Good Versus Bad Market Segmentation
Posted April 25, 2010 by
The qualities of good market segmentation include the results - does the research yield distinct, proprietary, highly profitable market segments? Copernicus Marketing Consulting and Research shares their 5 steps toward good market segmentation.
Market segmentation forms the foundation of marketing strategy.
Unfortunately, many CMOs complain they can’t do anything with the end result of their market segmentation research.
They end up with a bunch of groups that aren’t different in demographics or media profiles, never mind potential profitability. They have to rely on their intuition to pull together a brand strategy or a marketing plan and basically roll the dice that their marketing programs will work. And as we all know, most of the time they don’t—at least not as well as they could or should.
Good vs. Bad Market Segmentation
Good market segmentation research provides a company with clear direction on which group or groups represent the best target—one that represents a disproportionally high share of potential profitability to the company and can easily be identified in the population or in customer databases. If a market segmentation meets those requirements, then it will pay for itself many times over. If it doesn’t, then it will become a quickly discarded waste of resources—gathering dust on a shelf.
We don’t want to waste your time, money, or energy. The end-goal of every one of our market segmentation research exercises is to yields distinct, proprietary, highly profitable market segments—segments that your competitors do not even know exist!—described in rich detail in order to dramatically improve marketing efforts, boosting market share and profits.
Market Segmentation Should Show You the Money
We can’t emphasize enough the importance of including measures of profitability in market segmentation exercises. In addition to financial measures of revenue (e.g., lifetime value, current spending in category dollars, profit margins in the channels where the customer buys, current share for your brand today) and cost (e.g., cost to reach and influence with sales force and media, cost to deliver and serve) there are also at least 10 important stand-ins that reflect, for instance, how hard it’s going to be to get and keep them, how enabling they’ll be to marketing efforts, and future behavior.
The additional “proxies” for profitability provide a far more robust picture of the value of individuals—be they current customers or prospects—to a company.
Our Approach to Market Segmentation Research
Some research and consulting firms love to wax poetic over the latest statistical algorithm to use in market segmentation research exercises. That’s not us.
We believe usability, actionability, and applicability to different marketing, operational, and business decisions all depend on understanding exactly who in the company plans to use the results and how the plan (or hope) to use them. So that’s our first step.
Unlike other consulting firms, Copernicus Marketing Consulting recognizes that no one—no one—can possibly know what descriptive, definitive variables will be predictive of profitability and desirable behaviors until we talk to current and prospective customers, collect data from a representative sample of customers and prospects, and undertake serious analysis. This study must include hundreds of diverse variables—all of which might be candidates for a market segmentation solution—including needs, psychographics, demographics, behaviors, and media preferences.
Next, we test them to see which are related to profitability and proxies for profitability and identify the key variables about people—or firms for a B2B product or service—that best predict what they are doing or will do (or both) in the marketplace. We use different analytical tools including cluster analysis, latent class, and neural networks.
With some possible market segmentations schemes in hand, we evaluate possible solutions in terms of managerial, statistical, and financial criteria. We ask questions such as are we seeing different brand preferences? Different consumption levels? Different levels of profitability? We also consider their “manageability”—which market segmentation solution is most easily understood? Is this approach more or less easy to implement? Will the sales force be able to use it?
Last but certainly not least, we rank order alternative market segments in terms of their return on investment and hand the client marching orders—here’s who you should concentrate your marketing efforts on to grow your business.
A Hypothetical Market Segmentation:
One key segment - Energy Seekers - represents 20% of the population and accounts for 55% of Zippy's potential profitability.