Segmentation can provide the roadmap for short- and long-term success for a brand
The appeal of segmentation has a lot to do with efficiency. Marketers can’t be all things to all people, so they focus attention, strategy and resources on those things they can best deliver. Marketing spending can be targeted to the most attractive business opportunities, where the impact can be greatest. Segmentation gives an organization a way to concentrate its marketing activities, based on selected customers and particular brand positioning elements.
Segmentation can be especially useful for companies that have large potential customer bases and complex portfolios of brands. Segmentation helps sort out questions of who the ideal customer is and what will be offered when there is substantial internal overlap, cannibalization and competitive strategy.
Rapid changes in the marketing environment create direct challenges to long-held views on core ideas like segmentation. Digital technology fuels major changes in the marketing mix and in the nature of information to understand and track customers. A continuing stream of new ideas competes for the attention of marketers, advocates new strategies and practices and promises improved performance in market.
Segmentation has long been central to many marketers’ strategies, but does it still have the same relevance as it once did? What benefits accrue for marketing organizations that adopt segmentation? Is there an alternative?
Digital Marketing
Marketing that relies heavily on digital tools has the potential to engage with the consumer one-to-one. This promises very informed interactions with significant prior knowledge of who the customer is and continuing information on the customer response over time. A segment profile, which describes the typical segment member, is less critical to have when you can address the individual with a tailored message.
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In situations where marketing relies heavily or solely on broadcast media to address the market, the case for segmentation is more compelling. With broadcast media there is limited information about the individual consumer. The portrait of the consumer via the segment lens adds valuable detail, even if it only approximates what each individual is like, and acknowledges the natural variability within segments.
Overall spending by marketers is shifting sharply toward digital media and is now close to surpassing the long-time media-leading category, TV. If digital media can be targeted accurately to the right consumer, at the right time, with the right product, the need for higher-level segments diminishes.
However, there is still a question about benefit and message to deliver with this micro-level targeting. There are many highly targetable media available now, and often substantial behavioral and descriptive data on individual consumers. But are these tools being used to enable thematic consistency, brand strategy coherence and cross-portfolio management?
Increasingly targetable media should improve the direct marketing efficiency substantially over mass media that is informed by segmentation. But is it sufficient? If all individual targeted marketing initiatives are effective at achieving their individual goals, does it mean brand performance will advance?
If all the individual programs align to an overall strategy, the answer is likely yes. But in practice, individual programs are not always integrated into a holistic view of brand strategy. We often observe multiple messages that don’t all resonate with consumers, for example, or conflicting messages for acquisition versus retention. An integrated view of the market and response can provide a platform to set goals and measure success. It’s especially important or markets that deploy substantial non-digital media.
Competing Ideas
Arguments against segmentation often come from other ideas about how to focus and organize marketing activities. Are there simpler or better ways to go to market that don’t involve the processes for creating and acting on segmentation?
In recent years, several ideas have been advocated as key drivers of business performance that don’t particularly require or depend on segmentation, such as brand penetration, path to purchase, customer lifetime value or usage occasion. Each of these has benefits and limitations.
Some argue that observed consumer behavior offers the keys to growth, often through law-like patterns. Brand penetration is viewed as the most important factor on which to focus marketing efforts. Making the product available tops the list for implementation. Segmentation is considered a distraction, or worse.
Path to purchase emphasizes the interplay of the touch points a consumer has with the brand, purchase opportunities and the relative importance of stages of the journey over others. Successful orchestration of the pathways is based on how consumers navigate the shopping process, not an understanding of the consumers’ needs for products and services.
Customer lifetime value is based on knowing (or estimating) purchase amounts, acquisition costs, retention rates and duration, along with financial metrics and assumptions, such as profit margins or cost of capital. It can produce its own segmentation (e.g., the top few consumer deciles that produce most of the profit for the brand), but doesn’t require deeper understanding of why consumers might or might not be profitable. Success is defined by investing resources optimally in the customers who provide the best returns.
When the moment of consumption differs from the moment of purchase, occasion-based marketing can provide a framework for growth. It’s especially useful in markets like beverages, restaurants, hospitality, travel and personal care where the choices people make vary from situation to situation. Location-based digital media open up new opportunities to intervene effectively in real time.
Segmentation Success
Companies often select elements of several of these alternative practices, along with segmentation. They don’t know what the best practices are, so they assemble the pieces that make sense for them. In this scenario, what can segmentation do to improve business performance? It can synthesize and simplify the complex set of competing ideas and approaches. For example, are there unique paths to purchase for different customer segments? How do you reconcile customer segmentation with different occasion behaviors that cross segment boundaries? If brand penetration is paramount, how do you take into account that some segments present greater growth opportunities than others?
Segmentation can create architecture for implementation, such as identifying media and sales channels that are most relevant for achieving business goals. Segmentation that is limited to a single channel is unlikely to work for most companies. It’s apparent in retail, for example, that the strategic rationale for being in online and bricks-and-mortar channels is still being worked out. Despite the fast growth of digital media, it’s apparent that TV continues to play a significant role in concert with other media.
Segmentation can be a motivator for an organization to act in ways that improve the long-term health of brands. It can provide a roadmap for how the corporation will achieve short-term results across its portfolio of customers and brands, as well as how it will pursue long-term market development.
Gordon Wyner is research director at the Marketing Science Institute.