A Primer into Segmentation

Segmentation has always fascinated me. There is actually a school of thought that proposes that we should de-segment markets (more of that when I discuss Value Innovation and Blue Ocean Strategy in another section). Here is the problem as I see it. I was in a restaurant in Scottsdale, Arizona last year. It was a fondue restaurant and a real nice set up. As I walked in I had a big smile on my face as I was taken by the ambience and the decor. But then the menu was presented, and I was taken aback by the huge selection of entrees, followed by the very vast selection of cheese fondue. Choice is one thing but it was the most complicated menu I had ever seen and we ended up expending an excessive amount of time just ordering our meal. It was my opinion that the restaurant had overdone their segmentation to the point that the excessive choice was providing me very little incremental value. What is more I couldn't help asking myself how the kitchen could manage such a large selection yet still maintain consistent quality.

But segmentation, if done properly, allows organisations to better target their offerings to those that most need them. All organisations work with finite resources - money, people and time. What is more, rather than a 'hit and miss' approach to marketing, it seems logical to identify those prospective customers that are more likely to adopt your goods and services and possess needs that your goods and services are designed to satisfy. In a nutshell that is what segmentation is about and it is the recognition that it is the way marketers cluster customer's differences – which is the key to successful marketing.
Successful segmentation sits between marketing to the masses and one-to-one marketing to an individual and the key to a selected segment should be that it should have a sufficient potential size to justify the time and effort involved in marketing to it.

Examples of how companies segment in the B2B world include macro and micro segmentation. Macro segmentation involves segmenting the market by factors such as company size, SIC code and the purchasing situation (i.e. new task, modified re-buy or straight re-buy) whilst examples of micro segmentation are buyer decision criteria (quality, price, after sales service etc), perceived importance to the organisation's business and the structure of the decision making process.

Clearly macro based segmentation alone offers only a broad overview of likely candidates and the micro based factors allow you to refine your ‘attach to’ segments. But there is a tradeoff in terms of the cost and time to measure and test for these factors.

In essence segmentation is an important undertaking for marketers and the right approach for one company will differ for another. I favor the nested approach to segmentation where one moves from the outer nest to the more detailed inner nest as below:

1. Demographics: industry, company size, customer location
2. Operating variables: company technology, product/brand use status, customer capabilities
3. Purchasing approaches: purchasing function, power structure, buyer-seller relationships, purchasing policies, purchasing criteria
4. Situational factors: urgency of order, product application, size of order
5. Buyers’ personal characteristics: character, approach
   

As you move from 1 to 5 you are further refining your segmentation but the costs associated with gathering even more refined insight becomes more costly. The point here is to identify the correct collection of characteristics that make sense to your organisation, that can be measured and the collection of which, provide you with segments of adequate size that you can measure and market to profitably.