Customer Segmentation, is the subdivision of a market into discrete customer groups that share similar characteristics. It also divides customers into groups based on the distinct underlying needs or characteristics driving their purchase decisions. Segmentation is a powerful marketing tool to identify unmet customer needs. Truly distinct customer segments respond to different value propositions & require different strategic approaches. Customer Segmentation is most effective when a company tailors offerings to segments that are the most profitable & serves them with distinct competitive advantages. This prioritization can help organizations develop marketing campaigns and pricing strategies to extract maximum value from both high- and low- profit customers.
Customer Segmentation also serves as fundamental basis for allocating resources to Product development, Marketing, Service, and Delivery programs. In other words, if strategy is the art of allocating scarce resources, then segmentation and the understanding it provides about your core customer groups-is part of the science informing that allocation.
How should segmentation be done?
Customer Segmentation requires managers to:
However, one should remember,
- Divide the market into meaningful and measurable segments according to customers' needs, their past behaviors or their demographic profiles.
- Determine the profit potential of each segment by analyzing the revenue and cost impacts of serving each segment.
- Target segments according to their profit potential and the company's ability to serve them in a proprietary way.
- Invest resources to tailor product, service, marketing, and distribution programs to match the needs of each target segment.
- Measure performance of each segment and adjust the segmentation approach over time as market conditions change decision making throughout the organization.
Customer segmentation divides customers into groups based only on those needs and factors actually driving purchase decisions. A common mistake is to segment customers based on peripheral characteristics that, while interesting, provide no help in achieving the fundamental goal of segmentation: selling more product/services more profitably.
- Segment only on what truly drives purchase behavior.
- Think profit, not revenues. That being said, improved profits (not just revenues) should be the goal of customer segmentation. A common pitfall of companies defining target segments is to focus on revenue potential instead of bottom-line profit potential. This myopic view can lead a company to go after the wrong customers, growing sales even as the bottom-line suffers.
Companies can use customer segmentation to,
|*Prioritize new product development efforts.
*Develop customized marketing programs.
*Choose specific product features.
|*Establish appropriate service options.
*Design an optimal distribution strategy.
*Determine appropriate product pricing.