Market segmentation: a strategic analysis and positioning tool

This article focuses on the nature and importance of market and customer
segmentation, an aspect of strategic analysis which is covered within Section C
of the Strategic Business Leader syllabus.
An important aspect of this part of the SBL syllabus involves consideration of a wide range of internal
and external factors which influence an organisation’s strategic position and ultimately its strategic
direction. One such consideration is the organisation’s market and customers (both current and
potential), in order to take into account their different needs and to ensure that marketing is as
efficient and effective as possible.

Why is market segmentation important?

Segmentation of an organisation’s market is the foundation of a successful marketing strategy.
Instead of using a ‘one size fits all’ approach to marketing campaigns, use of a tailored marketing mix,
designed to suit more individual customer needs, should help to drive a more personalised, relevant
and a more effective marketing message which is more efficient in terms of time, money and
resources. Organisations which understand that their customers have individual needs, preferences
and behaviours, are better able to develop stronger relationships with customers and therefore,
importantly are more likely to retain them.

Market segmentation versus customer segmentation

Market segmentation involves splitting a market into segments and developing different strategies for
those segments. For example:

 Marketeers use market segmentation in planning (for example, some soft drinks producers
manufacture some of their products specifically for the diet segment).
 Media companies use segmentation as a tool to assist in efficient media buying, for example,
such as purchasing in-game ads to target teenagers or purchasing day-time TV advertising
slots to target retired people.
 Insurance company call centres use segmentation to identify ways to adapt their sales scripts
to different customers, based on age, gender, interests etc.
 Retailers use segmentation to identify which items to place next to others on their shelves.
  Pricing departments use segmentation to identify how to optimise the amount that customers
will pay (for example, train companies offering discounts to students to travel at off-peak
times).

Customer segmentation is the same basic idea as market segmentation, except that the scope is
limited to the organisation’s own customers. Typically, customer segmentations are based on data
held in an organisation’s own internal databases. Customer segmentation involves breaking down an
organisation’s customer markets into homogeneous groups, each of which will react differently to
pricing, promotions and other elements of the marketing mix. Each customer segment identified
should be targeted with an individually designed marketing mix.

Types of market segmentation

Demographic:

 Age, gender, marital status

 Income
 Occupation
 Nationality
 Ethnic group

This is normally the easiest form of segmentation, as this information is easy to gather and is
relatively inexpensive to obtain. However, it is most often used together with another type of
segmentation to help narrow the target market even further.

Behavioural

 Frequency of product/service use

 Brand loyalty
 Transaction behaviour (such as price sensitivity)
 Online shopping behaviour and habits

Behavioural segmentation assists organisations to understand how a customer interacts with the
product/ service, meaning that it can target them more effectively by knowing how they are likely to
react towards product/service or marketing message.

Geographic

 Country or region
 Rural or city based
Although a basic form of segmentation, it is often a highly effective form of market segmentation.
Understanding the location of a customer can help an organisation understand customers’ needs.
Understanding regional differences driven by factors such as culture, climate or language can allow
for a more targeted marketing message.

Psychographic

 Social status
 Personality
 Lifestyle

This form of segmentation focuses on the emotional or psychological behaviours of customers, where
customers are grouped according to values, personality traits, attitudes, lifestyles and interests. This
gives an organisation useful insight into customers’ needs and preferences. Organisations will often
combine demographic and psychographic customer analysis when undertaking customer
segmentation, in order to develop a richer and fuller picture of their customer segments.

Benefits of market segmentation

Satisfy customer needs
It is possible to satisfy a range of customer needs with a relatively limited product/service offering, by
using different incentives, promotional activities or product/service bundles. For example, digital TV
service providers offer a range of bundles and incentive plans based on different customer usage,
preferences and interests. The underlying product/ service is the same, but its offering is adjusted to
meet the needs of different customer segments. This should help to increase focus on that customer
and ensure retention.

Targeted communication
Even if an organisation’s product/ service features are identical for each segment, it still remains
important to communicate in a targeted and specific way to each. By targeting the message, it allows
the organisation to highlight the features which are most relevant or important to each segment (such
as price, reliability, availability and prestige). For example, a car manufacturer may target one set of
drivers with marketing messages relating to performance and speed of a car model, whereas they
would target another set of drivers with marketing messages related to reliability and design of that
car model.

Improve focus
Market segmentation helps an organisation to focus on exactly which segments they want to target
with specific products, services or marketing campaigns. By doing so, the organisation can ensure
they are targeting the right segment with the right product or message which will therefore enable the
achievement of the greatest return on investment.
Improve competitiveness
Market competitiveness can also be increased by focusing on specific market segments, which again
should lead to increased return on investment. By focusing on specific segments and learning
everything they need to know about that segment means that correct targeting is more likely and
therefore customers will be more satisfied.

Improve marketing efficiency

By breaking down large customer groups into smaller groups makes it easier for organisations to
manage customers and their target audience and therefore can design and tailor very specific
marketing campaigns to the most relevant people, through the most relevant marketing channels.
Less time will be wasted on mass marketing, which in most cases will be wasted on customers not
interested in the organisation’s marketing message.

Customer retention
Using customer segmentation, organisations can quickly identify those customers which require extra
attention, those that churn more frequently and those with will a high potential value. By developing
targeted marketing strategies that capture specific customer groups attention and by creating positive
experiences for each specific group, then it is far more likely that an organisation can maintain a
strong relationship with customer groups and therefore retain them.

Summary
A strong awareness of customer segments is likely to be of critical importance to organisations in the
future, due to the fast and ever moving environment, driven more and more by the internet economy.
Survival for many organisations will require a greater focus on the identification of their own value to
customers and the specific value of customers to the organisation.

Written by a member of the SBL examining team