Evaluating Market
Segmentation
Approaches
Thomas
Benson
This article is concerned with managing and monitoring
industrial market segmentation. The economics of market seg-
mentation are overviewed, and an attempt is made to relate the
segmentation tool to costs incurred. It is recommended that
managers employ more economical methods of segmentation
before using more costly parts of the marketing mix. A
monitoring scheme is presented with two components that
helps managers assess how well their segmentation strategy
converts customers to the firm, meets market needs, and repre-
sents an efficient allocation of resources.
Though a wide variety of segmentation schemes have
been proposed since Smith [lo] first argued for the ad-
vantages of market segmentation, managers have not
been offered guidelines for how to choose segments,
analyze serving costs, or monitor resulting customer
groups in a way that allows simplicity of choice and
clarity of results. Consequently, in many businesses only
the most simple and intuitive segmentation attempts are
made (e.g., [ 131); in other, more sophisticated ones,
management has little idea if its segmentation expendi-
tures are effective (cf. [ 141).
Address correspondence to: Thomas V. Bonoma, Graduate School of
Business, Harvard University, Soldiers Field, Boston, Massachusetts 02163.
Indusrrial Marketing Manu~ement 13, 257-268 (1984)
0 Elsevier Science Publishing Co., Inc., 1984
52 Vanderbilt Ave., New York, New York 10017
V. Bonoma
P. Shapiro
The purposes of this article are to discuss some aspects
of managing segmentation strategies in practice, and to
propose some guidelines toward increasing their efficien-
cy. We take, as a conceptual basis for our work a new
segmentation strategy model proposed for industrial mar-
keters because its breadth allows a wideranging discus-
sion of the relevant issues.
SEGMENTATION STRATEGIES
In a recent book, Bonoma and Shapiro [2] proposed a
“nested model” of segmentation that combines tradi-
tional macro- and micro- approaches to market partition-
ing on the basis of the intimacy and directness of man-
agement knowledge required to approach the market.
Five “nests” are proposed as an interlocking set of
segmentation strategy tools. Each successive “nest,” as
in nested computer program subroutines, requires in-
creasingly intimate and detailed customer knowledge for
effective use. Segmentation costs, of course, rise with
intimacy of knowledge.
Of the five segmentation levels listed, the demogruph-
ic is the outermost, for it requires little intimate knowl-
edge for management to discern prospects’ location or
industry. The operating nest requires somewhat more
257
0019-85011841$03.00
intimate knowledge of prospective buyers, because this
level references preferred production technologies and
other general “ways of doing business” variables not
easily gleaned from indirect sources. The third and fourth
nests require moderately intimate and direct contact with
prospects. To assess either prospects’ habitual purchas-
ing approuch or the relevant situational factors imping-
ing on purchasing behavior requires direct and frequent
vendor contact. Finally, knowledge about the inner-most
level, individual buyers’ personal churacteristics such as
risk proneness, is only gleaned through deep familiarity
with prospects and customers.
Unlike some other models, this “nested” one offers a
coherent and managerially understandable set of strategies
for segmentation. We argued in our book that marketing
management, for cost and other reasons, should start its
segmentation process with the cheaper, outer nests, and
work inward only until a “good enough” segmentation
scheme is found. However, the meaning of “good
enough’ ’ in this and in other (e.g., [S]) segmentation
models is not entirely clear. How does a manager know
when ‘ ‘good enough’ ’ segmentation has been achieved?
What monitoring methods allow a careful, realistic assess-
ment of this judgment over time and changing market
conditions’?
This article is also concerned with the development of
segmentation monitoring rules. We look first at some
differences in how segments are chosen, next at the
interaction of marketing tools with segment approach,
third at segmentation economics, and finally at the cre-
ation of monitoring methods to determine segmentation
efficiency.
CHOOSING SEGMENTS
There appear to be two different general approaches
toward segmentation. One is based upon customer needs
and works conceptually from the customer backward
toward the vendor. This approach is similar to benefit
segmentation [5].
