Why Customer Segmentation Tastes Great and Pays Off
As a devout fan of micro brewed beers, I can’t imagine a world filled with only Budweiser and Coors Light. Likewise, I might not be a coffee drinker if I only had the option of a light roast loaded with cream and sugar. A Southerner at heart, the tastes of the great Northwest have rubbed off on me.
These are just two examples which illustrate segmentation at work in consumer markets. Even if you don’t know what the term means, you have taken part in its influence on products and services over the years.
So what is segmentation?
A simple definition of segmentation is the process of grouping people together according to similar interests, attributes and behaviors. This allows companies to tailor products, services and marketing campaigns to please your palate…or senses…or communication style. Without segmentation, you’d be relegated to very little differentiation and choice. (Think Budweiser, Folgers coffee, cheese pizza and vanilla ice-cream). Not only does this one-size-fits-all approach often miss the mark, it can cost a lot, too.
The other extreme is a one-to-one approach that Amazon has famously mastered. While it is wonderful to get recommendations on how to spend more of your hard-earned dollars with the online giant, this approach can be daunting (and expensive) for most companies. Especially those who offer products and services in the offline world. That’s one reason why there’s not a different flavor of beer for every consumer of legal drinking age.
Segmentation helps bridge the gap to help make customization more affordable and feasible. Organizing the universe of people into four to six groups, organizations can better meet the needs and preferences of customers and prospects while also using internal resources more efficiently.
That’s my unscientific definition anyway.
When I taught marketing at Seattle University, I shared my view of segmentation through an academic lens. We taught four major variables for segmenting consumer markets. These are:
· Geographic (e.g., country, country region, city, density, climate)
· Demographic (age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, nationality)
· Psychographic (social class, lifestyle, personality)
· Behavioral (occasions, benefits, user status, usage rate, loyalty status, readiness state, attitude)
But who remembers textbook explanations? Let’s talk examples.
Behavioral segmentation
Back in 1892 , Dr. John Pemberton created a beverage known as Coca-Cola, a fountain drink sold as an alternative to alcohol during prohibition (and a cure for many diseases, including morphine addiction, indigestion, nerve disorders, headaches and impotence). Fast forward almost 100 years, the company introduced Diet Coke to satisfy calorie conscious individuals. Since that time, a wide variety of line extensions have been developed to attract varied tastes, such as Diet Coke with Lemon, Diet Vanilla Coke, Diet Cherry Coke, Diet Coke with Lime, Diet Coke with Splenda and Coke Zero.
How does the Coca-Cola Company satisfy consumers who don’t like soft drinks? They acquire other popular beverage brands like Fanta, Sprite, Dasani, vitaminwater, Powerade, Minute Maid, Simply, Del Valle, Georgia and Gold Peak.
At the end of the day, the company has methodically examined the behaviors of consumers and knows how to entice them to try and keep buying their beverages.
Psychographic segmentation
Lululemon embodies the notion of lifestyle brands, in my opinion (and according to my pocketbook). With an affluent demographic in mind, the company launched a business around technical athletic apparal designed for yoga. The website states their vision to create a community hub where people can learn and discuss the physical aspects of healthy living, mindfulness and living a life of possibility.
This brand speaks to a certain social class about mindful living in a very powerful language. Then they back up the brand promise with stylish, high quality products.
Demographic segmentation
When Starwood launched W Hotels in 1998, the company created a luxury experience ideal for the 30-something business traveler. With moody music and a large open area to work, converse and have cocktails, the hotel is like a home away from home for a younger age group. By understanding this demographic and fine-tuning an experience to meet their desires, the concept worked. And still does.
Similarly, when Howard Schultz launched Starbucks in 1971, he identified what he termed “a third place” for consumers to relax, congregate and enjoy a cup of coffee. Then by mining the taste profiles of those who visited the retail chain, the company created a menu of beverages to keep those customers coming back for more. What may seem like a free-for-all of beverages (like a skinny venti double shot vanilla flavored latte) is a fine-tuned selection of products that will please most, if not all, who visit. This demographic segmentation allows the company to determine how many baristas are needed on the floor each day and what quantities of raw ingredients to purchase, making the most of internal resources. All while building a loyal fan base.
Geographic segmentation
Much to my chagrin, it’s rare to see a side of grits on the breakfast menu in Boise, Idaho. It’s the same reason Maine sells more lobster than Colorado. These are examples of geographic preferences and product availability. Some food products are a staple in the South because they are prepared with milk and butter and taste better (and in other areas, the name is changed to polenta so consumers get the allure of sophistication in eating ground corn). Some food products are meant to be savored in local markets where they are plentiful and fresh (whether steamed, boiled or served as a luscious lobster role).
Geographic segmentation isn’t limited to grits and lobster. An online retailer like Backcountry.com, selling premium outdoor gear and clothing, heavies up advertising in areas of the country where people ski — or on digital mediums servicing the skiing industry. For example, they’d be more likely to place display ads on Liftopia.com than Surf.com. Or serve up ads when a someone searches for Vail or Sun Valley on Google. It’s no surprise the company is expanding into warm-weather sports like paddle boarding to broaden their geographic reach.
Segmentation makes sense
In a world increasingly competitive, consumer-driven world, an investment in customer segmentation pays dividends. Whether you are launching a brand, considering a line extension or devising a marketing plan, it’s advantageous to identify a small number of meaningful groups first. Knowing more about your customers and prospects and catering to their interests will earn their trust and loyalty. While also saving time and money.
