Marketers have long studied consumers' relationships with brands, with the goal of understanding the intersection of personal motivations, purchasing behaviors, needs and wants, and lifestyle characteristics. The most successful brands use this information to leverage opportunities that will better serve their customers and ultimately grow their businesses.
Market segmentation is an approach that divides a broad target audience into smaller, more specific, and manageable groups based on similar characteristics. By dissecting the broader market, businesses gain invaluable insights into the unique needs, preferences, and purchasing behavior of different sub-segments. This allows for improved targeting efficiency, sharper communication strategies in advertising, and the assurance that a brand better meets the needs of a diverse audience of consumers within a product category. Market segmentation also allows businesses to craft personalized marketing strategies that speak directly to the desires and pain points of different consumer segments.
Segments can be delineated by various factors, the simplest of which includes demographics such as age, gender, and geography. These have proven insufficient modes of segmentation on their own, considering the complexity of consumer choices of brands. More sophisticated approaches may include any combination of lifestyle characteristics, personal values and interests, and category attitudes, as well as product purchasing behavior.
Market segmentation fosters a deeper understanding of customers by recognizing their diverse needs and preferences. By tailoring products, services, and marketing efforts to specific segments, businesses can relate more effectively with their customers and identify underserved niche markets (or unmet needs) within specific segments. This insight often informs product development initiatives, enabling companies to create offerings that align more closely with the preferences of their target audience.
Whether through targeted advertising, tailored messaging, or specialized promotions, businesses can optimize their marketing efforts for maximum impact. Differentiation is key, and market segmentation empowers businesses to carve out a unique position in the market by catering to what competitors may overlook. By delivering specialized solutions and experiences, companies can establish a stronghold and cultivate customer loyalty.
Market segmentation also allows companies to allocate resources more efficiently by focusing their efforts on segments with the highest potential for return on investment. By prioritizing high-value segments and de-emphasizing low-value consumers, businesses can optimize their resource allocation and maximize profitability.
The successful implementation of a marketing segmentation exercise requires careful planning and execution. There are many statistical approaches to creating a segmentation, and each one has benefits and shortcomings. Our approach utilizes a two-step clustering methodology, combining Hierarchical with K-Means clustering for the most stable solution that can be recreated. Individuals within any segment are by design similar to each other, while the segments themselves are as differentiated from each other as possible.
We believe the most meaningful approach to creating market segments uses category attitudes and lifestyle characteristics in conjunction with category spending and future purchase consideration. Using these carefully selected survey measures, Hierarchical clustering is performed on small to medium sized data sets (or random sub-samples of a large dataset) to develop a matrix of Euclidean distances that defines the boundaries between segments, called “cluster centers”. K-means clustering is a procedure that places respondents into the single segment where they most closely align on these key measures. The classification of each successive respondent re-calculates the “cluster centers,” and the process continues until all respondents are categorized.
The best segments arise from data that is rich in variation across all measures. Respondents who “flatline”, or whose responses offer little variation across the key measures, tend to group together into an uninteresting (“flat”) segment. We employ data reduction methodologies to combine correlated items into more stable multi-item factors and then use those factors as inputs to the process. And unless measures are taken during data collection that flag and terminate lazy respondents, we recommend excluding some respondents from the analysis, as they bring very little additional value to this party!
The simple answer is that there are many solutions that may work, but we work with our clients to create the best one that meets their needs. These are some questions that sometimes help us to evaluate one solution against another and choose a favorite (and final!) mode of segmentation.
You may have some questions of your own to help you choose a solution that works best for you!
Market segmentation is a widely accepted practical tool that empowers businesses to uncover opportunities and drive sustainable growth. By understanding the diverse needs and preferences of different segments within a target audience, companies can tailor their offerings and marketing strategies for maximum impact.
At IntelliSurvey, we have over two decades of experience with market segmentation exercises. For more information on how we can apply our statistical rigor to your next study, please contact us today.