Management often faces segmentation
tension between the theoretically desirable
and the managerially possible.
258
The central theme in customer-driven segmentation is
that the vendor must implement a separate marketing
strategy to provide the products or services that deliver
uniquely sought benefits to each market segment chosen
as significant for serving [4]. Each segment, therefore, is
an aggregation of customers and prospects sharing a com-
mon set of needs different from the needs of other seg-
ments. The advantage of this “needs/benefits” approach,
obviously, is that it drives segmentation through its most
important variable-customer needs. That is, after all, the
basis on which the buyers make their choices, and the
bedrock of marketing decisions.
But, benefit segmentation is not always easy to imple-
ment, and in some cases is impossible to implement. For
instance, in markets prone to rapid change, such as office
automation, buyer needs may only develop in interaction
with new technologies (and the marketing of those tech-
nologies) which expand buyer opportunities in unex-
pected directions. While almost all managers may feel
they “need” the information freedom brought with per-
sonal computing power, for example, a significant seg-
ment have bought such machines only to learn that they
did not need the obtuse software, keypunching require-
ments and interfacing difficulties current generation ma-
chines exact for the promised benefits. Buyers, in short,
may be incompletely aware of their needs in a novel area
until faced with a concrete method to clarify and satisfy
them.
Ease of implementation is the major characteristic of
the second segmentation approach. It works outward
from the selling firm, and segments the market disag-
gregatively on the basis of prospect identifiability and
accessibility to the seller. All members of each segment
constructed using this approach can be identified through
the same criteria (geography, etc.) and are accessible in
the same manner (publications read, etc.). In this ap-
proach, buyer characteristics are assumed to be associ-
ated with underlying need. Buyers who attend a particu-
lar trade show, for instance, might be defined as a
segment of convenience from an identifiable/accessible
segmentation approach. Certainly they are identifiable
through virtue of their presence, and accessible through
the same means. But, it is likely that they do not share
the same specific needs, nor seek the same benefits.
Clearly, the benefits-oriented approach is the more
attractive in the theoretical sense (e.g., [6]), but most
difficult for managers to implement [ 131. The identi-
fiability approach provides readily-definable customer
groupings, but can claim no causal relationship to sought
benefits. Sometimes the two approaches can be made to
coincide. For example, prospects are easily identifiable
through coastal/noncoastal plant siting, and such infor-
mation easily is available to vendors to corrosion-re- FORTUITOUS
OVERLAP
sistant steels. Here the needs (corrosion resistance) and
IDENTIFIABLE/
identifiability/accessibility (location) coincide. But often
ACCESSIBLE
management and researchers face an interesting “seg-
mentation tension” between the theoretically desirable
and the managerially possible.
Figure 1 summarizes these two approaches to segmen-
tation, and the area of “fortuitous overlap” where
“identifiable means” meets “need differences”. The
most useful means of segmentation involve this area of
overlap; that is, segmentation management tools must be NEEDS/BENEFITS 1
forged which encourage sound (i.e., needs-based) and OR!ENTA’l-‘lt~M’ i
implementable (i.e., external criteria driven) schemes.
But, the occurrence of such an overlay is not independent /
of the marketing tools used to approach customer groups. /
...*.l
Segmentation Approach and Marketing Method
\-7
Different marketing tasks seem to be tilted toward
serving either the needs-oriented or identifia-
ble/accessible segmentation approaches. Table 1 shows
an array of “standard” marketing tasks along with a
judgment of the applicability of each to the needs/benefits
II ‘BUYING
COMPANY
I
or identifiable/accessible segmentation approach. FIGURE 1. Two approaches to segmentation.
As can be seen from the Table, those marketing tasks
most conceptually sympathetic to creation and manage.
TABLE I
ment of the product concept-product policy, pricing and Marketing Tasks and Segmentation Bases
to a lesser degree, market selection-can make especially
good use of needs/benefits segmentation. Setting a price, Basis of Segmentation

