Big Marketing Industry Problem #1: How San Diego leaders are addressing the issue
The American Marketing Association has identified “Seven Big Problems in the Marketing Industry” to provide critical context to the challenges all marketers face. The first major problem is “Effectively Targeting High Value Sources of Growth.”
In a nutshell, identifying the highest value sources of growth for your brand, product or service has been proven time and again to be a foundational issue in marketing. Focusing on the wrong target, or one that does not offer greatest value to the organization, negatively impacts growth and return on investment potential. The common solution to this is referred to as “segmentation;” however, the hot new term for this is “demand landscape mapping.”
In this article in our Seven Big Problems in Marketing Series, we outline the solutions to this first big problem articulated by leaders during the 2017 State of Marketing Report – The San Diego Perspective, which will be available for download in August 2017. We also review best practices to address this sticky issue as these can have a huge impact on the value marketers create for business.
What Is Segmentation?
Segmentation is an extremely powerful tool as it allows marketers to identify and target different customer groups based on their value to the company as well as their needs, attitudes, opinions and behaviors. Customer segmentation can be a huge competitive advantage. Rather than using a “one size fits all” approach to marketing, segments are targeted in ways that are likely to be most salient to each segment. Additionally, companies tend to focus on the higher value segments.
There are two primary forms of segmentation:
- Segmentation of the entire market (e.g. all adults in the U.S. over 18 who drink alcoholic beverages)
- Segmentation of the existing customer base (e.g. only those in the U.S. over 18 who drink our brand of alcoholic beverage).
Segmentation is both a science (e.g. multivariate statistical modeling) and an art (e.g. finessing based on in-depth knowledge of the brand) that involves using different variables, often in combination, to divide the “pie” of customers into pie slices. Each slice has specific characteristics that define them.
Segmentation can be as simple as dividing the customer base into male customers and female customers. It can also be as complex as using many different variables such as demographics, psychographics, behaviors, attitudes, opinions, needs, consumption and geography along with multivariate statistical modeling to separate the customer base.
Solutions Employed by San Diego Marketing Leaders
Participants in the 2017 State of Marketing Report – The San Diego Perspective clearly understand and value the overarching benefits of segmentation. Most report using some form of segmentation; however, only some are using sophisticated multivariate approaches. Both B2C and B2B businesses use segmentation.
Univariate or bivariate segmentation of a database is utilized more often than multivariate segmentation primarily due to perceived cost to conduct a multivariate segmentation study or the relative ease of use of univariate or bivariate segmentation. Univariate means that just one variable such as age group is used to segment the market. Bivariate means that only two variables such as zip code and income are being analyzed. Multivariate means that more than two variables are being examined.
Typically, when univariate and bivariate segmentation approaches are employed they are based on selecting customers from an in-house database or Customer Relationship Management (CRM) system. Marketing leaders using multivariate approaches typically outsource the market segmentation to a research organization that specializes in segmentation. Qualitative research, quantitative research and multivariate statistical modeling are typically involved when building a customized segmentation for the brand. Multivariate segmentation involves not only splitting consumers into different segments but also understanding how the different segments and characteristics interact.
Size of the organization does not seem to influence use of segmentation: some smaller organizations are using sophisticated segmentation and some larger organizations are using simplified univariate and bivariate segmentation, and vice versa.
Segmentation Best Practice
While there is no single way to do segmentation, here are some best practice considerations when segmenting:
First Things First
- Determine how the organization will use the segmentation before you embark on a segmentation exercise as this will have implications for what you do and how you do it.
- Decide whether you should be segmenting a market (e.g. all adults in the U.S. over 18 who drink alcoholic beverages) or the existing customer base (e.g. only those in the U.S. who drink our brand of alcoholic beverage). This decision will be closely tied to how your brand intends to use the segmentation.
- Consider starting with qualitative research to identify segmentation variables and begin to hypothesize what the segmentation scheme might be like.
- Use a customized segmentation approach for your brand. Do not use a “canned” approach to your segmentation. A “canned” approach would include using a standardized survey questionnaire that has been used for other brands.
