The buying behavior of customers will vary by segment, such as the elderly, the affluent, where people live, and so forth. If you want to understand how to compete, then you should understand the purchasing processes – who is buying what from whom? You can start your analysis with various customer segments and then test each hypothesis to see if this segment is buying the product or service. This type of analysis, referred to as customer segmentation analysis, helps the organization focus on those segments that provide the greatest growth. Customer segmentation analysis identifies and profiles promising target customers so that you can reach them with optimal marketing mixes.
All consumer markets contain many subgroups of customers and prospects who behave differently, have different hopes, fears and aspirations, and have different purchasing behaviors. Segmentation enables a company to craft individual marketing plans that hit the “hot buttons” of each consumer group. Segmentation is the practice of dividing consumers into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits. The goal of segmenting customers is to decide how to relate to customers in each segment in order to maximize the value of each customer to the business. Armed with a better understanding of their customer base, marketing managers can design targeted marketing and service campaigns to reach specific customer segments with offers that are suited to their needs and preferences. The goal of customer segmentation analysis is to identify groups in which the customers are as much alike as possible—and greatly differentiated from customers in other segments. If the customer segmentation system is well designed, members of a segment have similar interests, attitudes and behaviors, and they will respond similarly to elements of the marketing mix such as pricing, promotion and sales channel. Without this correct customer focus, the organization runs the risk of allocating resources to too many customer segments, leading to poor growth and lower profitability. Customer segmentation analysis is a cornerstone of market research.
Customer segmentation allows you to focus your scarce marketing resources and appeal to potential customers in ways that are most likely to get them to become loyal customers. Using customer segmentation, you can speak to the needs and interests of different groups; you can determine whether there is a product/service fit in high-opportunity segments; you can weigh whether product enhancements or new products might appeal to targeted groups. Marketing to specified customer segments doesn’t necessarily mean that you target one “best” segment and exclude others. It means that you know how each segment is likely to react to an offer, a price, a promotion or product enhancement, and with that knowledge you can craft a strategy that gets the best possible response from each segment. When conducting a customer segmentation analysis, you will potentially also be able to discover new segments, market niches and business opportunities, and new ways of positioning their products to different audiences. When having analyzed customer segments, you will therefore be able to tailor their marketing mix to specific customer needs and wants more directly, and thereby create a stronger presence within specific segments. This approach is often referred to as market positioning, in which companies are positioning themselves to satisfy the needs and wants of a homogeneous audience. Customer segments provide the building blocks for long-term growth and profits.
Certain critical questions lend themselves to Customer Segmentation Analysis:
- Which customer target groups are the most attractive based on the values we provide to the marketplace?
- Are we effectively reaching those targeted groups where we offer the most value?
- How profitable is our current customer base and should we alter the customer segment mix to improve our profitability?
- Do we have sufficient organizational capabilities going forward to meet the needs of our core customer segments?
Much of the analysis will center on definition of values – the values you provide your customers, such as innovative product features or meeting basic needs at low prices, as well as understanding the values your competitor’s provide. This is the baseline from which you segment customers. The trick is to match-up your values against different customer segments, identifying those segments that are the most profitable. Therefore, customer segmentation analysis can represent a critical tool for “profitable” strategic focus.
Since an understanding of customers is critical to customer segmentation analysis, a well-defined process should be in place for monitoring and tracking customers. It’s also useful to have a dynamic model in place for customer segmentation analysis. This helps you update your analysis as various factors change, such as changes in customer behavior, social trends, demographic shifts, etc.
Many companies will however not have the sufficient organizational resources to cater to all identified customer segments, and many companies will have to select one or few segments to attack. In this situation, companies could evaluate its core competencies, and analyze in which segments these competencies would be appreciated the most. By doing this, companies may create a much stronger presence within few selected target segments, and thereby potentially boost customer loyalty, brand recognition and profits generated in these selected customer segments.
- A New Framework for Customer Segmentation (Harvard Business Review)