Segmentation | Market Segmentation | Business Economics

Dr.

Kartik Dave
Dr. Kartik Dave 1

WHAT IS MARKET?
A market consists of all the potential customers sharing a particular need who are willing and able to engage in exchange to satisfy that need or want. All customers sharing a particular need, however, are not looking for same value from the competing products and services nor they are willing to pay the same price.
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WHAT IS MARKET SEGMENT?  

Among the competing products and services, customers choose the one that, according to their perceptions, provides the best value at a price that they are willing to pay. In a competitive market, every company must, therefore, group (segment) these customers, according to the value that they are looking for and the price that they are willing to pay for the product or service providing such value.
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WHAT IS MARKET SEGMENT? 

A market segment can, therefore, be defined as a group of actual or potential customers, sharing a particular need, who want the same value (benefits or solutions to problems) from the product or service.
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WHAT IS MARKET SEGMENTATION? 

Market segmentation is the process of dividing a varied and differing groups of customers or potential customers into smaller groups, who want the same value (benefits or solutions to problems) from the product or service.
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WHY MARKET SEGMENTATION?
By segmenting the market, the marketer is attempting to break the market into more strategically manageable parts which then can be targeted and satisfied far more precisely by developing product and marketing program tailored to each segment.
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FUNDAMENTAL FACTORS FOR EFFECTIVE MARKET SEGMENTATION    

First and most necessary is heterogeneity of customer needs and wants. Second, these customers do cluster into specific groups whose members needs are similar. Thirdly, it is possible to identity of these customers (i.e., ability to reasonably profile these customers). Finally, the costs of serving customers in a segment must be no more than they are willing to pay.
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SEGMENTATION BASES
The first step for segmentation of customers is to select a set of variables or characteristics (called segmentation bases) to assign potential customers to homogeneous groups. These variables should be related to some aspect of potential customer s needs or wants and should reflect differences between customers.
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CLASSIFICATION OF SEGMENTATION BASES
General Geographic, demographic and socio-economic variables Product-specific User status, usage frequency, loyalty and patronage, situations

Observable

Unobservable

Psychographics (life-style), values, personality
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Benefits, perceptions, preferences, intentions
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OBSERVABLE GENERAL VARIABLES FOR SEGMENTING CONSUMER MARKET
Geographic Region City Size Density Climate

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GEOGRAPHIC SEGMENTATION
The geographic approach assumes that customers found within a particular geographic zone would have common preferences and therefore, can be targeted with the same offer. Like climate has strong impact on resident s needs and purchasing behaviour such as their clothing, airconditioning and heating system, foods, sports and entertainments.
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GEOGRAPHIC SEGMENTATION
While there could be some common preferences of people residing in same geographic area, it does not mean that everyone down a particular street buys the same items. Everyone in the northern regions of our country (as individual consumers or as businesses) does not have the same buying criteria, or responds to only one type of message.
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GEOGRAPHIC SEGMENTATION
This approach on its own doesn't define the consumer needs, it doesn't define the product or service required, or the promotional stance to take. It can, however, play a role in segmentation by providing further help in identifying how to reach the found in particular customers segments.
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OBSEVABLE GENERALVARIABLES FOR SEGMENTING CONSUMER MARKET Demographic
Age Gender Family Size Family Life Cycle Monthly Household Income Occupation Education
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DEMOGRAPHIC SEGMENTATION   

Demographic variables are the most popular bases for distinguishing customer groups. One reason is that consumer wants, preferences, and usage rates are often associated with demographic variables. Another is that demographic variables are easier to measure.
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DEMOGRAPHIC SEGMENTATION   

Consumer wants and abilities change with age. Persons in the same part of the life cycle may differ in their life stage. Men and women tend to have different attitudinal and behavioral orientations, based partly on their genetic makeup and partly on socialization practices.

