CRM in Action

What is Market Segmentation?

Market segmentation is the process of splitting customers, or potential customers, within a market into different groups within which customers have the same or similar requirements satisfied by a distinct marketing mix (4Ps). In simple terms, customers often have different needs and wants so you divide them into groups to better serve them. In general, marketing segmentation should be used at any time you suspect there are significant, measureable differences in your market. However, you may be wondering why this exercise of breaking up your customer base into different groups is an important one? In my opinion, there are five good reasons to do that.

1. Demassification: The Mass Market Has Disappeared

Still remember how you bought coffee in the 1980s at a local coffee shop? The choice was simple at that time; the choice was between a regular coffee or decaf followed by the cup size, and that's it. If one wanted something more sophisticated, a cup of cappuccino or espresso could be ordered. There was no need to think too much when ordering because most coffee shops served coffee virtually the same way, as if everybody had the same needs. The way to achieve business success in the old days focused on a few concepts, such as centralization (to control quality), standardization (to ensure the same user experience), mass marketing (advertise to everybody), and mass production (to drive down the production cost). Even if companies were willing to adapt, incremental adjustment could be realized with no major changes.

As you might have noticed already, the business world has moved away from treating everybody in a similar manner to making customers feel personal, as if everybody has his or her own needs. A visit to a nearby Starbucks may drive home the point when one can hear somebody ordering something like....."Can I get a Tall extra hot soy with extra foam, split shot with a half squirt of sugar-free vanilla and a half squirt of sugar-free cinnamon, a half packet of sweetener, and put that in a Grande cup and fill up the "room" with extra whipped cream with chocolate sauce drizzled on top?"

This might be a little bit exaggerated but the fact is that the barista is willing to customize your coffee order to make you happy. In fact, many coffee chains are turning this customization ability into their competitive advantage to better differentiate themselves from others.

As futurist Alvin Toffler once predicted in his best seller "The Third Wave", the products and services that we buy will get more personalized, customized and demassified. The "One-size fits all" approach to do business is gone. Take the Hilton hotel chain for example; it has evolved into 10 different brands to serve people with different needs. It has designed hotels for people who prefer contemporary design with a luxury touch (Conrad), people who need a kitchen (Homewood Suites), people who need an extended stay (Home2), and has even created a separated brand for value conscious traveler (Hampton). The list goes on and on.... Perhaps the one that I like the most is the DoubleTree hotel as it serves fresh baked cookies when you check in!

2. Save Money through Better Targeting of Your Customers

There are some other good reasons why you should implement market segmentation. In my opinion, segmentation makes marketing easier. A company can better target them by grouping customers who share similar needs and background together, you can better target them. Canada is a multi-cultural society and the one-size-fit-all approach may not be suitable. For example, in trying to target the Korean community in Toronto, instead of dropping direct mail pieces in all FSAs (forward-sorting areas) through Canada Post, the company can fine-tune its mailing list to target the Bloor/Bathurst and Yonge/Finch areas where the Koreans mostly reside.

3. Explore Untapped Business Opportunities

Secondly, by going through the market segmentation exercise, niche markets may be discovered and targeted. These may be underserved or even unserved markets that have specific needs. For example, CIBC forms a dedicated team to provide Aboriginal banking service to groups such as First Nations, Inuit, and Metis. The bank is doing that because it recognizes the unique banking needs of the aboriginal community.

4. Make Your Marketing Activities Relevant

The third good reason to divide customers into groups is to make the marketing process more efficient and relevant. Thinking of giving out free hockey tickets to new customers who buy your product? That may not be a good idea because not everybody in Canada likes to watch the Maple Leafs although it is a popular sport in this country. Through proper market segmentation, you can avoid sending the wrong marketing message or incentive to your customers.

5. Improve Profitability for Your Business

Finally and perhaps most importantly, companies use segmentation to improve their profitability. Major wireless such as Bell, Rogers, and TELUS also own discount brands namely Virgin Mobile and Solo, Fido and Chat-r, and Koodo respectively. These tier-2 brands are highly profitable because most of the network costs have already been absorbed by the primary brand. The use of subbrand helps to improve the network utilization overall for better ROI for the wireless companies. To ensure that cannibalization (loss of revenue owing to customers downgrading and using the cheaper service) does not happen, the selection of handset and rate plans is rather limited as compared to the primary brand.