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Market Segmentation

What is Market Segmentation? Increase Marketing ROI with a Customer-Focused Strategy

LRW
Posted On  August 19, 2019
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To compete in today’s hyper-competitive digital environment, you must create the experiences, communications, advertisements, and products that resonate with your customers. So how do you develop the customer focus needed to win? Since customers are not homogenous in their needs, attitudes, criteria for brand choice, or responsiveness to different communication approaches, it can be extremely challenging for a company to prioritize strategies and initiatives. Market segmentation offers one of the most effective techniques of “bringing order to chaos” in order to initiate the plans that will provide the most leverage for a company.

Segmenting your market into key customer groups sounds intuitive, but what’s actually involved in a market segmentation study?

Benefits of Market Segmentation

Whether your business goal is innovation, improvements to communications and promotion, customer service transformation, or digital activation, you’ve got to focus your energy, creativity, and resources on your greatest opportunity customer segments to drive growth. “Unless you can dominate your category, you need to pick a lane and stick to it,” says Hilary DeCamp, LRW’s Chief Research Officer.

An effective segmentation study helps you identify the most valuable groups of customers and prospects, prioritized by their receptivity to your brand’s offering, their accessibility in the market, alignment with your strategy and brand purpose, and the size of their economic opportunity. It “helps focus your marketing and product development efforts against a portion of the market where you have a greater chance of succeeding, rather than trying to be all things to all people,” says DeCamp.

Though a segmentation’s useful life is normally about five years, that length of time can be shortened if there is disruptive change within the category or the company itself. If the rules governing a category, or a company’s approach to its competitors, change drastically, then it’s probably time to refresh or entirely replace an outdated segmentation, since it will no longer meet your business needs.

Types of Segmentation, and the Market Segmentation Process

Before launching a segmentation study, your internal stakeholders must collectively determine what kinds of decisions you plan to make as a result of it. Will you adapt your ad strategy, or rebalance your marketing mix? Are you looking to maximize the reach and minimize the amount of internal competition within your brand portfolio? Maybe you’ll prioritize a product line extension to capture an emerging customer set. Whatever the case, you need to decide whether you’ll segment the market by attitudes, needs, behaviors, or occasions.

Each of these segmentation study types maintain several common stages. In the ramp-up phase, it’s important to consider some initial qualitative research to hypothesize different segments that might exist, and to ensure that you have all of the right inputs (and consumer-facing language) for the survey questionnaire, which will form the foundation of your study. In addition to using more traditional types of qualitative research methods, tapping into blogs and other online sources can provide valuable insights.

As you write the questionnaire, which must be shorter than ever and mobile-compatible, begin with the end in mind and consider again what decisions you plan to enable. Both survey development and segmentation analysis phases are iterative processes that can take several weeks, and plan on a collaborative process to align on the best segments for your particular needs. Note that there is no data-driven way to determine the “correct” number of segments to support a business strategy; DeCamp says most clients choose 5-7 segments, “since they provide enough granularity to be actionable, while being few enough to “keep straight” and yield a large enough target to meet revenue goals.

Segmentation Outputs

The output stage involves delivery of deep segmentation profiling that combines visuals, descriptions, and key facts and figures. These profiles are the meat of your deliverable and will provide you with a wealth of knowledge to inform your marketing, communications, and innovation strategy.

Segments need to be able to drive your business for years to come, so they must be easily reproducible in future research. That’s why you need an efficient typing tool (an abbreviated set of questions from your larger initial survey) that enables you to quickly and easily categorize prospects or clients into their appropriate segment. This critical tool allows you to more easily recruit or classify key segment members for future research studies, message tests, innovation activities, brand tracking, and more.

Activating Your Customer Segmentation Study

Even the most sophisticated segmentation study is doomed to sit on the shelf without a plan to activate it. At its most basic level, actionability has always relied on good data and smart survey design (garbage in, garbage out). The next step: socializing your new segments within your organization to create understanding and empathy for the consumer through personas, brand books, and immersive experiences like Actionability Workshops designed to facilitate action planning for stakeholders.

Increasingly, however, segmentation activation has expanded to include activation through CRM, database scoring and digital ad targeting, all of which create a more direct-line marketing impact on the business. There’s no doubt that extrapolating your segments to the entire digital world can be a game-changer for brands committed to programmatic and other advertising programs.

You’ve got competing priorities and strategies, and having a time-tested approach for understanding your customers helps you set priorities, maximize ROI, and grow your business. Whether it’s marketing communications, customer service transformation, product development, or digital activation, a well-designed market segmentation study will become a tool you rely on for a wide variety of marketing decisions for years to come.

Written by LRW
For 40 years, LRW has been asking so what?® to help our clients use market research to have significant business impact. Learn more about us at LRWonline.com.

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