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DEMOGRAPHIC SEGMENTATION  

Income is a popular demographic variable for segmenting customers because income level influences consumers wants and determines their buying power. Occupation and education have also very important bearing on consumers purchasing behaviour.
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SOCIO-ECONOMIC CLASSIFICATIONS IN INDIA
Education Occupation Illite Rate 1 Unskilled Skilled Workers Petty Traders Shop Owners Businessman with employees None 1-9 10+ 01 02 03 04 E2 E2 E2 D School School SSC/ College Grad/ Grad/ Post 4 yrs 5-9 yrs HSC Edu Post (Gen) (Prof) 2 E2 E1 D D 3 E1 D D C 4 D C C B2 5 D C C B1 6 D B2 B2 A2 7 D B2 B2 A2

05 06 07

D C B1

C B2 B1

B2 B2 A2

B1 B1 A2

A2 A2 A1

A2 A1 A1

A1 A1 A1
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SOCIO-ECONOMIC CLASSIFICATIONS IN INDIA
Education Occupation Illite School Rate 4 yrs 2 D D D School SSC/ College Grad/ Grad/ 5-9 yrs HSC Edu Post Post (Gen) (Prof) 3 D D C 4 B2 C C 5 B1 B2 B2 6 A2 B1 B1 7 A1 B1 A2

1 Self-employed Professionals Clerical/ Salesman Supervisory Executives Junior Middle/Senior 08 09 10 D D D

11 12

C B1

C B1

C B1

B2 B1

B1 A2

A2 A1

A2 A1
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Dr. Kartik Dave

DEMOGRAPHIC SEGMENTATION 

The demographic approach assumes that customers differ according to some criteria about themselves. Demographic information on its own doesn't define the consumer needs, it doesn't define the product or service required, or the promotional stance to take.
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DEMOGRAPHIC SEGMENTATION
The role demographic plays is to help you identify for each segment a profile of the typical customer to be found in each segment. In other words, who is found in each segment. This in turn will help you understand how to reach each segment.
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PSYCHOGRAPHIC SEGMENTATION  

In psychographic segmentation, buyers are divided into different groups on the basis of lifestyle or personality or values. People within the same demographic group can exhibit very different psychographic profiles.
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PSYCHOGRAPHIC SEGMENTATION 

Although this approach on its own does not define the product or service required, by identifying the internal drivers of decision makers it can help define the most appropriate promotional stance to take for different segments. So, like the other alternative approaches to segmentation, it too can contribute to a segmentation project.
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PRODUCT/SERVICE SPECIFIC SEGMENTATION 

By looking at the product/service usages, loyalty, preferences etc. as a whole there is a danger that a company may be overlooking what in particular is attracting the customer to one offer as opposed to another. Understanding the particular features customers use to discriminate between competing offers will help you do this.
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PRODUCT/SERVICE SPECIFIC SEGMENTATION
This additional step is thus to understand what it is that the customer is really trying to achieve from the particular features they choose. The expression, 'we don't sell the features, we sell the benefits' captures this essential extra step.
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BENEFIT/VALUE BASED SEGMENTATION 

When choosing between competing offers, customers select the offer that meets their needs better than any other. Value or benefits people seek in products are the basic reasons for the heterogeneity in their choice behaviour, and benefits are thus the most relevant bases for segmentation.
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BENEFIT/VALUE BASED SEGMENTATION
On its own this approach to segmentation, while able to provide you with an invaluable insight into how to win a customer's business, still requires you to know how to reach them. The input to this part of the equation, provided by a detailed understanding of who the customers are and where they are to be found, is clearly very important.
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ALTERNATIVE CLASSIFICATION OF SEGMENTATION BASES 

It is, therefore, worthwhile to look at an alternative way to classify the segmentation variables so that we can find out  

What benefits/value the customers want? Who are they and where are they?
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ALTERNATIVE CLASSIFICATION OF SEGMENTATION BASES
Identifier Variables (Who they are)
Consumer Markets Geographic Location Demographics Socio-economic Factors Psychographics Business Markets Company Size Industry Geographic Location

Response Variables (What they want)
Benefits Desired Price, reliability, service Applications/Usage Situation User Status, usage frequency, application of the product Sensitivity to Marketing Mix Product features, price, promotion Purchasing Behaviour Buying volume Switching among brands Purchasing approach Channels used
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APRIORI AND POST HOC SEGMENTATION 

A priori segmentation starts by using identifier variables (e.g., age, gender, income, occupation, lifestyle, geographic location etc.) to divide the market based on who the customers are, in the hope that resulting segments behave differently in response to marketing mix variables.

