Know thy Customer – Segmenting your Market

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

A good and free tool to build segmentation trees (and mind maps) is www.mind42.com

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.

*References

Uncles & Bock 2002, Journal of International Research in Marketing, available

http://www.sciencedirect.com/science/article/pii/S0167811602000812