developing a product, or selecting the customer base is Needs/Benefit Identifiable/Accessible

Task Segmentation Approach

Associate Professor THOMAS BONOMA and Professor Market analysis Difficult but important Easy
BENSON SHAPIRO are in the Marketing Department at the Market selection Applicable Sometimes applicable
Harvard Business School. They have written extensively on Product policy Applicable Not applicable
industrial marketing and segmentation. This article is a Pricing Applicable Not applicable
companion to “How to Segment Industrial Markets,” Personal selling Applicable after Applicable for initial call
published in a recent Harvard Business Review. Both articles interaction
were drawn from their recent book, Segmenting the Advertising Applicable in some Applicable
industrial Market (Lexington: Lexington Books, 1983). situations
Distribution policy Applicable Applicable

259
done best with a clear sense of sought benefits from a
group of users. Those tasks, on the other hand, which
relate generally to communication-advertising, some
aspects of distribution policy, and the initial stages of
personal selling - can make good use of the identifia-
ble/accessible approach, since communication’s occur-
rence requires identification more than need awareness. I
Personal selling and distribution, however, are hybrids in
that they make good use of both segmentation approaches
in their application to market penetration. It is useful to
look more deeply at these two “hybrid” tools.
On the first sales call personal selling is much like
advertising. Selling at this stage is aimed at a target
audience which may or may not be in the appropriate
needs segment [3, 91. Management can, however, select
an identifiable and accessible prospect group toward
which to target salespeople. After initial contact, sales-
people can separate prospects (and existing customers)
on the basis of need. One advantage of personal selling
as a communication medium is that the salesperson can
segment the market at the most disaggregate level, i.e.,
that of an individual buying influence. Personal selling
thus undergoes a metamorphosis from employing the
identifiable/accessible approach initially to using the
needs/benefits approach over repeated visits as the sell-
ing process moves from prospecting through qualifica-
tion toward close.
Distribution is a different situation. Distributors per-
form a variety of functions which relate to communica-
tion, pricing, and product policy [ I I]. These include
communication (display, personal selling, etc.), invento-
ry support (product policy-related), physical distribution
(also related to product policy), credit (pricing), and post-
sales service. When choosing distributors, managers
might naturally make use of the identifiable/accessible
segmentation approach. A firm might, for instance, use a
particular distributor to reach its Wyoming customers. Or,
management might consider using distributors for orders
under $100, while it services the larger orders directly.
But, because distribution also affects aspects of product
policy such as time and place utility for buyers, manage-
ment must also consider distribution networks from a
needs/benefits point of view.
The two basic segmentation approaches work differ-
ently in the exercise of various marketing tasks. A man-
agement that uses primarily product formulation and
product line extensions for post hoc segmentation, for
‘Whether the communication will be effectwe, of course, is affected by the
recipients’ needs.
260
instance, probably is doing an effective job meeting
different segment needs but has a difficult time discrimi-
nating segments on grounds other than those of product
bought. Thus, management may be satisfying customer
needs inefficiently - it may miss the opportunity to
target new segments for increased sales. Managements
that segment mostly through the use of advertising or
other market communication tools like trade shows
probably have a pretty good idea of who prospect groups
are, but may not know what they want. Managements
that use distributors or their own sales forces to foster
segments (e.g., national versus other accounts) probably
have a better idea than most about who the prospects are
and what they want, but at some additional marketing
costs. Of course, no management uses one of these tools
in isolation from others; but, the marketing mix seldom is
understood in terms of its powerful, differential segmen-
tation effects. The task is to pick a mix that not only
satisfies customer needs, but which encourages efficient
resource allocation and effective monitoring.
It is the thesis of this article that whether segmentation
efforts result in the “fortuitous overlap” depicted in
Figure 1 or are misfocused on one approach or the other
depends on the marketing mix tools management uses for
segmentation, and perhaps most of all, the presence of
monitoring methods to diagnose the goodness of the
segmentation strategy. We look next at some economic
relationships between marketing tools and segmentation
results, and then at an integrated monitoring scheme.
THE ECONOMICS OF MARKET
SEGMENTATION
Market segmentation is an expensive process. There
