, on which the marketing plan was based.

The outcome of this is that for any operating site in the UK, provided the number of employees based there, and the nature of the activity is known, the segment can simply be looked up.

Segmentation Applied to the UK

YP Matrix

As the Segment lookup table is based on widely available commercial data we can apply the segmentation classification to any grouping where the two variables are known. This can be done for the whole UK market. It will be possible when more data is collected to apply this back to needs (product) data to get to a good estimate of the entire market.

Implications to Market Share Measurement

From the analysis of needs one can analyse market share by service type, which is a very difficult number to estimate otherwise.

Total Market Information

It is important to make reasonable estimates of the total market in order to know a denominator for market share.

Data quality and issues

System Design Issues

It is essential that computer systems record relevant information by customer.
There needs to be a hierarchy of accounts to allow accounts to be identified as related to other accounts. An example of this is where a company has autonomous businesses, but they are related to a parent company, this relationship should be recorded in the computer system.
Alterations to income by record need to be applied back, examples are credit notes, which need to be applied back at transaction level not just, account level. Accurate address information is essential.

Data Entry Issues

Having got a well-designed system, that can capture all of the relevant data, it is important to manage the data collection and input so that that all of the carefully designed fields are populated.
Examples of inconsistent treatment of Cambridgeshire include; Cams., Cams, Cambs, Cambs., Cambridge, Cambridgeshire! While this problem can be overcome it does highlight the issue.
One of the problems here relates to the ownership of the data, as it stands the data is adequate for both sending out invoices and basic operations and as such the owners of the data have not got a problem. This issue of data ownership needs to be addressed so that a more holistic view is taken.

Revenue by Segment

Proportions Count and Revenue

Analyses can be produced showing customer base categorised by segment. This shows the segment, the number of customers and the turnover associated with these customers

Change over time of revenue by segment

Markets and companies change. It is important to continually monitor the data returned and how it related to the classification of segments.

Profitability by Segment

Profitability by segment is one of the major objectives of market segmentation. The process above outlines how the revenue side of the calculation can be achieved. The cost side needs to be collected in a way that costs can be applied back to customers. Obviously many costs can be simply apportioned back to all customers, but more relevant cost data will give a better view. It is important to record the most important costs that vary by customer. This is almost always representative calls and hours spent on a particular customer! This means it is necessary to record representative time and travel etc. by customer (Yep, it’s the dreaded time sheets!). There are serious change management issues that can be raised by this sort of change, and the implementation of changes of this nature need to managed very carefully.

Implications to Sales Structure

Clearly if the profitability by segment is known, we can organise the sales force in such a way that it targets the identified segments most effectively.

Allocation of Customers to Representatives based on Segment

The clear contrast here is that for many organisations the sales force are associated with cost or profit centres, which are production facilities or offices. This type of structure will not normally be appropriate if the maximum benefit of the segmentation is to be achieved.

By accurately identifying the benefits sought by each group of customer, the sales force can be trained to specialise in the provision of the services required by the identified customer. So we have a clear set of objectives for sales force training.

Targeting of New Customers

The offer made to new customers is more likely to be acceptable.

Promotional campaigns can be better targeted, which should result in the hit rate/effectiveness being improved.

Efficient Allocation of Resources

Skills matched to customer needs

Career progression

Basis for a rational salary system

Sales Force Incentives

Individual sales performance based as opposed to profit centre based, will allow fairer incentive schemes to be developed.

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