Def: Identify and selectively target prime groups of customers and potential customers, to understand their preferences and to respond with different marketing strategies that are appropriate for each chosen segment.

Case: Market sizing and segmentation

You are the new CEO of Kool Concept, a new residential real estate developer, a greenfield project in the heart of Cluj, Romania. You can basically build whatever you want however you must address potential demand and meet revenue and KPIs (Key Performance Indicators). To be successful your residential concept also needs to incorporate other elements to attract residential owners: Offices, large employers, schools, retail, professionals, fitness centres, public transport etc.

The research company you hired came up with an extensive research and analysis on the addressable market in Cluj:

–     You know that there is an annual demand in the city of Cluj to build approximately 14.000 housing units annually.

–     Very few people live in houses currently, but there is high demand for single-family residences. Nearly 35% of those who intend to purchase a residential property would like to purchase a house.

Residential market segmentation

Income is the most critical predictor of ability to pay for say, high-end housing. You assumed the target market for housing in the Kool Concept development is concentrated in the segment >1.100 EUR/ month net income. In Cluj county, there are currently 7.800 households meeting this definition. Ten years from now this is expected to rise to over 20.000.

The research company combined income and social class with other factors to create a more complex, needs-based segmentation to help illustrate demand. This analysis delivered the following five segments:

• “Young Rich Kids”: Both young and successful entrepreneurs or children of wealthy parents who are studying in Cluj.
• “High potential students”: Students or recent graduates who have an above average level of interest in real estate and improving their living conditions
• “First Time Home Buyers”: Young adults in their mid-20s or early 30s, they have generally started their first home with a partner. Many have young children,  socially and physically active, have cars, are online and sophisticated consumers:
• “Happy families”: Middle-aged families in their 40s, married with older children at home or who have begun to move out of the house. Significant household equity, 80% of those want to buy a house, but only half intend to get a mortgage. Less active than younger segments, fewer tendencies to go out.
• “Empty nesters”: Older couples in their 50s/60s whose children have moved out, accumulated wealth and want to buy a place to enjoy their twilight years. Currently own a place, typically larger, with 3 – 5 rooms. They do not go out to bars and restaurants but enjoy culture, sports matches, having friends over, etc: 
• “Foreign expatriates”: Upper managers of current and future investors in Cluj will be present in the city for 2 – 4 years and will demand the highest quality housing.
• “Repatriate Romanians”: Roughly 2.5m Romanians have left the country since 1990. You estimated this could total 3.000 – 5.000 individuals over the next decade.

So what?

Now that your research generated what is called “Primary” data – data that has been researched and paid for (whereas “secondary” data is what you find in reports or the web, usually free), you now know that there are different categories or “segments” of customers to address and target.

Then what?

Once you have done the research and identified the clusters, the next task is to target the right product/message with the best media – this is called  „hunting with a telescopic sight “  vs. using the shot gun approach.

At my last employer ( Romtelecom) once we knew our segments, we targeted them with laser precision by offering them a product which we instinctively knew they would buy.

Results:

My direct mail (DM) campaign gave me a 12% success rate ( unheard of in the business) versus the usual  2-3% success rate.

Why were we succesful?

1)   We shocked  the segment since they had never received an offer from Romtelecom.

2)   They were targeted –almost a perfect fit  with the new product (hint:  I could see their consumption behavior based on their current usage).

3)   Our media or advertising campaign was incredibly cheap. Instead of using TV, radio or print, we used envelopes, stamps/courier service and a few follow up calls from the call centre.

All this because we did a bit of research, grouped customers with cool descriptors called segments, made a few assumptions and tested a different approach.

Ta Dah!! There lie the benefits of Segmentation!

Now I also need to admit that our product was indeed what they wanted.  How did we know that?

Well because all that research that we had commissioned in the first phase indicated to me what they were interested in buying. All we had to do was to “action” the research with a real campaign.

Q. Cost of Segmentation research.

A. Approx. 60K Euros. Regardless of company size (big or small) the process is the same and so are the results.

If your business is small then you need to use www research (web). The people in your team are critical. Any good Research Analyst will understand Segmentation even if they have never really prepared one. This was the case with my team – we learned from each other.