are definite costs involved in obtaining necessary
data, and in developing a multiplicity of plans to serve
each resultant segment effectively. In fact, some have
argued that segmentation costs are now so high it may
pay some firms to deliberately not segment their markets
171. Two specific questions about segmentation econom-
ics can be raised: 1) how does the amount of segmenta-
tion affect the cost of segmentation, and 2) how does the
market mix tailored for each segment impact the eco-
nomics? A third element, how the special characteristics
of chosen segments impact the economics of doing busi-
ness, will be taken up in the monitoring section.
Impact of Number of Segments Approaches
The more a market is segmented, the more expensive
it is. This easy truism, however, masks great differences
in the rate at which the marketing cost components
change. If segmentation costs are broken into “direct”
and ‘ ‘indirect’ ’ categories, direct costs include those
incurred obtaining and analyzing data on each new seg-
ment, as well as the management time and effort needed
to make sense of the data and repartition the market. Our
own sense and that of the executives with whom we work
convinces us that this very visible component of segmen-
tation costs, mistaken for the main component in many
analyses [ 121, does not rise very quickly with additional
segments analyzed. This is not to say that the costs of
such analysis and interpretation are not substantial in
large firms serving heterogenous markets; indeed, they
routinely run into the tens of millions of dollars. It is to
say, however, that if analysis of any sort is ongoing, it is
relatively easy to add another segment for analysis or
planning without major cost increases.
The group of costs thought of as “segmentation over-
head” rises very quickly when the decision is taken to
serve an additional segment. These are the “indirect”
costs of making and especially implementing the spe-
cialized plans, product line extensions, price schedules,
advertising programs, and perhaps even specialized sales
forces (or at least sales programs) necessary to serve the
incremental segment. A fungicide advertisement aimed,
for example, at citrus market usage will not be appropri-
ate for stone-fruit growers in terms of diseases prevented,
suggested dosages, or timing of applications. Indeed,
products that meet the needs of one segment are likely to
be largely inappropriate for the needs of another. The
same thing holds true for other marketing programs.
Very quickly, the incremental market strategy and imple-
mentation requirements of added business can strain both
personnel and budgets.
Though seldom cited by marketers, the same kind of
cost increases from additional segmentation occur in the
factory, often to a much greater degree. Sometimes, each
segment must have its own product line with attendant
duplication in facilities and effort. Managing the sched-
uling of multiple product “customizations” for many
The cost of segmentation is related to the
type of response the marketer chooses to
effectively serve the segment.
segments is a nightmare even when separate production
lines are not needed. Furthermore, administrative costs
and those incurred from low economies of scale can be
substantial.
The benefits of segmenting in terms of additional sales
volume, resulting scale economies, and marginal profits
must justify these added segmentation costs. As the
number of segments approached increases, admin-
istrative costs probably increase more quickly. The exact
shape of the cost and revenue curves, of course, will
depend a great deal on the nature of the production
process, the degree of component standardization, and
on marketing and sales “slack capacity” to deal with
not just more customers, but with difSeerent customer
groups.
One large company, for example, segmented its mar-
ket into 10 industry segments. The vice president of
marketing believed strongly in a “democratic” model of
staff and budget allocations to each segment, since on the
face of it, he didn’t think there was any reason that one
segment should use more of his resources than another.
However, after 3 years under this approach, sales costs
had reached the unacceptable level of 2 1% of revenues,
and a decision was taken to “look at the numbers.”
As the simple-minded ratio analysis in Table 2 (the
numbers have been disguised) shows clearly, there were
strong differences in the returns each segment provided.
Further, some of the worst returning segments were the
most expensive to serve, and generated the least amount of
sales force commission. While this firm did not feel it had
the option of abandoning any segment, two actions were
contemplated on the basis of the results. The first (see the
monitoring section below) was to drive sales statistics and
routine reports toward a contribution to fixed costs statis-
tic in order to get a single management yardstick on what
each segment returned. The second was to be freer about
reallocating people and expenses away from the currently
under-performing segments and toward those in which
incremental profits might be generated for the extra staff
and money allocated.
261
 TABLE 2
Results of a Major Utility’s Segmentation Strategy