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A PRIORI AND POST HOC SEGMENTATION 

In contrast, post hoc segmentation starts by using response variables to divide the market on the basis of how customers behave, and then hopes that the resulting segments differ enough in terms of customer profiles to enable identification.
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APRIORI AND POST HOC SEGMENTATION  

In practice, marketers need both a priori and post hoc process to fine tune their understanding of market segments. Unfortunately, many firms frequently rely too heavily on a priori segmentation variables.
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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 1: Divide the market into identifiable groups of customers based on demographic, psychographic, and geographic criteria such as age, gender, life stage, family size, income, occupation, lifestyle, and geographic location. Record personal details about the decision makers in terms of criteria mentioned above.
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KEY ELEMENTS OF SEGMENTATION PROCESS
St i i t : I tif r ti t t ff r . f t r iff r ti t

T i r i t li t r t t t t t r r tr i t ti f t r t f t r t t r t r i li r. t Feat res consist of ot t e tangi le and intangi le components of an offer.
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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 3: Establish a sample of customers which will represent the different decision makers found in your market (referred to as a priori segments'). This may be done by drawing up a combination of factors which may underpin differences between customers (such as age bands, genders, different locations, income levels, occupation, life style etc.).
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KEY ELEMENTS OF SEGMENTATION PROCESS
As best as possible, attribute a size to each a priori segment (volume or value) which reflects how much of the market each a priori segment represents. For each customer in the sample, ensure you list the personal details that will enable you to identify them.

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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 4: Understand the real needs of customers of each of these a priori segment and list the benefits they are seeking. This can be done by referring to the key differentiating features (KDFs) identified in Step 2 and noting the benefits that customers associate with them.
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KEY ELEMENTS OF SEGMENTATION PROCESS
Because a specific feature on its own or in combination with other features will satisfy a particular need, benefits will be associated with individual features and with the various ways that customers pull them together.

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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 5: Determine the importance of the listed benefits to each a priori segment. This can be done in two ways: Score each benefit out of 10 to indicate its importance to the a priori segment (whenever a benefit has no importance, put the score at zero).
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KEY ELEMENTS OF SEGMENTATION PROCESS
Distribute a hundred points between the benefits for each a priori segment to indicate the relative importance of each benefit to that a priori segment (whenever a benefit has no importance, put the score at zero).

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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 6: Bring together those a priori that illustrate similar segments patterns of importance for the benefits in order to form clusters. Depending on the number of a priori segments you are working with this may be possible to execute manually. An alternative is to put the data into an appropriate statistical routine.
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KEY ELEMENTS OF SEGMENTATION PROCESS
Step 7: Verify that the concluding clusters can be regarded as segments. The three most important questions are: Is the offer required by each cluster sufficiently different from that required by the other clusters? Is each cluster large enough to justify the development of a distinct offer?
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KEY ELEMENTS OF SEGMENTATION PROCESS
Can you identify which customers are to be found in each cluster so that you can target them with an appropriate offer? If the answer to all three questions is 'yes', then the clusters can be regarded as segments.

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SEGMENTATION TOOLS
Three important statistical tools commonly used for segmentation of customers are: Conjoint Analysis Cluster Analysis Factor Analysis

