Segmentation: Part 2: Who is the customer?

Welcome back – see my last blog for the definition of Segmentation:

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!

2 Comments

  1. Ben Waugh September 25, 2011 at 07:20

    I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.

    Reply
    1. Paul September 25, 2011 at 07:26

      Thanks Ben – glad you enjoyed it. I also like what you have created – congrats!

      Reply

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