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Market Segmentations That Matter
(Marketing Memo, December, 2006)

How do you segment your market for effective target marketing? Forming segments around demographic (age and region) and psychographic factors ("values, tastes, and preferences)" is useful for developing branding, positioning, and advertising in consumer markets. However, it is not useful for predicting purchases in particular product categories. What determines purchases is how different buyers relate to products and product categories, claim D. Yankelovich and D. Meer ("Rediscovering Market Segmentation," Harvard Business Review, 2/06, p. 124). Understanding how buyers relate to products is critical in b2b marketing.

Segmentation Helps Identify the "Underserved, the Dissatisfied," and "New Purchasers"

When seeking to identify segments that are "interested, "susceptible," and potentially "lucrative," consider your company's overarching strategy and its most important strategic challenges. Use qualitative and quantitative research to uncover attitudes that are conducive to buying. Find out what buyers are doing, and analyze sales data. Then, use laboratory simulations and field studies to anticipate responses to new products or untested features.

To develop meaningful market segment, first seek patterns in buying behavior:
--- Which features and benefits are important to your customers?
--- Which customers will pay higher prices or insist on lower prices?
--- What do customers regard as the chief advantages/disadvantages of your products/services?
--- Which "social, economic, and technological trends" are affecting usage and buying behavior?

Segmentation schemes must fit your purpose. Make sure that:

--- You have limited the schemes to one or two issues and have not tried to apply the schemes to other products or for other purposes.
--- You have identified what different groups of customers are actually doing.
--- You have identified the most profitable customers and found new customers who are similar.
--- Your segmentation scheme reflects how you do business.
--- Your senior management accepts the segmentation and understands the underlying reasoning.
---< You can adapt your segmentation when market conditions changes.

Segmentation Schemes Should Reflect the Significance of the Decision

Yankelovich and Meer recommend that you tailor your segmentation scheme to reflect the importance of the transaction or the decision that is involved. Determine where your decision is on a decision spectrum, and segment accordingly:

--- "Shallow decisions"-should you make minor product improvements or change pricing?
--- "Middle of the spectrum decisions"-should you develop a new product?

Deep end of the spectrum decisions-should you cut costs by substituting a 401K plan for your pension plan? A segmentation exercise that involves "deep end" decisions may expose a conflict between "core values" and "market values." You must address this conflict.

The goal of a segmentation scheme is to gain a better understanding of your customers. A segmentation scheme is not an end in and of itself.

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