Companies often address this problem by developing segmentation schemesbreaking down markets into sets of customers or potential customers whoshare attributes that might be based on demography (income, say, or age)or on values or needs.
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Consider some obvious examples. Video cameramanufacturers capitalize on the fact that families expecting their first chil-dren are likely customers. Telephone companies try to sell call waiting tofamilies with teenage children. The USAA insurance agency targets militarypersonnel because it has come to believe, correctly, that this group is likelyto be significantly more loyal, and therefore more profitable, than others.Unfortunately, easy cases permitting marketers to establish meaningfuldifferences among groups of customers and then to identify them—aphenomenon we call “actionable segmentation”—are rare. More often,despite decades of research and many refinements in the basic model, thesegmentation process creates very real difficulties for marketers. No doubtsuch methodologies as conjoint or latent-class analyses permit them to usevalues, needs, and attitudes to devise groups (for instance, price-, service-,and quality-oriented segments) thatinclude almost all customers. Yet itusually turns out to be very difficultto identify the flesh-and-blood peopleactually inhabiting the segments.How do you find customers whocare mainly about service or qualitywithout interrogating them all?A leading insurance company based in the United States spent a lot of time,trouble, and money dividing its world into segments, only to run into exactlythis problem. In the end, the company abandoned segmentation entirely.The basic difficulty is that value-based segments generally don’t fit neatlyinto demographic ones. Many companies therefore start with the simplertask of identifying differences based on demography or on the differentattributes of different companies. Companies in consumer markets, forexample, typically divide their customers into baby boomers, generationXers, and so forth. Likewise, many companies that sell to other businesses
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THE McKINSEY QUARTERLY
1999 NUMBER 3
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It has become fashionable to suggest that customer-relationship marketing, the interactivecharacter of the Internet, and the ability of today’s computers to collect, process, andretrieve detailed information about huge numbers of customers have moved business towardsegment-of-one marketing and away from marketing by traditional segmentation. But wethink it unlikely that this kind of “mass customization”—for example, custom-fitted Levi’s jeans—will replace segmentation as the basis of strategic decision making. First, designingproducts and services for individual customers probably won’t be cost effective anytimesoon. Second, even if companies have sufficiently large databases to customize servicesfor their current customers, they rarely have enough information to do so for their com-petitors’ customers or for nonusers. The information revolution thus will probably strengthenthe tendency of companies to use information about thousands or millions of customersbyorganizingthemintosegments.
How do you find customers who care mainly about
servicewithout interrogating
them all?
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