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Cooking a Good Segmentation

  • October 01 2001, 1:00am EDT

Segmentation, like cooking, is an art. Every analyst, like every cook, has a different recipe. The quality of the result is in how well it satisfies. In this column, I will discuss three reasons why segmentation efforts often fail to satisfy.

The ultimate objective of market segmentation is to provide a framework for the organization to make more money. In order to fulfill this objective, a good segmentation must be understandable, relevant and actionable. Over the years, I have encountered many segmentation projects that failed because they did not adhere to these criteria.

A segmentation must first be understandable. All of the managers who use it must have some comprehension of how the segments were derived. Their level of understanding, however, does not require them to understand the mathematical underpinnings of the analysis. Rather, they have to accept what the mathematical routines did to achieve the results.

To be understandable to users of segmentation, the results must be expressed in everyday terms. Managers need to understand what characteristics of the buyers were examined, why those characteristics are important and generally how the method used separated one segment from another. Managers need to accept that the results of the segmentations make sense, not that they were derived with some esoteric methodology.

Segmentation methodologies can be very intimidating. Most people do not discuss k-means clustering, Kohenen neural networks, factor analysis or discriminant functions at dinner parties. These methods can produce excellent results. In reporting segmentations, many analysts take great effort to highlight the method used to justify the findings. They use jargon to make the findings credible. Because the managers don't understand the mathematical methods, there is skepticism regarding the results. Analysts should present their findings to a nontechnical audience before sharing the results with management to determine where there is a lack of understanding.

Another source of lack of understanding is too many segments. One case I encountered was a company that had spent millions of dollars dividing its market into 32 different segments. The managers were unable to understand the subtle differences between the segments and make use of them. In order to be understandable, there must be clear interpretations of the similarities of members within a segment and the distinct differences between segments.

Next, segmentations must be relevant. Several years ago, I encountered a client who had commissioned a study to determine types of people buying his product through banks. The analyst segmented people on the criteria of how they felt about their banks and buying banking products. Quite astonishingly, the research did not address the characteristics of the product itself. Needless to say, the study failed because it was not relevant.

Whether the segmentation is derived through some multivariate grouping of attributes or on the basis of a single measure, such as sales, the criteria has to be relevant to understanding who buys the product or service and why. Managers need to determine whether the criteria on which the segmentation is based are central to their understanding these issues.

Questions managers need to ask include whether there is sufficient data, the cleanliness of the data, the way it was analyzed and whether customers groups per this data make sense. All too often, the data used for the segmentation is best characterized as being available, rather than being relevant to the marketing problem at hand.

Finally, segmentation results should lead to action. One segmentation project I completed showed that the organization was only contacting one-third of its potential customers. Its salespeople had access to only that portion of the market. Direct marketing would have solved the problem by reaching the remainder of the market. However, this solution would have upset the sales force, hence no action was taken. Before segmenting a market, one should consider whether management is willing to take action on the results.

Effective market segmentation requires a long-term focus. Management must use the segmentation information to identify the most profitable groups to target. The question that managers must ask is whether or not the organization can stick to the plan long enough to make the segmentation strategy produce good results. When segmentation is used in direct marketing, initial responses may not be as fruitful as management desires. Only by honing messages, repeating mailings to specific segments and assessing response patterns can the segmentation strategy be made successful.

One should also be wary of the majority fallacy. Very few marketers, even those who favor niche strategies, like to go after smaller segments. Most people want to target the largest segments. There are several reasons why this strategy can fail. First of all, the larger segments attract the most competition. Secondly, smaller segments may have more distinct needs that can be satisfied very profitably. Thirdly, targeting larger segments costs more and those costs may reduce margins more drastically than targeting smaller segments.

In many ways, segmentation, like cooking, is an art. Satisfying management requires an understanding by analysts of not only what's in the recipe, but also how it is served.

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