M

MARKETING MANAGEMENT
Shaping the Profession of Marketing January/February 2002

Marketing in Changing Times

Does Online Privacy Really Matter? SEGMENTATION THAT WORKS
Legal obstacles to e-commerce

MakIng SegmentatIon Work

Successful marketing really does begin with effective segmentation.

oday its a clich to suggest that successful marketing begins with good customer segmentation. In fact, ever since the late 60s marketers have sought to first divide consumers into distinct groups and then tailor products, service offerings, brands, and channel strategies to suit. Beginning in the world of packaged consumer goods and spreading across virtually all industries, customer segmentation is now broadly practiced by marketers almost everywhere. And countless approaches to developing the right segmentation, from needs-based cluster analysis to database mining to the Internet-driven myth of the segment of one are springing up almost everywhere. The trouble is these approaches rarely work.

Segmentation Pitfalls
There are three fundamental failures associated with most approaches to segmentation, and if youre a marketing professional, chances are youre familiar with all of them. Failure No. 1: We can target the customers, but they dont buy different things. This is traditionally the classic, and still the most frequent, reason segmentations fail. Most often this happens when companies try to segment the markets theyre in according to simple demographic (or in B2B markets, firmographic) data. This approach is appealing because it makes the customer groups you identify relatively easy to target. Segmentation built around gender and income can easily generate a direct mail list, for example. The trouble with this approach is that simple demographics almost never strongly correlate to actual behaviors in the market. While this has always been the case, it has become even more apparent as markets have grown more competitive over the last several years. Not all American men age 35 to 44 making $100,000 per year buy a Mercedes. In fact, not all of them buy a luxury car. Even worse, not all of them shop for cars at new car dealers. Not all of them buy new cars. Not all of them buy cars for the same reasons or use their cars in the same way. And so on. Time and again we have seen companies use this simple demographic-centered approach to segmentation to try to reduce the complexity of their mar-

keting mix, or their ad spend, or the training of their sales force. And theyve missed real market opportunities in the quest for that simplicity. Failure No. 2: We can identify clusters, but cant find the customers. The analytical antidote to the first failureor so many academics and consultants would claimis finding a sophisticated mathematical solution to the demographic problem. This approach recognizes that simple traditional segmentation approaches have worn thin, and it proposes a solution that seems to be simply common sense: Ask customers what they want, and then target their needs. In practice, this usually means a large, single customer survey that presents a sample of prospective customers with a battery of questions about what they want and why they buya reasonable enough thing to do. Then the statistical magic begins. Usually this involves a series of linear regressions or cluster-factor analysis to identify groups of customers with similar needs, who can then be targeted with products or services designed to meet those needs. These are the segmentations that result in segments with names like the free spirits and the outgoing socializers, which are intended to be memorably indicative of their needs or attitudes. In theory, this is an eminently rational approach. In practice, it almost never works. The reason the needs-based cluster approach fails is simple: In practice, needs almost never correlate neatly to demographics or other metrics that would and theoretically should help you find and target customers, no matter how many regressions you run. This is the opposite side

