Key remaining elements of the segmentation process

With the scope of the project clearly defined (project parameters — Step 1 in the process) and the individuals identified for whom it is essential you understand their buying criteria (market mapping — Step 2 in the process), uncovering the segments can now begin.

The key remaining elements of the process are outlined below:

  1. Establish a sample of customers which will represent the different decision-makers found in the specified market (referred to as 'micro-segments'), with the difference between them being the key features they use to discriminate between competing offers and the importance of these features (Step 3 in the process).
  2. Record personal details about the decision-makers (including their company details if appropriate) which can be used to identify them (also part of Step 3 in the process).
  3. Understand the real needs of customers and list the benefits they are seeking, along with the importance of these benefits, for each micro-segment (Step 4 in the process).
  4. Bring together those micro-segments that illustrate similar patterns of importance for the benefits in order to form clusters (Step 5 in the process).
  5. Verify that the concluding clusters can be regarded as segments (also part of Step 5 in the process).

    A diagrammatic summary of the process to this point can be found in the Process Examples section of this website.

    With the segments uncovered it is time to identify which of them you should be targeting:

  6. Establish the attractiveness of each segment to your company based on how well each of them meets your requirements (Step 6 in the process).
  7. Determine the relative competitive strength of your company for each segment based on how well you, compared with your competitors, meet their requirements (Step 7 in the process).

By combining segment attractiveness and relative company competitiveness you can construct a strategic picture of the specified market. This will help you select the segments that will enable your company to achieve its corporate objectives.

Further details

Additional information about each of these key elements appears below. Full details can be found in Chapters 6 through to 10 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). Techniques that can be applied to each step, worked examples, exercises and worksheets can be found in the relevant chapter.

  1. Establish a sample of customers which will represent the different decision-makers found in the specified market (referred to as 'micro-segments'), with the difference between them being the key features they use to discriminate between competing offers and the importance of these features (Step 3 in the process).

    This can be achieved as follows:

    Divide the specified market into identifiable groups of customers and, taking each group in turn, develop it into a micro-segment by carefully listing what the customers in the group regard as their key features for discriminating between competing offers (referred to as ‘Key Discriminating Features’ — KDFs). When meaningful differences are known to occur within a group, capture these differences as separate micro-segments.

    NB. It is not appropriate to include ‘price’ at this stage of the process. Price is better covered in the next step of the process.

    Identifying key discriminating features from the customer's point of view will provide the link to understanding the needs that customers are trying to satisfy (looked at in Step 4 and used as the basis for forming segments in Step 5). This is because customers seek out specific features not for their own sake but for the particular benefits that they deliver.

    It is all based on the well established principle that customers don't buy features, they buy the benefits delivered by the features. For this sequence to be successful, however, you need to think of features as consisting of both the tangible and intangible components of an offer.

    Now indicate the relative importance of the key discriminating features to each micro-segment and when further meaningful differences are known to occur within a micro-segment, develop additional micro-segments to accommodate them.

    An alternative to the above can be to list the customers found in your market (only suitable for markets with a small number of total customers).

    A further alternative is to obtain a sample through a market research exercise using a carefully designed sample frame (though this is best deferred until an internal segmentation project has developed a view of how the market splits into segments).

    In many in-company workshops, participants have been surprised at how much they know about their markets when this stage has been conducted rigorously.

    As best as possible, attribute a size to each micro-segment (volume, value or percentage) which reflects how much of the specified market each micro-segment represents. Please note that it is better to be approximately right than precisely wrong.

  2. Record personal details about the decision-makers (including their company details if appropriate) which can be used to identify them (also part of Step 3 in the process).

    For each completed micro-segment, add some details about who it represents using applicable profiling characteristics. As these may not apply to every customer in the micro-segment, indicate the proportion each characteristic represents.

    Knowing how to identify and reach the members of each concluding segment will be a crucial element to the success of a segmented approach to marketing. The standard categories for profiling customers are:

    • demographic/firmographic;
    • geographic;
    • geodemographic;
    • psychographic.

