Segmentation – what, how and why

People Pie
photo: Arthimedes/Shutterstock

Want to segment your customers but not sure where to start? This insight introduces three main forms of segmentation and explores the advantages of a ‘multi-dimensional’ segmentation driven by behavioral data.

What is segmentation?

Customer segmentation is the sub-division of a market or customers into discrete groups that share similar characteristics.

Why should I do it?

Breaking customers down into manageable chunks or segments makes it easier to set objectives and strategy.  Rather than thinking about needing to generate another 10,000 visits or attendances, you can start to think about generating 500 or 1,000 from each group. Segmenting your customers also means you can offer different, relevant products and messages for different groups.

What approaches are there?

There are three main forms of segmentation:

  • Demographic (e.g. grouping on the basis of age, income, etc.) where data is mostly derived and purchased from outside sources.
  • Attitudinal (e.g. grouping together people who are seeking intellectual stimulation or relaxation) – usually derived from primary research, but often inferred from other data or from modelling based on research samples.
  • Behavioral (e.g. grouping together people who behave in similar ways in terms of what they do or buy).

Demographic market segmentations are ultimately drawn from census data.  Commercial profiling companies such as Experian supplement the census information with other data from multiple sources (usually of varying levels of comprehensiveness).  Note that, for many characteristics, even census source data is itself only sampled.  This is not to denigrate the power and value of these tools, but we need to understand that we are not working with data that can be 100% accurate in respect of every household or individual.  In practice, a range of variables is being used to identify the residents of a zip code or postcode as having potentially similar characteristics, especially household income, type of household, age, and life stage as a particular ‘type’.  This ‘type’ is projected onto each household address in that zip code or postcode.

Attitudinal segmentation can be very rich, allowing you to assess things like willingness to take risks and as such can be very powerful in helping to develop and promote products.  However, it is very difficult to use for targeting, or to relate directly to behaviors (for example for monitoring and evaluation) because even a very strong primary research response will generate information on only a proportion of customers.

Going multi-dimensional

We believe that a ‘multi-dimensional’ approach to segmentation that involves all three approaches is the most effective.  This means you can exploit demographic information (to understand the potential market beyond your existing customers) and learn from research into attitudes.  At root, though, a segmentation must include information on customers’ behavior in relation to your organization.  Yankelovich & Meer were pioneers of psychographic profiling in the 1960s, but believe that much that passes for market segmentation these days is a ‘wasteful diversion’ because it doesn’t focus on actual customer behavior: “To be valid, a segmentation must identify groups that matter to a company’s financial performance” (Harvard Business Review, February 2006).

In other words, your segmentation must be rooted in what people are buying or might buy if it is to have an impact on your sales or admissions (and therefore your income). This means that behavioral data (which can be enriched with demographics, attitudinal data, or other relevant information) must drive your segmentation as it is the only way to understand the value of your segments and what they buy.

Behavioral Segmentation has four further advantages:

  • It is rooted in your programme and your customers so you can base your segmentation on behaviours which are most appropriate for your organization rather than superimposing a ‘one-size-fits-all’ model.
  • Basing your segmentation on customer data, rather than survey findings, means you include everyone on the database.
  • Behavioral segments can be updated every time an attender makes another visit.
  • Behavioral segmentation allows you to set objectives for strategy, implement that strategy directly and measure and evaluate the results.

Of course, each organization’s marketing activity and affiliation programs in effect create segments which form the vital first element of behavioral segmentation – are they a member / donor / subscriber?  Ideally, however, you might customize a segmentation to understand a customer’s entire behavior in relation to your organization, in the same way as that customer understands it as a whole: what have they attended / bought / given, but also when, via what channel, how often, in what party size, at what price, with what discount, in what combinations, etc.

This approach also means that the purchase behaviors which characterize each segment readily translate to sales objectives (e.g. the objective for customers returning each season, but attending infrequently, may be to increase their frequency of attendance) and to tactics (e.g. frequently attending ‘bargain hunters’ may suggest the need for a discount program that focuses demand on unsold inventory).