- Engage the internal audience at the beginning of a multivariate segmentation project to maximize ownership and use of the segmentation.
- Given that the end goal of segmentation is increasing profitability, ensure that there is a predefined scoring system in place to identify the most valuable segments. This would typically entail identifying consumption and business rules and measures.
- Segment using data from existing customers as this will provide a clear indication of what characteristics to look for in potential new customers.
Recognize That Segmentation is Both a Science and an Art
- Understand that you can employ intuition (non-analytic methods), your databases, and/or science (analytic methods) to develop your segmentation and that there are large differentials in cost as well as the level of sophistication of the segmentation solution depending on what decision you make.
- Never settle for just one segmentation solution. A minimum of three solutions (e.g. a four segment solution, a five segmentation solution, and six segment solution) should be requested. And it may even be necessary to come up with additional solutions until the optimal solution is identified.
- Use both art and science in the development of your segmentation. Science is introduced in the way a survey questionnaire is designed and the manner in which the data is analyzed. Art is introduced when deciding which segmentation variables to employ and which segmentation solution to use.
- Ensure that the segmentation solution has:
- No overlap between segments
- Clearly defined addressable targets for each segment
- Clear marketing strategy and tactics possibilities for each segment
- Segments that are cost effective and easy to reach
- Database scoring accuracy
Identifying the Best Segmentation Solution for Your Brand
Regardless of the segmentation solution employed, engage internal experts in the organization to determine if the segmentation makes intuitive sense. If the segmentation does not make intuitive sense, it will not be used.
Deploying the Segmentation
- Consider developing personas for each of the segments in your segmentation solution as this will make it easier for everyone in your organization to internalize and recognize members of each segment.
- Segmentation is the first step of a twofold process. It is how segmentation is used that will generate results. For segmentation to be worth the investment, companies must focus on personalizing the communication to each segment, or to high value segments only, and build a relationship with each.
Thinking Long Term
Refresh the brand’s segmentation every three to five years.
EFFECTIVELY TARGETING HIGH VALUE SOURCES of GROWTH
Segmentation is the best means of identifying high value sources of growth. While there are many ways to segment (non-analytic/intuitive, univariate, bivariate and multivariate), multivariate statistical modeling with a predefined scoring system in place to identify the most valuable segments is most sophisticated. The statistical modeling may be preceded by qualitative research to identify segmentation variables and begin to hypothesize the segments.
All this said, any kind of segmentation is better than a shotgun approach to marketing, targeting as large a population as possible, which in the long run is costly and ineffective for most brands.
Other articles on segmentation from Q2 Insights:
2017 State of Marketing Report – The San Diego Perspective and seven big problems in marketing article series
In late August 2017 AMA San Diego will be making the 2017 State of Marketing Report – The San Diego Perspective available to the marketing community. The study includes inspirational marketing strategy and tactics, trends in marketing, and rich insights from 38 marketing leaders representing 32 San Diego organizations. Q2 Insights is publishing a series of eight articles on the “Seven Big Problems in the Marketing Series” in response to the AMA’s Intellectual Agenda as well as the 2017 State of Marketing Report – The San Diego Perspective.
Q2 Insights, Inc. in partnership with FreshForm Interactive, Inc., designed, implemented and reported on the 2017 State of Marketing Report – The San Diego Perspective.
Marketing is changing. The mindset of your customer is changing. The most successful companies understand and embrace change.
Today’s marketing leader must be more agile, data-focused, and customer-obsessed than ever before. We spoke to CMOs, VPs, and Director-level marketers from a variety of B2B and B2C businesses to learn how this shift in marketing is impacting San Diego.
Our 2017 State of Marketing Report – The San Diego Perspective is available now at no cost!
Kirsty Nunez is the President and Chief Research Strategist at Q2 Insights, Inc., a research and innovation consulting firm with offices in San Diego and New Orleans. She can be reached at (760) 230-2950 ext. 1 or firstname.lastname@example.org.