    ('Firmographics' is often used to describe 'demographics' in business-to-business markets.)

    Also note the outlet and channel preferences of each micro-segment. This may be how you reach specific segments.

  3. Understand the real needs of customers and list the benefits they are seeking, along with the importance of these benefits, for each micro-segment (Step 4 in the process).

    Help for this step can be obtained by talking with a cross-section of people within the organization who have customer contact and by referring to sales (and lost sales) reports and appropriate past market surveys. Do not forget, however, that the project is looking at the specified market as a whole, not just your customers.

    Benefits are identified by taking each micro-segment in turn and determining the needs that are being satisfied by its key discriminating features (KDFs) both individually and as a ‘package’ (refer to point 1 for key discriminating features). These are the buying criteria that customers regard as being decisive when choosing between alternative offers (and are referred to as ‘Decisive Buying Criteria’ — DBCs).

    Price is included as a decisive buying criteria for every micro-segment.

    WARNING: 'Price' on its own is rarely the real reason for a particular purchase: what it may be is the final decider between two competing offers that match each other in all other respects (with the lower priced offer providing better value for money).

    Now indicate the relative importance of the decisive buying criteria to each micro-segment and when meaningful differences are known to occur within a micro-segment, develop additional micro-segments to accommodate them.

  4. Bring together those micro-segments that illustrate similar patterns of importance for the benefits in order to form clusters (Step 5 in the process).

    Depending on the number of micro-segments you are working with, this may be possible to execute manually. The simplest approach is to represent the importance levels for each segment’s decisive buying criteria (DBCs) in a way which enables you to look for matching patterns across the micro-segments, such as by using stars 'star’ (refer to point 3 for decisive buying criteria). It is also possible to form clusters mathematically which requires importance levels to be indicated numerically.

    Once the clusters have been formed the information associated with each cluster’s micro-segments (size, decisive buying criteria importance levels and profiling characteristics) should be consolidated.

  5. Verify that the concluding clusters can be regarded as segments (also part of Step 5 in the process).

    The three most important questions are:

    (a) Is each cluster large enough to justify the development and marketing of a specific offer?

    (b) Is the offer required by each cluster sufficiently different from that required by the other clusters?

    (c) Can you identify which customers are to be found in each cluster so that you can target them with their appropriate offer?

    If the answer to all three questions is 'yes', then the clusters can be regarded as segments.

    ‘Market segment’ definition

    A market segment consists of a group of customers within a market who share a similar level of interest in the same, or comparable, set of needs.

    It is also important to check your own company’s ability to focus on the new segments, structurally and in its information and decision-making systems.

  6. Establish the attractiveness of each segment to your company based on how well each of them meets your requirements (Step 6 in the process).

    Here you list the factors that are important to your company when having to decide where it should focus its resources, along with their relative importance to each other. Each segment is then assessed against these factors in terms of how well it can met your requirements and by taking the relative importance of these factors into account an attractiveness score is determined.

    The results are then transposed onto the vertical axis of a portfolio matrix as this is a useful tool for constructing a strategic picture of your market (an example appears in point 7).

  7. Determine the relative competitive strength of your company for each segment based on how well you, compared with your competitors, meet their requirements (Step 7 in the process).

    The ability of your company to deliver against the buying criteria of each segment is assessed from the segment ’s perspective and by taking the relative importance of these criteria into account a competitiveness score is determined. This is also determined for each of your main competitors.

    A relative competitiveness score for your company is then calculated for each segment by comparing your competitiveness score with the highest score of the competitors.

    The results are then transposed onto the horizontal axis of the portfolio matrix containing the segment attractiveness scores and the points of intersection for each segment are identified on the matrix. A circle can then be drawn at each intersection to represent the size of the segment it relates to. An example containing two segments appears below.

example matrix

Note: Although ‘high’ is positioned on the left of the horizontal axis it can, if you prefer, be placed on the right.

It is now possible to redraw the portfolio matrix based on different assumptions about your performance and that of your competitors.

Software

Software is available for constructing a portfolio matrix. If you would like to know more about this software package and order your copy please register your interest.