If you are participating in a consulting project devoted to Sales & Marketing or Strategy most likely you will have to either do segmentation or analyze existing segments of customers. You will try to achieve it on the basis of internal data, market research as well as other external data. That’s why today we will discuss the main methods of segmentation that you can use.
In this post, I will show you the main concepts. For more details, I recommend checking my online course Segmentation for Management Consultants & Business Analysts.
Essential Concepts in Segmentation
First, let’s discuss why do we want to segment the market? Segmentations have a lot of benefits. It enables you not only to understand and measure better the market, but also you can adjust your offer to specific segments. By segmenting the market, you can also optimize money spent on marketing and acquiring customers. To segment the market we will usually use a 5-stage process. Let’s see what we do during each and every stage:
Segmentation Methods in B2C
We will start by discussing the 4 main methods of segmentation used in consumer markets. Similar methods are used for B2B markets. Before we discuss every method in more detail let’s briefly look at them
- Geographic segmentation. One of the first types of segmentation used is geographic segmentation. In this sort of segmentation, we divide customers by physical areas to which they belong. Customers that live in different regions, cities, or countries may belong to totally different segments. Let’s look at a few simple examples of Geographic segmentation:
- Demographic segmentation. One of the most popular and commonly used types of market segmentation is demographic segmentation. In the demographic segmentation, we divide customers into groups on the basis of their age, gender family size, education, nationality, etc. Usually, you will use 2-4 characteristics to define unique segments. Let’s look at a few simple examples of such a segmentation.
- Behavioral segmentation. If you gather a lot of information on customer behavior you can consider using behavioral segmentation. In the behavioral segmentation, we divide customers by looking at how often they use the product, at what stage of purchase there are, their status, the benefit sought, etc. This method requires much more data and is heavily used in the case of digital products. With the rise of loyalty programs and direct-to-consumer business, it has become extremely popular. Let’s look at a few simple examples of such a segmentation.
- Psychographic segmentation. People within the same demographic group may still make different choices. That’s why some analysts prefer to use Psychographic segmentation. In psychographic segmentation, we divide customers by looking at their believes, attitudes, values, lifestyle, interests. This method has been pretty popular 10-15 years ago. Unfortunately, it’s pretty difficult to make it actionable. On top of that, we have seen segments of people with similar believes making different choices. It’s also difficult to use this segmentation if you are operating in many geographical markets.
- Mixed Segmentation. Most firms will mix different methods. For example, you may segment the markets by region, but within every region, you do a demographic segmentation. In other words, you assume that the choice of product will be influenced both by geographic as well as demographic characteristics. An interesting segmentation uses Netflix. It would seem that the main segmentation is a behavioral one (e.g. if you watch a lot of comedies it will suggest new comedies). However, given how important may be the language and local differences it will also take into account geographic characteristics.
What are management consultants asked to do during consulting projects
During Consulting Projects you may be asked to do different types of analysis around segmentations. Let’s briefly see what you may have to do:
- Divided the market into segments. Many firms, don’t have any segmentation at all. Your role may be to propose a segmentation that will help them improve their market position.
- Estimate the size and value of segments. Some firms have some sort of segmentation, but they have not measured the size of segments and their value. Your role will be to see how big each segment is in terms of the number of customers, how often customers buy products and how much they spend on an average purchase. Based on that you can calculate the value of every segment both in terms of the potential of revenues and profits. Quite often smaller markets in terms of revenues can generate bigger profits. A great example of such a paradox is Apple vs Android. The majority of people are using smartphones with Android. However, those who use Apple spend much more per 1 user. Therefore, the majority of profits are created by users of iPhones. Let’s look at an example of such analysis:
- Create a strategy for a specific segment. The next step is to create different strategies for segments. It may require different products, pricing, and distribution. If you propose such a change you will have to conduct a cost-benefit analysis to make sure that dedicated treatment of every segment makes sense. Below is an example of such an analysis done in the ceramic tiles market:
- Predict the development of segments. You can’t forget that the structure of the market can change over time. Therefore, in certain situations, your task will be to forecast the size of segments in the next 5-10 years.
- Find gaps not served. Finally, you may be asked to find segments that are not currently serviced by the firm.
Segmentation Methods in B2B.
So, far we have discussed how to segment customers in consumer markets. B2B uses also four main methods. Geographic, behavioral and psychographic segmentation are similar to what we have seen in the B2C market. Instead of demographic segmentation, they use the so-called firmographic one. In this segmentation, we group firms by the number of employees we have, industry, revenue level, sales channels, etc. Let’s look at some examples that will help you understand segmentation methods used in B2B.
In the case of firms, you will also have to use different segmentations for different business units. For example, if you are produce of juice and you are selling it under your own brand as well as private label, you will be running 2 types of businesses. The first one, B2C business, operating under your own brand may use for example demographic segmentation of consumers. The second business unit, B2B business, selling private labels may be using geographical segmentation of firms that order them to produce the juice. Let’s look at another example for a furniture producer:
It’s also worth mentioning that many firms that are B2C will use B2B segmentation to analyze their partners that provide the sales channels. For example, if you are selling shoes you will segment the sales channels such as retailers, wholesalers, e-commerce pure players, marketplaces, direct individual consumers, etc.
On a similar note, you may also decide to segment your own sales points. An interesting challenge is experiencing Retailers that run different stores. They usually segment the stores by size, format, location but also by main sales mission served.
That’s in short. As always I recommend checking for more examples of our online course Segmentation for Management Consultants & Business Analysts. You will find there +3 hours of content and more than 80 lectures, that will teach you all the things you need to do fast simple segmentation of customers during consulting projects.
Have a look also at our post on Business Model Innovation Techqniues. and the overview of Top Management Consulting Tools, Frameworks, and Techqniues.
You can also check the post in a form of a presentation: