Wednesday, March 16, 2016

Re-Evaluating Market Segmentation

By Manuel Dieguez

Digital & IT Business Partner

Back in 1956, noted marketer Wendell R. Smith described market segmentation as a “rational and more precise adjustment of product and marketing effort to consumer or user requirements.”  Since then, market segmentation has helped to reduce market complexity by dividing each large, heterogenous market into smaller markets composed of distinct groups of buyers with homogenous needs, characteristics or behaviors.

Companies can increase their responsiveness to elements of the marketing mix by being more precise in identifying unmet customer needs for each market segment. Most of these segments are usually defined by:

  • Geography, which consists of dividing a market into different geographical units, such as nations, states, regions, cities or neighborhoods.
  • Demography, which consists of dividing a market into groups based on demographic variables such as age, sex, income, occupation, education, religion, race and nationality.
  • Culture and psychology, which consists of dividing a market into different groups based on social class, lifestyle or personality characteristics.
  • Behavior, which consists of dividing a market into groups based on consumer knowledge, attitude, use or response to a product.
In addition to these categories, we could add an internal segmentation based upon “customer potential.” For example, variables that did not increase marketing efficacy (it didn’t help us to better understand customers’ needs and requirements) but it did help us to prioritize company resources and increase marketing efficiency.

Digital changes everything…or doesn’t it?

Yet, despite the importance of good market segmentation, many companies still struggle to adapt their strategies to the digital world, continuing to use geographic, demographic, psychographic and behavioral market segmentation approaches based on past data, behavioral assumptions and small sample sizes. One frequently sees them struggling to fit their customers into pre-defined, segmented classifications that are no longer relevant or that, in reality, do not exist.

For these companies, the good news is that most of the traditional segments may still apply, although segmentations based on geography or customer potential are losing significance. The bad news is that they will have to radically change how and when these segments are defined and how they evolve.

So, how do current marketing trends affect market segmentation techniques? Let’s look at the impact of the key trends of 2016:

  1. Content Marketing. Content is still king, but the royal family is more diverse than ever. Instruments like content curation, content co-creation, social media marketing, SEO and SEM, signal that customers are not the passive content consumers that they used to be. They will search for their own sources of content, assess the value and compare it with the content from your competitors. They may also promote, criticize and even modify or create your content.

    Segmentation impact: Your content and your content platforms are products of your company. Design your own marketing mix to effectively compete in the segments for which they have been created, while giving the customer the ability to tailor their own content experience and choose freely: Don’t fence your customers into one “content segment”.

  2. Big Data. What can we do with all the rich data obtained from customer interactions and their behaviors? With traditional behavioral segmentation, customers could be tagged based upon similar customers who had performed a specific behavior in the past. With digital tools and big data, modeling approaches can predict for each customer the likelihood of performing a behavior in the future. This shift will not only help you to better understand customer’s needs and their probable future actions, but will also increase the efficacy of your segmentation.

    Segmentation impact: Look for compelling segmentation models that integrate customer preferences, behaviors and needs, AND also predict future customer behaviors. Redefine and create new segments as the data evolves: Obtain insights to cluster your customers into segments based upon predicted behaviors.

  3. Marketing Automation. There are plenty of marketing tools out there to help you to more effectively market on multiple channels, and to automate repetitive tasks. They will help you to personalize your interactions and, in some cases, will tempt you to create micro-segments, or even unipersonal segments.

    Segmentation impact: Regardless of the level of your marketing efforts (mass marketing, segment marketing, niche marketing or micro marketing), your product, content or interaction should feel relevant and valuable to your customers. Remember that “relevance” is always more powerful than “personal”: Personalize, but don’t creep your customers out.

So, let’s go back to the beginning of marketing segmentation, 60 years ago, when  Wendell R. Smith published his seminal article. He would probably be surprised by the endurance of what he described as “a brief and temporary phenomenon.” And, most likely, he would be amazed by the possibilities that lie ahead.

Manuel Dieguez is an experienced leader in the technology and pharmaceutical industries. He has a Master’s degree in Telecommunications Engineering and a CIO Pocket MBA from Boston University School of Management. Throughout his career, he has led product and process transformations across multiple functions and geographies. He is passionate about digital transformation, digital marketing and behavioral influences, and is an avid follower of technology trends and their impact on society.

Manuel may be found on LinkedIn at and Twitter at @manueldieguez