Factfile 9
What is segmentation?
Definition: Market Segmentation
The process of splitting customers, or potential customers, within a market into different groups, or segments, within which customers have the same or similar requirements satisfied by a distinct marketing mix.
Malcolm McDonald and Ian Dunbar, www.MarketSegmentation.co.uk
Segmentation has existed as a marketing concept since the 1950s, and practised long before then, but has often been seen as a purely consumer marketing technique. In fact, nothing could be farther from the truth, as the case examples by The Market Segmentation Company, the Fifield Organisation, British Telecom, Unisys and British Airways illustrate.
Segmentation is the subdivision of a market into groups of customers who are alike in some important way and can be addressed with a distinct marketing mix. The term customer is used to refer to whomever it is you need to sell to.
The objective of segmentation is to win and retain profitable customers.
Figure 2: Approaches to targeting the market
Source: M2B Canon, 2002.
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In practical terms it means finding a cost effective balance between treating the whole marketplace as one, undifferentiated, mass of customers and treating/serving each customer individually.
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Properly identified, market segmentation allows organisations to create and deliver a manageable number of different offers which make customers feel they are being treated more like individuals.
Why segment?
You have to segment because quite simply all customers are not the same - the mass market is dead and, as Levitt (Harvard) said, if you are not talking segments, you are not talking markets. Segmentation in twenty-first century b2b marketing is not an optional extra it is an essential competitive tool.
Except for the remaining regulated markets, competition is increasing everywhere and, apart from price wars that ultimately only one organisation can win, successful competition must be achieved through differentiation and customer focus. Without segmentation, neither differentiation nor customer focus is possible.
What approach to segmentation should I take?
The bases for segmentation are many and various and these are summarised in the figure below.
Figure 3: Bases for segmentation
Source: Bonoma and Shapiro, 1983.
Companies that choose to segment their market using generally observable factors find these approaches simple and easy to adopt. And often, this approach is adopted by organisations labouring under the misguided belief that they operate in a commodity market (where differentiation is impossible and only price matters).
At the other end of the spectrum, are the companies that develop a detailed understanding of the criteria their customers use to choose between competing offers.
Adopting such an approach means that you can then look at what each segment is looking for, how good you are at delivering it (competitively) and whether this will produce the profits you require, with profitability measured by customer as opposed to product/service.
Segmentation by customer need may be more difficult than a commodity market approach but ? when implemented successfully ? it is far more rewarding, both for the customers and for the company itself.
Very simply, it comes down to a choice between adopting a convenient method of classifying customers, for administrative purposes, or determining how to win and retain profitable customers.