Alternative approaches to market segmentation

Some of the alternative approaches to segmentation found in many marketing textbooks and followed by numerous companies around the world are listed below. A brief comment appears for each of them. Please select any you would like to review and compare them with The Market Segmentation Company's approach; market segmentation by customer needs.

  1. Segmentation by products and services
  2. Segmentation by demographics/firmographics
  3. Segmentation by geography
  4. Segmentation by channel
  5. Segmentation by psychographics
  6. Segmentation by customer needs — The Market Segmentation Company's approach (it's also how customers segment themselves)

Segmentation by products and services

There are three issues to consider here:

  1. By solely looking at the products or services bought you may be ignoring other aspects of the purchase which are important to the customer. This often includes, for example, the convenience of sourcing the item (often associated with the preferred distribution channel), or even the reputation of the channel they are buying it from (I buy it because 'Retailer XYZ' stocks it and I trust their choice).
  2. By looking at the product or service as a whole there is a danger that you 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.
  3. However, in choosing between competing products or services and their associated features, customers make their decision based on which offer best satisfies their needs. Segmentation cannot, therefore, be left at the product/service level, it has to be taken one step further. This additional step is to understand what it is that the customer is really trying to achieve from the particular features they choose. The expression, 'don't sell the features; sell the benefits' captures this essential extra step.

The products and services produced (and the distribution channels used) are a company's attempt to ensure they win profitable customer business, both now and in the future. Product/service preferences provide a crucial input into segmentation but in a supportive role rather than a determining role. These preferences are best used to help identify the real buying criteria of customers (see customer needs).

Segmentation by demographics/firmographics

('Firmographics' is sometimes used when referring to 'demographics' in business-to-business markets.)

The demographic/firmographic approach assumes that customers differ according to some criteria about either themselves or about the company they work in. So, every 30 – 35 year-old can be targeted with the same offer or everyone who works in a particular industry or in a company of a particular size has exactly the same buying criteria. Look around you! How true do you believe this is? Does everyone in a particular age range, or at a particular stage of their life, or in the same company respond in a similar way to the same offer?

Demographic information on its own does not define a marketing proposition, it does not define the product or service required, or the promotional stance to take.

Demographics play a role in segmentation, but that role is not to 'define' segments. The role it 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.

Segmentation by geography

The geographic approach assumes that customers found within a particular geographic area can be targeted with the same offer. So, everyone down your street buys the same items do they? Everyone in the northern regions of your country (as individual consumers or as businesses) has the same buying criteria, or responds to only one type of message?

Once again, this approach on its own does not define a marketing proposition, it does not 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 customers found in particular segments.

Segmentation by channel

Please select whether you are looking at this as a company which is a distribution channel or as a company that sells through distribution channels.

As a distribution channel

There are three issues to consider here:

  1. By solely looking at the different channels and specific companies used there is a danger that you may be overlooking what in particular is attracting the customer to one as opposed to another. Understanding the particular features customers use to discriminate between competing channels will help you do this.
  2. However, in choosing between competing channels and their associated features, customers make their decision based on which channel best satisfies their needs. Segmentation cannot, therefore, be left at the feature level, it has to be taken one step further. This additional step is to understand what it is that the customer is really trying to achieve from the particular features they choose. The expression, 'don't sell the features; sell the benefits' captures this essential extra step.
  3. It also should not be forgotten that the particular channel customers choose to use and the specific company they elect to buy from is only one aspect of a purchase. For whatever product or service line(s) you sell, ensuring there is a match between the specific items you stock and the type of customers your company attracts will be crucial to the success of your business.

The type of distribution channel you elect to be is your attempt to ensure the company wins profitable customer business, both now and in the future. The specific features on which customers focus when selecting between alternative channels provides a crucial input into segmentation but in a supportive role rather than a determining role. These preferences are best used to help identify the real selection criteria of customers (see customer needs). Channels can, however, play an additional role in segmentation when specific segments can be associated with particular routes to market as the channels they use will provide further help in identifying how to reach them.

Through distribution channels

The particular channel customers choose to use, and the specific company they elect to buy from, is only one aspect of a purchase. Even customers for whom channel is the deciding factor will still, in most instances, have to make a choice between the alternative offers available through their preferred channel.

A segmentation project solely focused on distribution channels would therefore overlook the other key buying criteria customers used when deciding between one offer and another. Strategies developed solely around channels would therefore be unsuccessful.

This does not mean that the issue of channel can be ignored when it plays only a minor role in a segment's buying criteria: there is a limit to how much inconvenience customers will subject themselves to in order to obtain their preferred product or service. Understanding the criteria used by the different channels and the companies within them when they select which specific products or services they will offer is clearly crucial. A separate segmentation project designed to understand their selection criteria is therefore essential.

Unless, of course, your product or service is so heavily in demand that for a channel not to offer it would be suicide!

When distribution channels play a key role in the purchase behaviour of customers and therefore have to be included in your segmentation project, it is important to bear in mind the following two points:

  1. By solely looking at the different channels and specific companies used there is a danger that you may be overlooking what in particular is attracting the customer to one as opposed to another. Understanding the particular features customers use to discriminate between competing channels will help you do this.
  2. However, in choosing between competing channels and their associated features, customers make their decision based on which channel best satisfies their needs. Segmentation cannot, therefore, be left at the feature level, it has to be taken one step further. This additional step is to understand what it is that the customer is really trying to achieve from the particular features they choose. The expression, 'don't sell the features; sell the benefits' captures this essential extra step.

The distribution channels used (and the products/services produced) are a company's attempt to ensure they win profitable customer business, both now and in the future. Channel and product/service preferences provide a crucial input into segmentation but in a supportive role rather than a determining role. These preferences are best used to help identify the real buying criteria of customers (see customer needs). Channels can, however, play an additional role in segmentation when specific segments can be associated with particular routes to market as the channels they use will provide further help in identifying how to reach them.

Segmentation by psychographics

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.

A review of the alternative approaches used in market segmentation can be found in Chapter 1 of Market Segmentation: How to do it and how to profit from it (2012 edition published by John Wiley & Sons, ISBN 978-1-1184-3267-9).