Companies segment their markets to improve their competitiveness and profitability in fundamental ways:
By focusing product development, marketing, and service resources on segments with the most potential, companies literally can multiply their marketing and service efficiency.
By developing products, services, and marketing messages that address those segments’ specific needs, they can greatly improve their share of the most desirable business. At the same time, by focusing on the needs of the most desirable customers, companies can improve retention of those customers.
Very often, companies shape their market segmentation using the results of market research and analysis. Market segmentation research is not designed to shape the market. Rather, it reveals underlying divisions in the market and characteristics of the market segments that can be used for effective and profitable marketing.
At the very least, segmentation research places the steps companies take on a firm factual foundation. Often, it also uncovers characteristics of the market that are not obvious and identifies ways of dividing and approaching the market that will be particularly effective. If these ways are not evident to competitors, the marketing impact of segmentation research can be even more beneficial.
At a more tactical level, market segmentation can make the choices a company faces in developing products, services, and marketing messages easier. Often, market segmentation shows that many conceivable combinations of interest in product features, combinations of service needs, or combinations of attitudes are actually very rare in the marketplace. As a result, there is no need for the company to be prepared to deal with these combinations.
What makes a segmentation analysis valuable? Market segmentation research includes more “art” (although no less "science") than other types of market research. This is the case because analysis often turns up two or more different sets of segments, that is two or more different ways of dividing the market. For example, one analysis might subdivide a segment; another might not recognize that division.
In these circumstances, what counts is a segmentation scheme that the firm can implement to create real marketing advantages. Which scheme is best depends not just on which provides the best description of the market, but also on the company’s strengths and marketing goals:
For example, a company that is relatively large in its market might view a segment constituting 10% of the market as too small to serve as the foundation for a marketing strategy, no matter how desirable that segment is. A smaller firm in the same market, however, might see pursuit of the same segment as an exceptionally fruitful strategy.
Thus, the best segmentation analysis is the one that is most useful.
Deciding what Data Inputs to Use: Prior to carrying out a segmentation study, a firm should carefully consider what data inputs to use to ensure that the different segments identified can be targeted for actual marketing. If segments cannot be targeted, the most descriptive segmentation scheme may not be very useful.
SOM: In our segmentation projects, we have used a neural network based method that allows a computer to “learn” the structure of the market. The specific type of network used is called a "Self-Organizing Map" or SOM. SOMs have important advantages over other more traditional segmentation techniques:
SOMs show how many segments naturally exist in the market and how they are related to one another, rather than requiring the analyst to make assumptions about how many segments there are.
In our experience, the segments SOMs identify often are more distinct than those identified by cluster analysis, the most common type of segmentation analysis. We have seen this difference in studies where we used both techniques to analyze the same data.
The following brief case studies illustrate some uses our clients have made of market segmentation research using SOMs. Of course, findings are disguised where necessary to protect the proprietary interests of our clients.
To read the rest of this article and have access to the entire TRC white paper library, please click here.