Customer segmentation

Segmentation can broadly be defined as any analysis that attempts to identify groups of individuals who are similar in attitudes, response to marketing messages, where they live, or how they are described—for just about any marketing-related task. The purpose of market segmentation analysis is to understand where customers are coming from. People engage in observed behaviors for many different reasons. Marketers would like to understand these reasons and design suitable strategies to drive sales.

Segmentation can be done at various levels.

Segmentation by products bought – This kind of segmentation can be built upon the product groups that come out of a Market basket analysis (discussed later). Product groups are groups of products that are bought together. This approach basically groups together people on their buying behavior. People who exhibit similar buying behavior are grouped together and targeted using segment level strategies.

Segmentation by geography – The geographic approach assumes that customers found within a particular geographic area can be targeted with the same offer. This approach on its own does not define a marketing proposition; it does not define the product or service required or the promotional stance to take. It can, however, play a role in segmentation by providing further help in identifying how to reach the customers found in particular segments.

Segmentation by demographics/psychographics – Demographic information on its own does not define a marketing proposition, it does not define the product or service required, or the promotional stance to take. Demographics play a role in segmentation, but that role is not to ‘define’ but rather ‘profile’. The role it plays is to help you identify for each segment a profile of the typical customer to be found in each segment. In other words, who is found in each segment? This, in turn, will help you understand how to reach each segment.

The type of segmentation a company chooses to go after largely depends on the nature of a business and the relative importance of all the factors discussed above and also the quality and richness of information available.