Segmentation is the process of slicing a market for a particular product or service into a number of different segments. The segments are usually based on factors such as demographics, beliefs or the occasion of use of the product. One segment of the market for video cameras, for instance, might be the group of people who have new-born babies. Another could be the group of people visiting relatives who live abroad.
In their book “Breakthrough Imperatives”, Mark Gottfredson and Steven Schaubert say:
"The goal of customer segmentation analysis is to identify the most attractive segments of a company’s customer base (existing or potential) by comparing the segments’ size, growth and profitability."
The idea of segmentation has spread beyond its consumer origins. Human-resources departments now talk about segmenting their “customers”—that is, the different groups of employees within their own organisation. In a bank, for example, three such segments might be retail bank tellers, investment bank advisers and money-market traders.
Once different segments of a market have been identified, suppliers to that market can target their advertising and promotional efforts more accurately and more profitably. Different segments can be reached through the most appropriate channel: parents of new-borns through ante-natal clinics, for instance, and foreign travellers through airlines’ websites.
Each market segment represents a group of potential customers with common characteristics. In consumer markets, segmentation is usually based on the following:
• Demographic factors. Gender, age, family size, and so on.
• Geography. In most countries there are marked differences in the consumer preferences of different regions. The consumption of wine in the north of England, for example, is very different from that in the south.
• Social factors. One classic segmentation is by income and occupation, but this is proving to be less and less useful. There are a lot of extremely wealthy people who do not spend much, and vice versa. So the focus is shifting to lifestyle. In recent years, marketers have become more interested in categorising consumers as “generation Xers” or “the millennial generation” rather than by the size of their bank accounts. Consumers are thought to have more in common with people from the same generation than with any other grouping.
Industrial markets have been notoriously more difficult to segment than consumer markets. Firms find it hard to decide which factors are most useful for categorising their corporate clients. Should it be size, industry sector, or geography? Computer-maker Hewlett-Packard segmented its big industrial customers into five categories based on the value of their purchases and the complexity of their IT systems.
Segmentation was in part a reaction against the mass-marketing tactics sparked off by Henry Ford when he said that customers could buy his Model T car “in any colour as long as it’s black”. Many of its classifications, however, have proved to be of little use. Baby boomers have been found to have little more in common than their defining characteristic: a birthdate in the years following the second world war. John Forsyth, a consultant, wrote in McKinsey Quarterly in 1999:
Unfortunately, easy cases permitting marketers to establish meaningful differences among groups of customers and then to identify them—a phenomenon we call “actionable segmentation”— are rare.
The internet promises to provide new opportunities for segmentation. It offers continuous opportunities to capture information about customer behaviour. Consumers identify themselves and their characteristics by their electronic participation in particular interest groups, and by their general online behaviour.