Since its development in consumer goods in the 1960s, market segmentation has become a core tool in the marketer’s toolbox, across virtually every industry. Despite this heritage, and countless attempts to develop the most effective approach, untold research dollars have been wasted on segmentation that haven’t worked, or at least haven’t lived up to expectation and the provider’s hype! In 2004, research by the Economist Intelligence Unit showed that 59% of large companies had conducted a major segmentation project in the previous two years, however only 14% of senior executives thought that they had achieved significant value. While this data is now 5 years old, anecdotal evidence suggests it remains relevant. Is this ‘value gap’ the result of poor research and analysis, or the result of overblown expectation and the flawed search for a one-answer-fits-all framework?

Segmentation is the informed identification of homogenous groups of customers (groups which are different from their neighbours)… the goal of which is to identify those customers which are economically attractive to target and achieve a deeper understanding of their setting, needs, beliefs, attitudes and behaviours. This enables the organisation to deliver a ‘better’ customer experience for those target groups while ensuring the most efficient use of marketing resources. Segmentation therefore directly impacts strategic ‘where to compete’ questions i.e. which customers to focus effort on, their relative priority, and the economic opportunity they represent, as well as more tactical ‘how to win’ questions i.e. what products, services and marketing activities are most likely to achieve our objectives in attractive segments.

Informing ‘where to compete’ and ‘how to win’ means that segmentation provides a customer insight platform for a number of business activities within an organisation that rely on and utilise effective segmentation. The obvious, and seemingly symbiotic, use of segmentation is customer targeting – defining the market, developing a picture of the ‘ideal’ customer (or who the organisation wants it to be), and sizing the opportunity that customer group represents – but its influence stretches much further.

Market segmentation is critical for innovation and product design, and crucial to ensure that the product features match the requirements, the unmet needs, of the target customers. The use of segmentation as an interface between the brand team and the innovation team is an example of effective segmentation becoming the ‘lingua franca’ of the organisation. Brand teams use segmentation to develop brand positions, manage brand portfolios, set value-based pricing levels and design optimal customer experiences. In communicating the brand position or essence, the brand teams may use segmentation to help develop optimal media plans, maximise the efficiency and effectiveness of marketing communications activities, optimise limited budgets or execute specific campaigns (e.g. a DTC mailing). This requires the ability to be able to identify the segment in a way that is consistent with media buying, the CRM database, or some other applicable means of execution. Allied to this, where a direct sales force is employed, the sales teams need to be able to easily place contacts/customers in one of the target segments with certainty and without having to ask a whole battery of questions. In many instances, an organisation will change the overall structure of the sales organisation to tailor an approach to its target segments. Effective segmentation clearly provides inputs to a wide spectrum of marketing activities, but does one segmentation approach provide the optimum insight for each of these activities? Is a unified theory of segmentation achievable or even desirable? Possibly not! There are many segmentation approaches available, drawing upon different analytical and statistical techniques, each with its own pros and cons. We have listed a few here.

Beware the vendor who claims to be able to address every question with one approach. The choice of approach should be dependent upon the purpose of the segmentation itself, however too often, a provider is chosen based upon other selection criteria (i.e. price), and they then apply their ‘proprietary’ approach, irrespective of the end use of the outputs, deeming it universally applicable.

Successful segmentation is a combination of both art and science – an inclusive team with clear objectives, a systematic approach and the right methodology will result in effective segmentation. What does this mean in practice? We have spent the last 10 years working on a whole host of segmentation projects, and from this experience we have developed guidelines for getting the most from your investment in segmentation.

(1) Know what you want from your segmentation – discuss the impact segmentation is meant to have on the organisation, on different functions, and on the way people undertake business activities – where is the ‘centre of gravity’ for the segmentation within the organisation?

(2) Define an appropriate scope – if the project is scoped too broadly or too narrowly, its impact will be limited. Ask yourself what you are trying to accomplish in the market. What behaviour do you need to explain?

(3) Identify the right methodology – different statistical approaches come with different strengths and weaknesses. Identify the approach that will enable you to best meet the business objectives you set out for the segmentation exercise. The choice of technique and statistical approach can determine the shape of the final solution and so rigorous analysis would employ multiple techniques and approaches and look for the convergence of outputs, to provide credibility and assurance. If considering different providers or research agencies, ask them just how and why their methodology is best suited to address the business issues you face. The question is likely to surprise them!

(4) Build a team – we came across this pertinent quote in an online segmentation blog. “Even the most brilliant plan can be brought utterly to its knees by simple obstruction and inaction”. Too often segmentation fails because it doesn’t resonate with the business. It lacks support and sponsors, and creates friction between teams. In many instances, research, marketing and sales have different views on how the market might segment, and when market research imposes a scheme delivered by an external agency, it can lead to scepticism and resistance. The project team should include representatives from all parts of the organisation – marketing, sales, innovation, brand management, market research – even finance and channel partners if appropriate. Outputs will be richer by including different perspectives, and inclusion will facilitate more effective buy-in and communication through the organisation.

(5) Ensure the research agency operates as transparently as possible – foster continual dialogue and arrange regular working team meetings. Get the project team involved, ensuring hypothesis development and decisions are collective. At the end of the project, it should matter who presents the segmentation – agency, market research, marketing, sales – they’ve all had a hand in developing it, they understand how it was created, and need no ‘sell-in’! Segmentation is, and will remain, a core tool in the marketer’s toolbox. In understanding and appreciating its value, it is important that the teams using it, and the senior executives who sign off the investment, discuss why and to what end they are deploying it, agree the right methodology (while understanding that all methodologies have their pros and cons) and get involved in the process of its development. Currently, there is no magic bullet that answers every question, that delivers insight at every level for each stakeholder group, but the tools available can still deliver significant business value if applied thoughtfully.