 This segmentation discussion was more in line with the classical approach which stands the test of time.  I would need another article to explain newer approaches to getting primary data through “permission based” or “inbound” marketing”   techniques in order to gather info about segments.

On a closing note, when Jim Hubley our CEO first told me “Paul…Set up segmentation for us” I said  “of course Jim “  walking away and not having a clue how to do this.

After a few months building the team, setting the direction, getting buy-in as well as convincing top management the merits of Segmentation we were able to deliver a 12% sales rate on our Direct mail campaign!

So as you can see it took time but it was an investment in people, processes and getting a better understanding of customer segments which enabled us to become more strategic in our approach.

It paid off…Happy hunting!

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1)   Marketers that need to be reminded…

2)   Non-marketers who want to challenge (read,  not criticize – that’s too easy) their Marketing peers.

I usually try to convince new EMBA students to be as excited of Marketing as I am.  I don’t always succeed. When I do convince them to ‘listen up”, they soon understand how to ask their Marketing peers the right questions. Segmentation is one of these areas:

First to understand segmentation, whenever I am asked to speak in public I am very inquisitive with the host organization, drilling them to know more about the audience. Why am I so persistent?

If I don’t know the audience, I cannot customize my message and “I will lose them”.

If you are selling your products/ services (let’s call it “product” moving forward) by using a “shot gun” approach and you’ve been successful…great.  However over time unless you have a meticulous understanding of your customers you will “lose them” too.

The most fundamental question for any marketer is:  Who is my customer?

If you know this, then you are doing fine. In fact the more you know this and the more you know about who is NOT your customer the better you stand a chance of identifying new sources of revenues.

Segmentation is the buzz word when it comes to understanding current customers and new ones. It would take a few chapters to explain all the relevant aspects of segmentation but let’s see if I can summarize this fascinating aspect of marketing in a few posts.

Definition: The aim of Segmentation is to identify and selectively target prime groups of customers and potential customers, to understand their preferences and to respond with different marketing strategies that are appropriate for each chosen segment.

Any form of segmentation requires a lot of analysis such as:

Ø Evaluation of external data/trends:  Economic, competitive, market dynamics, sizing/opportunity, etc.

Ø Evaluation of  internal data/trends: sales, repeat purchases, churn, retention, loyalty factors,

Ø Understanding what drives the customer experience with sales, product, and customer care which translates into the value propositions.

The importance of segmentation results from the fact that buyers of products are not a homogenous group. Actually, every buyer has individual needs, preferences, resources and behaviors. Since it is virtually impossible to cater for every customer’s individual characteristics, companies group customers to market segments by variables they have in common. These common characteristics allow developing a standardized marketing mix for all customers in this segment.

Ok… so how do you group them?

There are least 5 common ways to group your customer by segments after you’ve done your research:

1)   Geographic segmentation,

2)   Demographic segmentation (Age, gender, income, generation, social class).

3)   Category -based segmentation

4)   Needs based segmentation

5)   Psychographic or lifestyle-based segmentation

Geographical is self explanatory; Demographic segmentation is used mostly by retailers and banks: Psychographic segmentation (more common method in business these days) divides buyers into different groups on the basis of Values and Lifestyle (VAL). Factors that describe individual lifestyles are:

1)   Activities

2)   Interests

3)   Opinions

People buy things based on their needs but they are influenced by a variety of factors. Psychographic segmentation identifies those reasons and groups these particular customers in clusters which indicate the propensity to buy/not buy your product, or to influence other clusters to buy /not buy.

Seems pretty simple right… But how do you get there?

You can try to establish these clusters on your own but you would need a strong, analytical research team to embark on this exercise, or you would need to work with a research firm to help you indentify these clusters while your team maintains the lead on fine tuning the results. Third alternative; you could use a consulting firm that manages the research, identifies the clusters and provides you with a roadmap to drive revenues.

In my next post we’ll use an example.

In the meantime don’t forget: If you are not crystal clear on who exactly are your customers then you need to do something fast – find out in my next post.

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