👥Customer Insights Unit 3 – Market Segmentation and Targeting

What's Market Segmentation?

• Process of dividing a market into distinct groups of buyers with different needs, characteristics, or behaviors
• Enables companies to tailor their marketing mix (product, price, place, promotion) to specific segments
• Involves identifying key differentiating factors among customers (demographics, psychographics, behaviors)
• Segments should be measurable, substantial, accessible, differentiable, and actionable
• Allows for more efficient allocation of marketing resources by focusing on most promising segments
• Helps companies better understand their customers and develop more targeted value propositions
• Facilitates the development of customized products or services that meet specific segment needs
• Enables more effective marketing communication by tailoring messages to resonate with each segment

Why Segment Markets?

• Allows companies to better meet the needs of specific customer groups rather than trying to appeal to everyone
• Enables more targeted and cost-effective marketing efforts by focusing resources on most promising segments
• Helps identify underserved or untapped market segments that offer growth opportunities
• Facilitates the development of differentiated products or services that command higher prices and margins
• Enables companies to build stronger customer relationships by understanding and catering to specific segment needs
• Allows for more accurate forecasting and planning by analyzing segment-specific trends and behaviors
• Helps companies gain a competitive advantage by specializing in serving specific segments better than rivals
• Enables more effective resource allocation by prioritizing investments in high-potential segments

Types of Market Segmentation

• Demographic segmentation divides market based on age, gender, income, education, occupation, etc.
  • Enables targeting based on observable and measurable characteristics
  • Widely used due to ease of data collection and analysis (census data, surveys)
• Psychographic segmentation divides market based on personality, values, attitudes, interests, lifestyles
  • Provides deeper insights into customer motivations and preferences
  • Helps develop more resonant marketing messages and brand positioning
• Behavioral segmentation divides market based on purchase behavior, usage patterns, brand loyalty, price sensitivity
  • Focuses on actual customer actions rather than just characteristics
  • Enables targeting based on demonstrated needs and preferences (heavy users, loyal customers)
• Geographic segmentation divides market based on location, region, climate, population density
  • Allows for customization based on local market conditions and cultural differences
  • Enables more efficient distribution and promotional strategies (regional advertising, localized products)
• Firmographic segmentation (B2B) divides market based on company size, industry, location, technology use
  • Enables targeting based on organizational characteristics and needs
  • Helps tailor solutions and sales approaches to specific types of businesses

How to Segment Your Market

• Define the market to be segmented (product category, industry, geography)
• Identify key segmentation variables that differentiate customers (demographics, psychographics, behaviors)
• Collect and analyze customer data to uncover distinct segments
  • Use surveys, focus groups, customer databases, market research reports
  • Look for patterns, correlations, and clusters in the data
• Develop segment profiles that capture the key characteristics, needs, and preferences of each group
• Evaluate the attractiveness of each segment based on size, growth, profitability, competitiveness
• Select target segments that align with company strengths and offer the greatest potential value
• Develop customized marketing mixes (product, price, place, promotion) for each target segment
• Continuously monitor and adapt to changes in segment characteristics and market conditions

Targeting Strategies

• Undifferentiated (mass) targeting appeals to the entire market with a single offering
  • Appropriate for products with broad appeal and low differentiation (commodities)
  • Enables economies of scale in production and marketing
• Differentiated (segmented) targeting develops separate offerings and marketing mixes for each segment
  • Allows for better meeting the needs of each segment
  • Requires more resources and can lead to higher costs
• Concentrated (niche) targeting focuses on intensively serving one or a few segments
  • Enables specialization and building strong market position in chosen segments
  • Risks over-reliance on limited segments and missing broader market opportunities
• Micromarketing tailors offerings to very small groups or even individuals
  • Includes local marketing (tailoring to specific neighborhoods or stores) and individual marketing (one-to-one)
  • Enabled by advances in data collection, analysis, and digital marketing technologies

Evaluating Segment Attractiveness

• Segment size and growth potential
  • Look for segments with sufficient scale to be profitable
  • Consider both current size and projected growth rates
• Segment profitability
  • Assess likely revenues and costs of serving each segment
  • Consider price sensitivity, bargaining power, cost to serve
• Competitive intensity within segment
  • Evaluate number and strength of competitors targeting the segment
  • Look for segments with unmet needs or dissatisfied customers
• Company fit with segment
  • Assess alignment with company strengths, resources, and strategic priorities
  • Consider brand image, channel relationships, technical capabilities
• Segment stability and risk
  • Evaluate likelihood of segment disruption due to new technologies, regulations, substitutes
  • Consider cyclicality, seasonality, and other demand fluctuations

Practical Applications

• Consumer packaged goods companies often segment based on brand loyalty, price sensitivity, and usage occasions
  • Procter & Gamble targets different segments with Tide (premium), Gain (mid-tier), and Era (value) detergent brands
  • Coca-Cola targets different occasion-based segments with Coke (meals), Diet Coke (breaks), and Sprite (refreshment)
• Automotive companies segment based on demographics, psychographics, and vehicle preferences
  • Toyota targets younger, budget-conscious buyers with Yaris and older, affluent buyers with Lexus
  • Ford targets outdoor enthusiasts with Bronco and eco-conscious buyers with Mustang Mach-E electric SUV
• Technology companies segment based on user sophistication, business size, and industry vertical
  • Apple targets tech-savvy consumers with iPhone and creative professionals with MacBook Pro
  • Salesforce targets different-sized businesses with tailored CRM editions and industry-specific solutions
• Retailers segment based on shopping behaviors, lifestyle preferences, and channel usage
  • Nordstrom targets affluent, fashion-conscious shoppers with curated merchandise and personalized service
  • Amazon targets convenience-seeking shoppers with broad selection, low prices, and fast shipping

Common Pitfalls and How to Avoid Them

• Defining segments too broadly or too narrowly
  • Overly broad segments may overlook important differences in customer needs and preferences
  • Overly narrow segments may be too small to be viable or require too much customization
  • Aim for a manageable number of segments (5-10) that balance distinctiveness and scale
• Relying on outdated or incomplete data
  • Customer characteristics and behaviors can change over time, especially in dynamic markets
  • Regularly update segmentation models with fresh data from multiple sources
• Ignoring segment profitability
  • Attractive segments should be not only large and growing, but also profitable to serve
  • Carefully assess cost to serve, price sensitivity, and lifetime value for each segment
• Failing to adapt to segment evolution
  • Segments can shift due to changing demographics, technologies, and competitive landscape
  • Continuously monitor segment trends and adjust targeting and positioning as needed
• Overemphasizing observable characteristics vs. underlying needs
  • Demographics and behaviors are easier to measure but may not fully capture customer motivations
  • Supplement with psychographic and needs-based segmentation to develop richer insights
• Treating segments as static and homogeneous
  • Recognize that segments are not perfectly distinct and that customers can belong to multiple segments
  • Use dynamic and granular segmentation approaches (microsegments, persona-based segments) where appropriate