The psychographic profiling that passes for market segmentation these days is a mostly wasteful diversion from its original and true purpose—discovering customers whose behavior can be changed or whose needs are not being met.
Rediscovering Market Segmentation
by Daniel Yankelovich and David Meer
Included with this full-text Harvard Business Review article: 1 Article SummaryThe Idea in Brief—the core idea The Idea in Practice—putting the idea to work 2 Rediscovering Market Segmentation 12 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications
Rediscovering Market Segmentation
The Idea in Brief
Fifty-nine percent of recently surveyed companies executed a majormarketsegmentation initiative in the previous two years. Yet only 14% derived real value from the exercise. What’s wrong with market segmentation? Segmentation typically focuses on consumer “types” (High-Tech Harry, Joe Six-Pack). This categorization may help advertisers strengthen brand identity by developing messages that speak to different consumer groups. But it doesn’t tell companies which productsor services consumers might actually buy, so it can’t help firms decide which new offerings to develop. To get more from segmentation, Yankelovich and Meer suggest several tactics. For example, tailor your segmentation to a strategic decision. (Do you want to reduce customer defections? Extend a brand?) Define segments based on consumers’ actual purchasing behavior (heaviness of use, brandswitching) and their likely behavior. And redefine segments as market conditions change. Apply such tactics, and you respond promptly to rapidly shifting market realities. You gain insight into how to compete. And you extract maximum value from scarce marketing resources.
The Idea in Practice
To segment markets effectively, apply these tactics: • Identify a strategic decision that would benefit frominformation about different customer segments. For instance, a fastfood company is considering developing healthier menu alternatives. A personalcare company wants to extend a soap brand into deodorants. • Determine which customers drive profits. Understand what makes your best customers so profitable, then identify segments that share at least some of those characteristics. Example: A luggagecompany finds that many people who buy its highest-margin carry-on bags are international flyers. It thus identifies international travelers as a promising target segment. • Analyze actual and potential purchasing behavior. Current behaviors (including heaviness of use, brand switching, and channel selection) can help you predict future behaviors using a statistical technique called conjointanalysis. Through such analysis, you present consumers with combinations of product features and ask them how willing they’d be to purchase the product in question if particular attributes were added or removed, or if the price changed. You then segment based on your findings. Example: A pet food manufacturer used conjoint analysis to determine which features to include on food packaging (such as aresealable opening and a handle on 25-pound bags). It segmented consumers according to their degree of price sensitivity and desire for convenience. It then redesigned its packaging with added features that would maintain existing customers and attract new ones. And it jettisoned features whose cost would have required charging too high an overall price. • Segment in ways that make sense to seniormanagement. Resist any urge to flaunt your technical virtuosity by dissecting segments into ever finer slices containing improbable combinations of traits. Instead, define segments in ways that make intuitive sense to senior managers. They’ll be more likely to accept your research and to fund resulting initiatives. • Revise your segmentation as market conditions change. Unlike personality traits,...