What is Segmentation

In the past, companies such as Sears or Coca-Cola, when asked who their customer is, would answer “Everybody.” But a marketer can rarely satisfy everyone in a market. Not everyone will like the same camera, car, cafeteria, or concert. Therefore, marketers must start by dividing up the market.

Companies that moved away from mass market thinking started by identifying large market segments. Procter & Gamble, in selling its Duncan Hines cake mix, would define the target market as “married women between the ages of 35 and 50 with families.” Later companies moved from large segments to narrower niches. Estée Lauder might design a product for “black American professional women between the ages of 25 and 35.” Finally, some companies have moved to the ultimate segmentation scheme, segments of one, namely individual customers.

Today more companies are guilty of undersegmentation than oversegmentation. They imagine more high-potential prospects for their offerings than really exist. The antidote is to divide the market into several levels of potential. The first level consists of those customers who would be the most responsive to the offering. This group should be profiled in terms of their demographic and psychographic characteristics. Then a secondary group and a tertiary group should be defined. The company should then focus its initial selling on its primary prospects; if they don’t respond, the company either has mis-segmented or its offering is of little interest.

Segments can be identified in three ways. The traditional approach is to divide the market into demographic groups, such as “women between the ages of 35 and 50.” This has the advantage of ease of reaching this group. Its disadvantage is that there is no reason to believe that women in this group have similar needs or readiness to buy. Demographic segmentation is more about identifying a population sector than a population segment.

The second approach is to segment the market into need groups, such as “women who want to save time in shopping for food.” This is a clear need that can be met by a number of solutions, such as a supermarket taking telephone orders or Web orders that would be delivered to the home. The hope would be to identify demographic or psychographic characteristics of such women, such as being more highly educated or having a higher income.

The third approach is to segment the market by behavior groups, such as “women who order their food from Peapod and other home delivery groups.” This group is defined by their actual behavior, not just needs, and the analyst can then search for common characteristics that they may have.

Once you identify a distinct segment, the question is whether it should be managed within the existing organization or deserves to be set up as a separate business. In the latter case, Nirmalya Kumar calls it a strategic segment. For example, food companies such as Kraft and Unilever focus primarily on their retail sales and only secondarily on food service systems. But food service requires different quantities, packages, and selling systems. It is a strategic segment and should be run independently of the food retailing group and manage its own strategy and requirements.

Article added at: 11.13.2006 by Emanuel Julo