Segment Rankings

Seg Total Rev. New Salesb vs. New Sales/ New Sales Number No. of
No. Opportun.a Total Revenues Staff Dollar Expense on Staff Accts

I 6 1.5 I 4 3 Y
2 5 4 I I Y 6.5
3 9 5 5 I I0 6.5
4 4 9.5 8 8 2 1.3
5 2.5 1.5 3 6 I 1.3
6 2.5 3 4 2 8 I0
I I 8 6 5 4 1.3
8 8 Y 2 3 I 5
9 I IO Y Y 5 x
10 I@ I( IO’ IO’ 6’ 41

“Rank-order, a tied rank, e.g.,
bThe company generated two
current sales.
<To be read: segment IO was
opportunity, 10th in new sales per
4th in number of accounts served.
2.5, is expressed halfway between the two ranks tied.
kinds of revenue: ongoing revenue from past sales and new revenue from
10th of IO segments in total revenue opportunity. 1”’ in new sales revenue
person and per sales dollars expended, but 6”’ in number of staff assigned and

The Nature of the Segmentation Approach
The cost of segmentation is closely related as well to
the type of response the marketer makes to achieve effec-
tive segments. Some parts of the marketing mix are
cheaper to use for segmentation purposes than others.
Figure 2 reflects our best sense of direct cost dif-
ferences for four marketing tools. The cheapest imple-
mentation of segmentation is achieved through market
selection: “declaring” a segment, as it were, available
for serving. After the data related to segmentation are
collected and analyzed, marketing management decides
to approach some segments and avoid others. The direct
costs of so doing are fairly low, and involve mostly
executive and administrative functions. Such costs do
not, of course, include the opportunity costs of neglecting
a segment which might be highly profitable.
The next more expensive segmentation tactic consists
of tailored communication approaches, in particular ad-
vertising approaches. It is fairly inexpensive to develop
and execute a specialized advertising campaign for dif-
ferent market segments. More expensive, but still rela-
tively inexpensive, are specialized sales programs, or
even specialized sales force deployment. In most indus-
tries such tools are less expensive than segmented price
policies or product designs.
Specialized price policies are very hard to administer,
particularly when large product differences are not pre-
sent. They mostly, however, are expensive in terms of
the margin given up through price cuts. Such costs, when
maintained over time, are more substantial then the add-
ed costs of even a special sales force.
By far the most expensive segmentation tool is a spe-
cialized product line. It costs large sums of money to
develop, test, and introduce specialized products. Such
specialized lines additionally wreak havoc in the produc-
tion facility forcing short runs, constant retraining of
labor, hand work, increased inventories, and general
disorganization. But, on the other hand, customers with
unique needs are most responsive to the unique benefits
of the customized line.
Following the latter logic, Figure 2 may also be read to
reflect the potential impact of different marketing tools
on segments. All other things equal, we would predict
communications, especially advertising, to have the
lowest direct sales impact and specialized pricing and
product policies the greatest.
To this point discussion of the distribution function has
been consciously avoided, because its unique aspects as a
segmentation tool require an understanding of the re-
maining tools first. Figure 3 shows four marketing tools,
selection, communication, price and product as possible
“segmentation levels” for management application. The
thesis for this approach to segmentation through market-
ing tool application is that managers should, where possi-
ble, use the least expensive or outermost tool possible for
segmentation. Thus, if a segment can be approached
adequately with a specialized advertising program, then
specialized pricing policies should not be necessary. The

262
 PRODUCT

PRICE

COMMUNICATION

MARKET SELECTION

SEGMENTATIONMETHOD

FIGURE 2. Direct cost of market segmentation.

