A proper segmentation ensures that
a product roadmap and its respective marketing efforts are focused on a
specific segment, aligning customers’ needs and marketplace offerings closer
together.
But segmenting a market usually
poses a challenge for Marketers and Product Managers alike since collecting the
relevant data and understanding the critical segmentation variables are pivotal
to gain reliable insight to identify the ‘market opportunity’. Jumping
into quantitative segmentation can be overwhelming especially for products of
mass consumption where millions of units are sold through multiple channels and
in different consumption occasions (i.e. how do we segment the market of Diet
Cola drinkers?). Thus, selecting relevant variables and proper segmentation
methods is the first step to define a strategic segmentation that could drive
refined quantitative research.
Deductive Logic
Segmentation
A simple yet powerful segmentation
method to identify relevant market segments is through “Deductive Logic”
method. Deductive logic is powerful as it results in a valid argument as long
as the premises are true.
To apply deductive segmentation
one can rely on segmentation trees. They work the as a classification tree but
instead of using statistical criteria, it uses deductive logic .
Conclusions will follow a set of premises that are neither wrong nor right, as
they are based on our own hypothesis and Its quality depends on the validity of
such premises. It could be compared to a mental map that will allow Product
Managers to see all possible segments to better calculate the real market
opportunity.
An Example
Let’s look into the case of
finding segments for a Diet Cola.
Before drawing the tree we have to
choose appropriate segmentation variable. It is recommended to start with
variables that are relevant to the product supplier (Uncles and Bock 2002*) i.e customer
profitability: frequency of consumption (number
of units/time) or volume of consumption
(size of product/time), and suppliers’
bargaining power (how many similar products can the customer obtain at a
similar price and in a similar place). These variables will help identify
segments based on frequency and place of purchase and also consider the
consumers’ choices against competitors. Remember that choosing other variables
will also be valid but as deductive logic explains, the validity of the outcome
will depend on the quality of variables.
Followed by supplier variables, we
must choose consumer segmentation variables that are strictly related to the
product we are analysing. This is if we want to segment using age as a variable then we must ask
ourselves ¿is it age a determinant variable in Diet Cola consumption?... It is
probably not as relevant as knowing the
product benefits, availability and the point of sale or awareness of the brand.
Building the
Segmentation Tree
After choosing the relevant
segmentation variables: frequency of
consumption, volume of consumption (size of product/time), knowing the product
benefits, availability and the point of sale or awareness of the brand, we rank
them logically from more important to least important. For example, frequency
and volume of consumption should be placed high in the tree because it will
show profitable segment of consumers directly related to the market opportunity.
Brand awareness although important, has less direct influence on the product’s
consumption and is more difficult to quantify (although in the case of Diet Colas
brand awareness and product availability are key for sales).
First, we have to ask the obvious
question: Does the customer drink colas at all? And does the customer drink
sugar-free colas? These logic basic questions raise at least 6 macro
segments. At this stage, a Product Manager can start discarding or
reconsidering segments not relevant to the opportunity she is trying to
evaluate.
Continuing with the logical
variable ranking; the following order is suggested:
·
Frequency of purchase
·
Volume of purchase
·
Brand awareness
·
Product availability
Discovering
Segments
Once all segmentation variables
are displayed in a segmentation tree (or classification tree), relevant
segments are consequently ‘discovered’.
The point of this exercise is to
find the segment or segments that will deliver business return.
As shown in the tree above,
consumer segments are identified by following the arrows and multiplying the
number of options per segmentation variable. For example, Diet Cola drinkers
that consume the product 3 times a week form 27 segments (3 options of product
presentation (X) 3 options of brand awareness (X) 3 options of product
availability). The same process is applied for all three frequency of purchase
options, resulting in 27 additional segments (18 for one time a week diet cola
drinkers and 9 for non cola drinkers).
All 54 segments are not
necessarily valid or worthy of further investigation.
For example the ‘3 times a week’
diet cola drinker that has high brand awareness and access to the product is
not a segment that the business should spend additional resources on. There is
no point increasing the consumption of that particular segment given that their
propensity to purchase is already high.
On the other hand, it is worth evaluating
segments where diet cola is consumed only once a week and brand awareness and
product availability is low.
Validating
Segments
It is necessary to validate
segments that have been ‘discovered’ through this process.
Here are some ways of validating
the segments:
· Differential
strategy development: do the differences between the segments suggest that different
strategies should be developed for different segments?
· Accessibility: can the
different strategies be targeted towards the different segments?
· Communicability: will the
people responsible for implementing the segmentation be able to understand it?
· Technical
validity: are the true differences between the segments known?
This simple yet comprehensive
taxonomy can help us narrow the number of quantitative analysis needed to
identify the true potential of a market.
Once the segments have been
identified and validated, narrowing them to the valid ones will help Product
Managers quantify the real market opportunity and support their product’s
business case. Additionally its helps in prioritizing the number of product
improvements needed since it brings deeper understanding of the customer group
the product addresses.