By Jennifer Barron and Jim Hollingshead

EXECUTIVE b r i e f i n g
In todays marketing world, segmentation is often treated as old hat. And its no wonder. With so many misconceptions and segmentation failures, marketing professionals are left with little more than survey statistics, textbook rhetoric, and wasted market research dollars. But all hope is not lost. Building segmentation that works requires a new approach to an old concept. And doing it well can revolutionize a market and create explosive top-line growth. of the same coin of Failure No. 1. While this seems counterintuitive to most experienced market researchers, we have proven and re-proven this finding hundreds of times, even in our own work. During the late 80s and early 90s, we developed extremely sophisticated tools for conducting this type of needs-based segmentation. Again and again, despite a continual increase in the statistical and mathematical sophistication of our analytical tools, we ran into the same brick wallneeds-based clusters almost never identify groups of customers you can find in the real world. Where do the free spirits shop? Where do they live? How old are they? How much money do they make? What media do they read? These are the simple questions that would lead to marketing actions, and cluster analysis rarely if ever answers them. Failure No. 3: Sales, marketing, and management cant agree on what the segmentation looks like. In light of the first two classic failures, the third is not surprising. Most marketing organizations have war stories about the giant segmentation study that went nowhere or the guys in market research doing yet another segmentation. Often sales, marketing, and market research cant agree on how to segment their markets, which leads to untold amounts of waste, not only in additional but yetto-be-unused market research, but in poorly targeted product development, poorly conceived channel strategies, wide-of-themark ad campaigns, and organizational friction. Often this friction becomes so pronounced that different parts of the organization stop talking to each other and a general skepticism develops regarding the usefulness of customer segmentation, or even market research broadly speaking. This is a dangerous situation because the organization becomes paralyzed, unable to generate new insights into constantly changing markets. A marketing death spiral can result as you lose share, and different parts of the organization argue with each other rather than focus on working together to solve the problem. brand management, and sometimes channel partners or general management. By including people with different perspectives, the process will not only incorporate a richer and more varied set of knowledge, but it will also ease the process of buy-in and communication across the company. Define an appropriate scope. Launch the analytical task by asking practical questions about what youre trying to accomplish in the market, not in the analysis. This means getting the scope of the exercise right. First, segmentations should explain and predict customer behavior in the market because this is what youre trying to manage. You want to know why customers buy what they buy so you can sell them your products or services. This point may seem almost too basic to mention, but were continually surprised by how often we find segmentations that are too broad or too abstract to be useful. If, for example, youre trying to grow your share of the mobile telephone market, you want a segmentation designed to understand customers choices about mobile telephone service, not a segmentation built to understand lifestyles or attitudes toward technology. In many cases, youll want to be even more specific. For example, in consumer goods the relevant customer behavior may be brand choice (Coke vs. Pepsi), but it may alternatively be a prior category choice (soft drink vs. water), so your segmentation should explain that. In any case, you need to scope the effort around a practical set of customer behaviors you want to understand and influence. Brainstorm and test new variables. Once you have appropriately scoped the segmentation effort, then create a short list of segmentation variables to explain customer behavior and help target customers. The key in this step is to find variables that are meaningful (they help explain and predict customer activity in the marketplace) and actionable (they help identify the customers and reach them with practical and proven marketing actions). Variables that are actionable, but not meaningful, lead to Failure No. 1; variables that are meaningful, but not actionable, lead to Failure No. 2. When we work with clients we brainstorm variables and then systematically score them for actionability and meaningfulness according to a set of criteria we create beforehand. In many cases the variables normally regarded as the most meaningful will simply not be actionable. So, to return to the foregoing example, attitudes toward technology may well be a meaningful variable driving customer choices of mobile phone service providers. But an attitude is very difficult to identify in the market without interviewing each customer. In these cases, the team works together to develop hypotheses around which variables could proxy for attitudes toward technology. The idea is to find a variable or combination of variables that together draw

Steps to Success
Despite these classic failures, segmentation remains a vital strategy for any successful business and is as much an art as it is a science. Taking certain steps can help prevent these common pitfalls and put your company on the path to success. The right team armed with clear objectives and a systematic approach can develop a segmentation thats both insightful and practical, forming a solid foundation for a marketing strategy. Assemble a team. The first step in building an effective customer segmentation is making sure the right people are involved. This means putting together a team from multiple parts of the organization. The best results are produced when the working team includes people from marketing, sales, market research,

an inference about an unidentifiable attitude and still find the customer. For example, Internet usage could be a proxy, or ownership of a PDA, or both taken together. Both of those variables would be more actionable because direct information is available for sale from ISPs or direct marketing companies. In developing such proxy variables, two critical developments take place. First, the segmentation takes a step toward being practical, or being actionable. Second, the team assembled begins to build a consensus around the market; they share their individual experiences and perspectives, and in doing so not only surface tacit knowledge that has never been systematically captured, but also build bridges between different parts of the organization. Create a frame. Once the team has identified variables that score high on both meaningfulness and actionability, it performs quantitative analysis to identify which short list of variables is likely to best predict customer behavior. This refined short list of variables is then put into a segmentation frame, as shown in Exhibit 1. In this (disguised) example, taken from work with a client in the food and beverage sector, the team was able to identify a number of proxy variables that were both actionable and powerfully meaningful. The original segmentation, which was not producing strong results in terms of penetration or growth, was built around very broad demographic categories, such as teenagers or blue collar workers. Consistent with the steps outlined above, this team began by defining the scope of the segmentation around a marketing objectiveselling more snacks in the setting of the workplace. Once that refined scope was established, the team brainstormed a long list of variables, which were scored and then tested. One of the more interesting results here is how powerful relatively simple demographic variables turned out to be. On the left axis age and gender were used as proxies for more meaningful attitudinal variables around health and snacks. However, demographics alone dont tell the whole story. The team knew there would be a number of constraints and drivers around the choice of snack, the accessibility of it, and the reason or occasion for buying it. After brainstorming and quantitative testing, we determined that the nature of the occupation could act as a strong proxy for a number