SELECT A GROUP OF CUSTOMERS IN ONE OR MORE MARKET SEGMENTS

-1
DEVELOP A SPECIALIZED COMMUNICATION PROGRAM
FOR EACH SEGMENT

DEVELOP A SPECIALIZED PRICING PROGRAM

FOR EACH SEGMENT

DEVELOP A SPECIALIZED
PRODUCT OFFERING FOR

263
wGuRE3. Segmentation implementation nests.
marketing executive can move from the outside to the
inside of these segmentation execution “levels” as justi-
fied by the expected rewards of such a policy versus its
certain higher costs.
The Figure also provides a context for discussing dis-
tribution. Distribution cuts across selection, communica-
tion, price, and product policy all at once. It can be used
as a response to special segment needs at all three differ-
ent levels, although the levels often come as a package.
Thus, if the marketer employs distributors for segmented
communication purposes, he may be forced to segmented
pricing and product policies as well. Because a particular
form of distribution tends to define more than one level
on Figure 3, distribution has been drawn as a tool cross-
cutting several areas.
MONITORING SEGMENTATION
IMPLEMENTATION
Given the interaction between segmentation strategy,
marketing tools, and segment economics, it seems clear
that if a company is to be effective at approaching a
market in a segmented fashion, management must deter-
mine the profitability of each group served. Particularly
problematic, of course, is deciding which currently un-
served segments to add to the target list.
Management must determine the
profitability of each segment served.
We will not review the information and control liter-
ature here. Much of it is at least indirectly applicable to
segmentation (e.g., [ 11). However, the remainder of the
article describes two major segmentation control pro-
cesses and illustrates specific control procedures within
each. The first, customer conversion analysis compares
various segments on the basis of their customer yield. In
the context of the preceding sections, it serves as a check
on customers returned eflectively, given a marketing mix
of any type. The second category, segment profitability
analysis, concerns the quality of each customer generated
by management’s strategies in terms of profits generated
per marketing dollar expended on the segment. It is a
measure of the efficiency of management’s moves.
264
Customer Conversion Analysis
Figure 4 shows an inverted triangle. The triangle sug-
gests a scheme for evaluating current segments, or com-
puting the attractiveness of prospective ones. The control
measures to be computed on each segment include densi-
ty, access, qualification, trial conversion, and customer
conversion.
The top of Figure 4 starts with a group of prospects or
customers that management believes to comprise a valid
segment. Choices about which segmentation variables to
employ have already been made and decisions have been
made on how to approach each segment (e.g., commu-
nications, product modifications, etc.).
Customer conversion analysis begins with a calcula-
tion of density. Consider the example of a producer of
small safes. The president of the company said that he
“didn’t care whether the customer is a small business
with critical records or an old person with a photo of a
dead spouse to protect-we want to sell to everyone.”
Of course, it might not be equally profitable for this safe
company to pursue certain segments of the market for
small safes. Clearly, the density of potential customers
who need or want a small safe (and for whom the safe
produced by this particular company is a good “match”)
differs among possible segments. The “little old people
with photos” segment, though its total size is a massive
16.1 million (these figures are hypothetical), provides a
very poor density of only 100 prospects per 100,000
individuals. On the other hand, professional corporations
provide a high density of 500 good prospects per 100,000,
even though the absolute size of this segment is much
smaller than that of the first. The objective of density
computation is to seek segments with the highest possible
density. A percentage measure should be used to control
for different absolute numbers in each segment.
The next step in customer conversion analysis is com-
puting the ability of the vending firm to access the poten-
tial prospect list. This measures how many of the total
possible prospects (some call them “suspects” at this
early marketing stage) can be reached per unit marketing
 IDENTIFIED/ACCESSIBLE
MARKET GROUPS1
A such buyers customers, but only “trial users. ” For ex-
NVMBER OF PROSPECTS PER “NlT POTENTlAL
PER “NIT ACCESSIBLE PROSPECTS
NUMBER OF BUYERS
PER “NIT ““ALlFlED
/ petitors, rather than using a pure “repeat buying” ratio
CUSTOMERBASE
FIGURE4. Customer conversion
cost. Prospect efficiency can be expressed as a ratio, or
more qualitatively as involving “low,” “medium,” or
“high” marketing costs per prospect accessed. In a per-
sonal selling situation, the location of the prospects will
be a major factor in determining the sales force costs
incurred to reach each prospect.
The next measure is an estimate of how many accessi-
ble prospects can be “qualified” for the purchase. In
many businesses, qualification is not an issue. But in
others, such as in selling business jets, it is of maximal
importance. Though many companies in the United
States rightly might be thought of as prospects and most
of them as accessible prospects for a business jet, a much
smaller percentage (less than 10%) will be qualifiable.
Major qualifying variables include the geographical
“spread” of the prospect’s operating facilities, ability to
