Segmentation - Overview
Author: Scott Davis
©2009 Scott Davis and Strategic Marketing Decisions. Any distribution or other commercial use of the contents of this note is prohibited unless written permission is obtained from Scott Davis and Strategic Marketing Decisions.
Customer segmentation is a key to developing a successful strategy and pricing policy in a competitive environment. By segmenting in the market, it is possible to determine who the most likely prospects are for your product and develop product designs and prices that will most effectively target them. In addition, it makes it possible to determine who the most appropriate targets are for your competitors. Segmenting also makes it possible to identify actions that will have a significant impact on your competitors and will therefore greater a competitive response. A failure to properly segment the market when estimating demand often will lead to a poor and misleading characterization of the way the market will respond to changes in prices and product designs. Segmentation analysis may be applied before the assessment of perceptions and preferences, or after, or both. Identifying potential segments prior to a preference study is very helpful in developing an effective sampling strategy and will suggest straightforward approaches to analyzing subgroups of the data.
Segments may be defined according to a variety of different criteria:
- Behavioral characteristics: Behavioral characteristics may include experience in the product category and how they use related products and services. For example, prospective software customers are likely to vary in their need for advanced features based on their experience with related software. Experienced users may be extremely attracted by a set of special features that enable them to perform certain tasks more efficiently. Novice users, on the other hand, will not recognize the value of those features and may actually deter purchase if they perceive the added functionality to also make the software harder to use. Other behavioral characteristics will influence the expected cost of serving a customer. For example, the expected cost of providing health insurance to cigarette smokers is higher than for nonsmokers because of their higher incidence of lung cancer and other respiratory diseases.
- Institutional characteristics: These characteristics are often relevant for business-to-business product categories in which institutions vary in their priorities, budget constraints, or decision processes. For example, a company interested in selling business telecommunications services may be interested in factors such as the number of employees, type of business, average monthly calling volume, among others, when designing service plans and target market priorities.
- Demographic characteristics: With many consumer goods and services, demographic factors such as income, age, gender, education, et cetera, will have a substantial impact on attribute preferences and price sensitivity. Preference and purchase behavior: It is often useful to identify segments of the population with similar preferences. Doing so enables better demand modeling.
- Institutional characteristics: In addition, different segments may vary in the cost of serving them, which should be considered in identifying target markets and pricing. Identifying segments based on cost of service is critical for industries, such as financial services and insurance.
- Statistically Derived: It is often desirable to identify segments based on preference or purchase data. Using clustering techniques, one can identify segments of the population with similar preferences. By employing data mining techniques such as CHAID (Chi-Squared Automatic Interaction Detection), C&RT (Classification and Regression Tree) and QUEST (Quick, Unbiased, Efficient, Statistical Tree).
Identifying potential segments prior to a preference study is very helpful in developing an effective sampling strategy and will suggest straightforward approaches to analyzing subgroups of the data. In addition, different segments may vary in the cost of serving them, which should be considered in identifying target markets and pricing. Identifying segments based on cost of service is critical for industries, such as financial services and insurance.
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