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CONJOINT ANALYSIS  

Conjoint analysis is a method of portraying consumer s decisions realistically as a trade-off among multiattribute products or services. It is based on the simple notion that consumer s evaluate the value of something by combining separate amounts of utility provided by each attribute.
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CONJOINT ANALYSIS
Conjoint analysis is particularly useful because it allows for the grouping of consumers according to how they respond to product features in making choice decisions. A two-stage procedure is often used for benefit segmentation with conjoint analysis.
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CONJOINT ANALYSIS
At the first stage, benefit importance values are obtained at the individual level by direct rating of product attributes. The respondents are presented with stimuli that consist of combinations of different product attribute levels. They are asked to evaluate these stimuli in terms of their desirability.
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CONJOINT ANALYSIS
Conjoint procedures attempt to assign values to the levels of each attribute, so that the resulting values or utilities attached to the stimuli match, as closely as possible, the input evaluations provided by the respondents. At the second stage, subjects are clustered on the basis of similarity of those importance values.
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CLUSTER ANALYSIS
The basic purpose of cluster analysis is to segment objects such as customers into groups so that members within each group are similar to one another on a variety of characteristics. Cluster analysis is potentially valuable in market segmentation studies in which the objective is to identify distinct customer groups.
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CLUSTER ANALYSIS
For example, consumers may be clustered on the basis of benefits sought from the purchase of a product. Each cluster would consist of consumers who are relatively homogeneous in terms of benefits they seek. These clusters are not defined a priori by the researcher but are formed by the cluster analysis procedure itself.
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FACTOR ANALYSIS
In factor analysis, the interrelationships among large number of variables (questionnaire responses) are analysed and then they are represented in terms of common, underlying dimensions (factors). It can bring out the hidden or latent dimensions relevant in the relationships among product preferences.
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FACTOR ANALYSIS
Factor analysis can be used in market for identifying the segmentation underlying variables on which to group the customers. New car buyers may be grouped based on the relative emphasis they place on economy, convenience, performance, comfort, and luxury. This might result in five segments: economy seekers, convenience seekers, performance seekers, comfort seekers, and luxury seekers. Kartik Dave Dr. 52

GRAVITY OF DECISION SPECTRUM  

In any segmentation project marketers must begin by evaluating the expectations consumers bring to the particular kind of transaction. This can be located on the gravity of decision making spectrum, which will tell the marketers how deeply one need to probe consumers motives, concerns, and even psyches.
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GRAVITY OF DECISION SPECTRUM  

At the shallow end of the spectrum, consumers are seeking products and services that they think will save them time, effort, and money. So segmentation for items such as toiletries and snacks try to measure things like the price sensitivity, habits, and impulsiveness of the target consumer.
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GRAVITY OF DECISION SPECTRUM  

Segmentation for big-ticket purchases like cars and electronic devices, in the middle of the spectrum, test how concerned customers are about quality, design, complexity, and the status a product might confer. At the deepest end, consumers emotional investment is great, and their core values are engaged.
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GRAVITY OF DECISION SPECTRUM  

Market segmentation project should, therefore, try to find out the core values and beliefs of the target consumers related to the buying decision. Choosing a course of medical treatment or deciding where to live are some of the products/services at the deep end of the decision spectrum.

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SEGMENTATION OF BUSINESS CUSTOMERS   

The difference between consumer and business market segmentation involve the specific bases of segmentation. Consumer markets are typically segmented on the basis demographic, psychographic, and product specific variables. As the business customer is not an individual but a number of interacting individuals in a decision making unit (DMU) of a formal organization, the bases of segmentation are different.
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SEGMENTATION OF BUSINESS CUSTOMERS
Organizational demographics: Industry/ Company size/ Location

General, observable (Macro)

Operating variables: Technology/User status/Customer capabilities (financial) Purchasing approaches Organization of DMU/Purchasing policies/Purchasing criteria Situational factors Urgency/Applications/Order size Personal characteristics: Motivation/Buyer-seller dyad/ Risk perceptions

(Intermediate)

Specific, subtle (Micro)

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SEGMENTATION OF BUSINESS CUSTOMERS  

The three outer nests cover company variables, the fourth inner-middle nest situational factors, and the inmost nest - personal characteristics. The data in the outer nests are generally highly visible, even to outsiders, are more or less permanent, and require little intimate knowledge of customers.
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SEGMENTATION OF BUSINESS CUSTOMERS   

But situational factors and personal characteristics are less visible, are more transient, and requires extensive vendor research. A marketer can begin at the outside nest and work inward because data are more available and definitions clearer in outer nests. On the other hand, situational and personal variables of the inner nests are often the most useful.
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SEGMENTATION OF BUSINESS CUSTOMERS   