pay, competition from scheduled airlines, and other
factors.
The essential difference between the “density” mea-
sure at the top of the triangle and the “qualification” one
discussed here is that qualifying a prospect probably will
require some customer contact to assess the buyer’s in-
terest and ability to buy. Density is the rough screen of
buying possibility; qualification the finer one of buying
probability.
“Trial conversion” refers to the percentage of quali-
fied prospects that can be persuaded to try or buy the
vendor’s product or service once. This does not make
ample, word processing stations cost $7,000 to $15,000
DEi:SI-V
MARKET TCTAL each and have semicustom software. The preferred way
to evaluate such machines in major corporations is to
outfit one department or division with a vendor’s offering
for test purposes. Thus, an initial purchase of 5 to 100
machines is often made. Yet, the vendor has not convert-
ed the entire corporation to a loyal user.
Finally, the astute manager will measure conversion or
TRIAL CONVERSION the percentage of users who become regular customers.
The higher this percentage, obviously, the more attrac-
REPEAT CONVERSION
tive the segment for pursuit.
Each measure will need minor tailoring to make it
suitable for the particular industry and company em-
ploying it. For instance, industrial suppliers with few
customers may wish to measure the percentage of a
customer’s total business they get versus their com-
for the last item on the triangle. Cereal companies will be
much more comfortable with straight trial and repeat
analysis.
measures.
Customer conversion analysis yields useful segmenta-
tion diagnostics. If density is found to be abnormally low
among some current segments, it may mean poor market
selection. If access is lower than desired, the manager
can examine the market communications methods cur-
rently employed to reach prospects, the marketing and
sales force allocations, or the “mix” of prospects identi-
fied to determine the source of the inefficiency. If the
qualification percentage is unsatisfactory, either market
selection or qualification procedures are called into ques-
tion, or worse, selling tactics themselves. If trial conver-
sion is not at desired levels, the manager might look
to the selling efforts, the product or service delivered, or
price to assure that all are adequate and offer desired
benefits. And, if repeat conversion is low, the selling
effort, product/service/price and post-sale services are
possible culprits.
However, the critical diagnostic provided by customer
conversion analysis concerns whether the “identified,
accessible” groups input by management actually com-
prise a needs/benefits segment. Customer conversion
analysis allows this determination by providing manage-
ment with a series of diagnostic indicators and sug-
gestions for tactical fixes when such indicators do not
meet desired levels. Given that all such tactical fixes
have been made, and key indicators on the triangle still
do not “read within expectations,” management is
forced to the correct conclusion that it has not found a
265
needs segment, but only a group that appears to be a
segment. For instance, if density, access, qualification,
and trial use are all high but repeat conversion low, and
no obvious marketing implementation problems exist,
management may rightly suspect that its products or
services do not meet the needs of the segment sought. In
this case, segmentation strategy must be reformulated.
Segment Profitability Analysis
It is not enough to find segments that generate high
customer conversion ratios. The customers obtained
must be serviced at reasonable cost, maintained without
excessive marketing expenditures, and hence, contribute
a high margin to fixed costs and profit. Figure 5 presents
an upward-pointing triangle that contains notions about
controlling segment profitability. The input to the top of
the triangle is a market segment.
The first two sections of Figure 5 deal with order size
and product mix. If the customers attracted provide or-
ders that cannot be filled profitably, or if their product
mix results in suboptimal utilization of resources, the
desirability of serving the segment is questionable. For
example, small electrical contractors, called “basket
contractors,” often buy “three fixtures, 100 feet of ca-
ble, and six electrical boxes.” This small quantity, wide
variety order may be the backbone of the local industrial
distributor’s business, but is the bane of the larger dis-
tribution company which primarily wholesales to other
distributors but maintains counter service to contractors
as well.
Desirable order sizes and product mixes depend not
only on marketing costs, but on production technology,
the distribution system, and other variables. For exam-
ple, in a continuous processing industry such as a paper
mill, low demand specialty items are undesirable in peri-
ods of high demand because the changeover time inter-
rupts the mill’s long runs which generate a limited vari-
ety of product in higher volumes but higher dollar profits
per hour of machine time. In tool and diemaking, where
a specialty job shop atmosphere prevails, a conceptually
similar but opposite problem can be encountered with
regard to order size. Ambitious firms that have sold
diligently to obtain large, batch-type orders have found
that they could not deliver such orders at a profit because
their marketing, production technology, and other sys-
tems were developed to deal with low-volume, short-
runs.
Regardless of the particular conditions, every business