of purchase driversagain, a somewhat obvious segmentation variable that turns out to be richer and more predictive in the context of an array of meaningful and actionable variables. Collapse the cells. In most cases, as in this example, the first frame will generally be treated as a strong working hypothesis and then tested with all existing data. This is an iterative process shared by the team that relies on hard customer data. With each step, the analysis goes into increasing detail. Preliminary quantitative work tests the effectiveness of the frame variables to arrive at a final frame. Then, key behavioral data within each cell defined by the frame (e.g., brand choice, channel choice, volume consumed, price paid) are compared to determine which cells will collapse into segments. For most markets it will be impractical to manage offers to more than eight or 10 segments, and in practice, youre likely to find that cells are relatively easy to compare and collapse around real customer behaviors. Profile the segments. Finally, all available data from the cells that comprise the segments can be placed into an integrating framework. This data can and should come from multiple sources, ranging from existing quantitative and qualitative customer research to the experiences and latent knowledge of the team and the broader organization. The effort mayor may notrequire new primary research. This is obviously an empirically driven process, but one that incorporates significant amounts of judgment along the way. The fact that a team of people makes those judgments helps ensure the results will be both rich and practical. Our preferred integrating framework is the Customer Portrait, as shown in Exhibit 2. Rooted in cognitive psychology, it allows us to integrate a variety of data describing customer behavior in a way that allows us to more effectively interpret and ultimately influence it. In this way, the Customer Portrait acts as bridge to the development of segment-specific marketing plans. The segmentation approach enables in-depth segment profiling, like this, and the creation of targeted marketing plans. You can both understand the segments and find them in the marketplace precisely because youve designed in the capability to easily identify them from the beginning of the process. In the end you will have created a customer segmentation

EXHIBIT 1
Segmentation frame for selling salty snacks in the workplace
Labor intensive (e.g., factory worker) Standing and interacting (e.g., retail assistant) Sitting and Stationed in interacting office (e.g., (e.g., operator, secretary, telemarketer) software engineer) On-the go (e.g., nurse, securities trader ) Up and about professional (e.g., executive, consulting)

Age Gender Male 18-25 Female Male

Age and gender are proxies for: Attitudes about health and nutrition Role of the snack

26-35 Female Male 36+ Female

Nature of occupation is a proxy for: Nature of formal work breaks and ability to eat snacks on the job Type of meal consumed during the work day Physical/emotional need for certain types of snacks Availability of snacks onsite, likelihood of "home" provisioning, availability of alternative sources

EXHIBIT 2
Portrait of a labor intensive consumer in a manufacturing job

Purchase and Usage Environment

Predominantly men working in suburban or rural settings Find work physically demanding and repetitive They are usually standing or moving around while on their feet Work environment likely to be unpleasant Least likely to work in an environment with heating or air conditioning Break room without kitchen is the primary facility where they can relax, socialize, and consume snacks The most commonly available snacks are chips, pretzels, and sweets Although they purchase most snacks at work, they are more likely than any other segment to bring snacks from home Least likely to consume snacks outside of scheduled breaks or mealtimes Have to walk the farthest of all segments to get their snack source

Desired Experience
Want a snack that tastes good during both meal and non-meal occasions More likely during non-meal occasions to want a snack that provides energy More likely during non-meal occasions to use a snack that to help them cope with their work environment Want a snack that is fun

Product/Service Beliefs and Associations

More likely than other segments to believe that snacks satisfy physical needs (taste and refreshment) rather than emotional needs (personal reward, escape) More likely than other segments to enjoy the taste of chips and pretzels More likely than other segments to believe that "healthy" snacks will improve their work performance Only segment to prefer competitor product over client product

Purchase and Usage Behavior

Most likely to use vending machines as their source of snacks Chips and pretzels are their top choice of snack for both meal and non-meal occasions Client brands consumed more often during non-meal occasions, but at the same rate as competitor brands during meal occasions Medium bag is the package of choice Most likely segment to use a single serving bag during meal times More likely to consume a snack in social settings than other segments

that overcomes the three classic failures. The segments youve identified will exhibit significantly distinctive behavior. Youll be able to identify the customers who lie within them. And crucially, your organization will be well down the path toward agreement about who your top-priority customers are, how to find them, and what to do with them and for them. This approach produces more than segmentation, it produces a shared view of your market, a shared language, and a shared set of goals. If this seems like common sense, it probably ought to. All customers are people. Effective marketing is about finding them and understanding their behavior. A segmentation that works shouldnt be as hard, or as easy, as a complicated statistical model. Your organization probably already has all the data and experience it needs to build an effective customer segmentation. All thats required is a systematic approach to capturing and systematizing that knowledge. The point of all of this, of course, is more than just creating analytical insight into customers; its to generate results for your business. After developing a segmentation that actually allows

you to find and target customers, youll find its much easier to align the entire organization as it goes to market and to grow your top-line revenues and bottom-line earnings. Like many clichs, this one turns out to be truesuccessful marketing does begin with effective customer segmentation. The trick is simply using an approach to segmentation that works both analytically, and also practically, with your customers and across your organization. s

About the Authors

Jennifer Barron is a partner at Monitor Group based in Cambridge and a co-founder of Market2Customer, a Monitor business unit that focuses on growth-accelerating marketing strategies. She may be reached at jennifer_barron@monitor.com. Jim Hollingshead is a partner at Monitor Group, London. He has 10 years of experience in marketing and strategy, having worked with clients in consumer goods, telecommunications, and several other industries. He may be reached at jim_hollingshead@monitor.com.

Reprints with permission from the American Marketing Association

Reprinted with permission from MARKETING MANAGEMENT, January/February 2002. Copyright 2002 by American Marketing Association. All rights reserved. For reorders, call 651-582-3800. 220610