The outer-nest criteria are generally inadequate when used by themselves in all but simple or homogeneous markets because they ignore buying differences among customers. Over emphasis on the inner-nest factors, however, can be too expensive and time-consuming for small markets. A balance is to be achieved between the two nests.
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SEGMENTATION DILEMMA  

Segmentation based on customer needs, i.e., benefits-oriented approach, is attractive in the theoretical sense, but also more difficult for managers to implement. Furthermore, the needs/benefit approach is clearly more applicable to marketing decisions.
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SEGMENTATION DILEMMA
The basic problem of value-based segmentation is that these segments generally don t fit neatly into demographic/firmographic one. On the other hand, identifying differences based on demographic/firmographic is also not adequate as all customers of a demographic/firmographic group do not have the same preferences and purchasing behaviour.
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SEGMENTATION DILEMMA  

Segmentation based on demographics or company characteristics thus is not very actionable. These approaches do not help the company to get to the customer with the right offer.
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SOLVING THE SEGMENTATION DILEMMA  

There are different ways to solve this dilemma. Before worrying about how to identify and reach individual customers in any given segment, it is worth attempting to determine whether the collective traits of a market segment might themselves suggest profitable strategies. (Example of Mobile Oil)
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SOLVING THE SEGMENTATION DILEMMA   

Another way to solve the segmentation dilemma is self-selection . The basic idea of self-selection is to reverse the roles of a company and its customers. Instead of trying to find, say, pricesensitive customers, the company figures out what segments it wants to reach and gives the customers in them ways of finding them.
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SOLVING THE SEGMENTATION DILEMMA  

Companies most commonly develop a product line and have customers sort themselves among the various offerings based on their preferences. The key to to making this approach work is the design decision to differentiate products in such a way that customers preferences sort themselves among the options in desired fashion.
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SOLVING THE SEGMENTATION DILEMMA  

Apart from different versions of products, companies can promote selfselection through a variety of other mechanisms, such as coupons, pricing structures based on times of the day or days of the week. These approaches are most suitable when the base of customers is large but the money value for each of them is too small.
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SOLVING THE SEGMENTATION DILEMMA 

It is possible to convert un-actionable segmentation schemes into actionable ones by trading a small amount of precision in delineating segments for a significantly increased ability to identify the customers who belong in each of them by optimizing a function that is weighted sum of value-based segmentation and demographic segmentation.
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DUAL-OBJECTIVE SEGMENTATION
High Value-based Segmentation Actionable Segmentation Joint Optimization

Demographics-based Segmentation Low Low
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High
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Identification of Customers

SOLVING THE SEGMENTATION DILEMMA  

Another possible solution to this problem is to provide opportunities to individual customers to design their own products and services by choosing from a menu of attributes, components, prices, and delivery options. This facility can be provided through a choiceboard - an interactive on-line system.
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SOLVING THE SEGMENTATION DILEMMA   

Dell s choiceboard expands consumers options in the personal computer realm. Cisco Marketplace is an on-line configurator that allows corporate customers to create the precise combination of data networking gear they need. Charles Schwab s Mutual Fund Screener allows customers to design their own investment portfolios.
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SOLVING THE SEGMENTATION DILEMMA  

A choiceboard model of doing business with individual customers becomes possible in any industry when a system of accessible, integrateable components is available from which customers can select and combine options based on their own priorities. The choiceboard enables customer selfsegmentation, which is fast, costefficient, and precise.
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ONGOING SEGMENTATION PROCESS  

Segmentation, whether of consumer or business customers, should be considered an ongoing process and, to the extent possible, be built into a company s marketing intelligence system. Effective segmentations are dynamic in two senses:
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ONGOING SEGMENTATION PROCESS  

First, they concentrate on customers needs, attitudes, behaviour, which can change quickly. Secondly, they are reshaped by market such as fluctuating conditions, economics, emerging consumer niches, and new technologies, which in today s world are evolving more rapidly than ever.
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ONGOING SEGMENTATION PROCESS 

The organizations, which are able to overcome excessive interest in consumer identities; too little emphasis on actual consumer behaviour; and undue absorption in the technical details of devising segmentations, will be able to respond quickly and effectively to rapidly changing market conditions, develop insights into where and how to compete.
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