ORDER SIZE

/DESIRED SIZE\

ACTUAL MIX TO

DESIRED MIX PRODUCT MIX

/ \

CUSTOMER CONTRIBUTION HARGIN PERCENTAGE CoNTRIBUT1oN

/ \ MARGIN

CONTRIBUTION

RETURN ON
SEGMENT CONTRIBUTION MARGIN PER DOLLAR INVESTED
INVESTMEN

/
l \
FIGURE 5. Segment profitability analysis.

266
 will have some optimal order size and product mix. We
suggest periodic review to insure that either 1) customers
are meeting order and mix criteria, or 2) there has been a
conscious management decision to serve customers who
do not meet the criteria. For example, a company may
choose to service customers who individually do not
meet the order size criterion, but who as a group generate
a desirable product mix portfolio.
The third part of customer profitability analysis turns
from customer serving costs to customer maintenance
costs, recognizing that continuing business ordinarily
requires additional marketing resources and that custom-
ers differ in the resources required per dollar of revenue
generated. There are many ways to measure marketing
expense-to-revenue ratios, including the costs of commu-
nication, price promotion (discounting, etc.), and other
costs per customer. Nonmonetary measures also exist,
such as total selling days per customer account (which is
useful if customers are large and the sale is project
oriented like major power plant construction). Re-
gardless of the particular measure chosen, the objective
is to compute the marketing costs involved in customer
maintenance for each account, and in each market
segment.
Order size, product mix, and marketing expense-to-
sales revenue measures all help to determine the percent-
age contribution per revenue dollar for each segment.
This measures the amount of contribution left for cover-
ing fixed costs and providing profit after direct produc-
tion, distribution, and marketing expenses. This analysis
can and should be performed by account or market seg-
ment. But, analysis should not stop here.
Contribution margins must be related to the invest-
ment. Often, marketers throw up their hands at the pros-
pect of allocating investment to segments because of the
difficulty. Yet, it has been our experience that for larger
segments or key accounts, it is usually possible to get a
good sense of the investment intensity required. If this
can be done for the firm’s major segments, it is possible
to compute a rough but useful marketing return-on-in-
vestment ratio, which is the most sophisticated measure
in the control system we propose.
It is not quantitative rigor that supplies management
with the ability to assess and control its segmentation
efforts, but rather the discipline of the process. If ROI
cannot be computed, can contribution? If this cannot be
computed exactly, can segments be scaled on a “more” to
“less” qualitative rubric? In many instances, such infor-
mation is all that is needed to permit sound segmentation
decision making and tight segment control. Though data
such as these would be thought to be readily available to
almost every manager in today’s data-oriented com-
panies, they are not. Indeed, it is the rare and excep-
tionally able manager who has been able to defeat the
accounting system’s obfuscations in order to determine
the “back-of-the-envelope ratios” suggested here.
Integration of the Measures
It is no accident that the customer conversion triangle
in Figure 4 is downward pointing and its companion in
Figure 5 upward. The entire process of segment control
requires first exploring the downward triangle of custom-
er conversion analysis, and then continuing to monitor
customers obtained through profitability analysis. Thus,
segmentation control can form an “hourglass model” of
a) tracking the costs of getting customers, and b) the
return they deliver. Though the triangles can be imple-
mented separately, optimum application comes from
using them together.
CONCLUSION
Much has been written about the strategy of segmenta-
tion (e.g., [2]); little about its implementation, control,
and management. We find two general approaches to
segmentation; a needs approach that is theoretically
“right,” but very difficult to implement, and an identi-
fiable/accessible one that is easy to implement but not
generally tied to customer benefits. A way was sought to
encourage a “fortuitous overlap” between these ap-
proaches.
The logic suggested here attempts this integration by
relating segmentation approach to marketing tools, mar-
keting tools to segmentation economics, and all three of
these factors to segment controls. Management is not
asked to abandon finding identifiable customer groups
for depth psychology studies of benefits, for those are
often unimplementable in practice. Rather, it is recom-
mended that managers 1) understand the difference in
philosophy between what is recommended (benefit seg-
mentation) and what frequently is possible (identifica-
tion/accessibility segmentation); 2) note that different
marketing tools seem to implement one or the other of
these concepts more directly; and 3) understand the rela-
tionships between segmentation strategies and segmenta-
tion economics.
The central innovation, though, is the construction of
the control system which may be simple and qualitative if
lack of data dictates, but which accepts segments at one
end of the “hourglass” and returns two central decision
267
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268