TECHNICAL | FLBS

Six degrees of segmentation

Sue Brear
The first of two articles on how customer segmentation can help business to target their most profitable clients

he pace of product and service innovation, and the speed with which competitors respond, means there has never been a greater need for organisations to use effective segmentation. Consumer behaviour has become more sophisticated, and customers want to be treated as valued individuals. Customer profiling uses statistical data on the population to provide comprehensive information to help companies gain a better understanding of the needs of their current and potential new customers. Segmentation divides the market into groups of customers (potential or existing) who may have the same or similar requirements satisfied by separate products or marketing mixes. Studies can be designed to collect information on: l consumer behaviour factors that generally influence peoples buying habits (to be more effective, behavioural data may be combined with an understanding of consumer attitudes and motivations); l demographics the way in which population characteristics (for example, age, sex, social class, level of income and employment status) influence demand; l Geodemographics. Data is broken down by geographical area. This can be by region or country, but is more typically done by postcode. The information obtained from these studies enables a company to develop segmentation information and to identify which groups of consumers have the most potential to use its products and services. This allows the organisation both to focus on the segments that best fit the customer profile and to avoid customers with less buying potential. They can then create more effective marketing campaigns, tar22 CIMA Insider May 2002

geting people who are most likely to buy their products. Even if a company has the resources to serve all segments of a given market, it should always question whether it wants to meet the needs of certain customer groups. Unless it is a not-for-profit organisation, it

has a duty to shareholders to target those customers who add most value to profits. For example, firms in the financial sector may want to target wealthy clients who are interested in high-yield investment accounts, annuities and stocks and shares, rather than low-income families. Electrical

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goods manufacturers and small restaurants, on the other hand, may wish to target urban consumers in small flats, who are likely to buy electrical gadgets and who will often eat out or buy take-aways. The main objective of segmentation is to win and retain the customer groups that contribute most to your profits. Businesses need to measure each customers strategic value so they can predict their future buying potential. They can then plan their strategic direction and effectively allocate marketing efforts across these segments. This is exactly the route followed by organisations such as Abbey National and Direct Line when they develop strategies for internet products. A market segment needs to be: l homogeneous customers who share a common set of characteristics or needs that the companys products and services can fulfil; l significant sufficiently large to warrant specific market development; l measurable having discrete and measurable characteristics compared with other customer groups; l accessible capable of being reached in a cost-effective way; l sustainable market segments should be stable and profitable. Any segmentation strategy should provide long-term direction to the business. The organisation needs to be structured to support this strategy if it is to work well. But there are limitations. Although such a strategy provides a valuable insight into how to win a customers business, it does not help the company to reach the target customers and understand what motivates them to buy products and services. And it wont increase a companys market share. Customers are not interested in how an organisation segments its markets. When choosing between competing offers, they select the one that best meets their requirements. An organisation must ensure that what it offers is the best at meeting consumer needs and is seen as being the most attractive, in terms of, for example, cost or convenience. Segmentation is underpinned by R&D. An organisation will not succeed simply by refining elements of its marketing mix, focusing on customers who provide the highest volume of sales, or by changing elements of the sales process. If it disregards all of its less frequent customers, it could lose high-value clients who place fewer orders but who, when they do, make more valuable orders than people in other segments.

Segmentation in brief Organisations need to segment markets for a variety of reasons: l to reflect differences in consumers tastes and lifestyle requirements; l to ensure efficiency; l to gain a competitive position; l to identify gaps in the market. Organisations can use comprehensive information from statistical studies of the population. These are available from sources including Social Trends, the General Household Survey, and leisure and tourism consultancy reports. These studies help organisations to gain a better grasp of consumer requirements, particularly current and potential new customers. Studies may be designed to collect information on: l Consumer purchasing behaviours the factors that generally influence peoples buying habits. l Demographics significant characteristics such as age, sex, marital status, occupation, economic position, education and home. l Geodemographics demographic data broken down by geographical area (typically at postcode level). Geodemographics tend to perform better than those based only on behavioural information. Consumers generally live where they do because of their age, household and socio-economic circumstances. These factors influence their buying habits. l In formulating a strategy, an organisation requires comprehensive information on the customer for instance, spending behaviour and industry-specific data such as customer target analysis and demographic reports. l To design an effective segmentation strategy, an organisation has to ask customers what they need from it. l The segmentation process needs continuous updating and improvement, which requires wide participation throughout the organisation.

When designing a segmentation strategy an organisation must ensure that it understands its customers needs marketing initiatives based on inadequate research are unlikely to succeed. For example, a pizza chain that opened a restaurant in the Caribbean failed because it did not account for the tastes of the local community consumers preferred local fish delicacies. Supermarkets have been quick to recognised the need to understand customer behaviour. The introduction of loyalty cards led to the realisation that they could also be used to capture information on the products bought by particular types of customers. Even mass marketers who do not have products that can profitably be marketed directly to consumers can benefit from customer purchasing information. Despite the internet revolution, the main distribution channel is still the shop. So actual purchase data enables firms to match distribution and local promotion efforts to the characteristics of consumers in each area. Key questions for organisations are: l how do you identify all your current clients; l what are their buying behaviours? Many firms discover that they dont hold enough customer data to develop meaningful segments, or they find that the way it has been retained makes data analysis and

therefore decision-making too difficult, which means that they have to conduct supplementary research. In order to gain truly useful information, they require industryspecific marketing applications for example, customer profiling segmentation, customer target analysis and demographic reports. They also need comprehensive information on consumer spending, buying potential and lifestyles. Management accountants can play a key role in providing this type of information. Once it has been set up, the segmentation process needs continuous development, not only to acquire new customer data, but also to revise and recalculate the data as the segmentation strategies start to influence customers buying behaviour. The development of an effective segmentation approach depends on wide participation, combining a range of skills and processes across the organisation including that of the management accountant. The closing article in this series will consider the role the management accountant can play to ensure a successful customer segmentation strategy. n Sue Brear is a lecturer at Leeds Metropolitan University and a CIMA exam marker May 2002 CIMA Insider 23