How to use variables to segment a market 

To answer the question: who is the customer is never simple or easy. The key is intelligent market segmentation by dividing the market into distinct groups of customers with a similar perception of customer value. Reduce the demands for adaptation by focusing on defined and more profitable groups of customers. Identify the sweet spots in your market.

 

The first step is to identify the variables defining the segments – figuratively speaking; it is to determine the borders of your market segments.

 

Customers fulfilling the variable are part of your segment, and customers not fulfilling the variable are excluded. You usually need 3-5 variables to define your market segments.

If customers can be in more than one segment, different variables can be used for different segments:

 

Example yogurt product:

  • Plain yogurt for breakfast

  • Frozen yogurt as a snack in the afternoon

 

Individual customers can be in one segment in the morning eating breakfast but also in a different segment in the afternoon eating snacks, and that is not a problem.

 

The overlap is usually not a problem if customers use multiple products as in the yogurt case.

If customers can’t be in more than one segment, the same variables must be used for all segments.

 

Example car insurance:

  • Mileage/year may be used as a divider between segments to prevent overlap

 

To select the right variables to use is the key to smart market segmentation and discover previously underserved segments. Areas where you can grow and charge premium prices for your products.

 

A smart variable:

  • makes it easy to place customers in the right segment using non-sensitive data

  • makes segments homogenous from a customer value standpoint

  • separate customers into distinct groups that you can capitalize on by differentiating your products, services, or marketing messages.

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How much of the market should your segments cover?

In business, maintaining focus is the key to success. How much of the total market your organizations should cover, therefore, depends among other things on:

  • available resources

  • adaptation required (product and/or marketing) between segments

  • the competitive situation overall and in different segments

  • product stage in the life cycle

    • new to the world products focus only on the pioneers

    • mature products go for larger segments

 

This doesn´t mean that you will not sell to customers outside the segments. But you will not adapt products or different marketing activities for customers outside the selected segments.

For most companies:

  • use of few segments, approaching 4, makes them heterogeneous and less useful

  • use of many segments, approaching 12 or more, makes them difficult for the organization to handle

  • the optimal trade-off is around eight

  • as the final number of segments will be determined later, create at least ten potential segments to select from.

Examples of variables used in  market segmentation

Descriptive segmentation variables

  • Describes who the customer is

Geographic

  • Continents – Europe, Asia, America …

  • Countries – Sweden, Germany, China …

  • Climate – cold, rainy, desert ...

  • Area – rural, suburban, urban …

Application

  • Industries – mining, metal, aerospace …

  • Hospitals – emergency, oncology, psychiatric …

  • Use – bolting, gluing, welding …

  • Environment – indoor, outdoor, explosive …

  • Working place – fixed working place, mobile working place …

  • Type – manufacturer, service, government …

Demographic

  • Gender – male, female …

  • Age – 20-25 years, 26-30 years, above 30 …

  • Earnings/revenues – 1 million, 2 million, 3 million …

  • Education – high school, college, PhD …

  • Occupation – blue collar, white collar …

  • Family size – single, couple, family …

  • Social class – working class, middle class, upper class …

 

Customer chain

  • Categories – reseller, distributor, government …

  • Stakeholders – operator, engineer, manager …

 

Business

  • Company size – small, medium, big …

  • Capabilities – none, some, professional …

  • Financial – weak, normal, strong …

Miscellaneous

  • Work situation – cramped, open area, spacious …

  • Personal protection – gloves, hearing protection …

  • Communication – hand signals, radio, phone …

  • User situation – alone, pairs, groups

  • Risk – no risk, medium risk, high risk …

  • Usage – one hour per week, one hour per day …

  • Working method – manual, semi-automatic, …

  • Units used – one unit, two units, several units …

  • Health condition – pre-diabetes, type 2 diabetes …

  • Experience – non, medium, extensive …

  • Technical skill – ignorant, basic, advanced, expert …

Who is the customer?

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Pros:

  • Supports finding and identifying new customers

  • Data readily available

  • Easy to combine with other variables

Cons:

  • Segments become heterogenous from a behavior and value perspective

Psychographic – segmentation variables

  • Describes how the customer thinks

Models:

  • VALS – thinkers, achievers, believers …

  • 4C – resigned, struggler, mainstream …

  • c2b – self achievers, balance seekers …

  • Myers-Briggs – extraversion, sensing, intuition …

  • Lifestyles – Dinks, Woopies, Opals …

  • Yuppies – guppies, huppies …

Miscellaneous

  • Personality – thinkers, achievers, believers …

  • Education – school, college, working …

  • Attitude to risk – pioneer, early adopter, laggard …

  • Interests – culture, sport, nature …

  • Recreational activity – running, cooking, travelling …

  • Personality traits – adventurous, optimistic, dishonest …

  • Attitudes – safety, familiarity, economy …

  • Personality – introvert, extravert, highly introvert …

  • Loyalty – switcher, loyal, ambassador …

  • Social status – low, middle, high …

  • Social class – lower class, middle class, upper class …

  • Opinions – on politics, on abortion, on equality …

How the customer thinks !

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Pros:

  • Supports brand message

Cons:

  • Difficult to get data and put customers in the right segmemts

Behavioral – segmentation variables

  • Describes how the customer buys and uses the product.

Behavior

  • Behavior – variety-seeking, habitual …

  • Loyalty – none, occasional, totally loyal …

  • Retention rate – low, medium, high …

  • Price sensitivity – low, medium, high …

  • Buyer readiness – awareness, interest, desire …

Communication

  • Media used – News paper, TV, Internet …

  • Channel – internet, distributor, direct …

 

Purchasing and using

  • Type – new purchase, modified rebuy, repeat …

  • Situation – emergency, planned, routine …

  • Occasion – impulse buying, universal occasions …

  • Frequency – daily, weakly, monthly …

  • Volume – 10 units, 20 units, 30 units …

  • Usage rate – light, mid-level, heavy …

  • Usage purpose – commuting, vacation trips, recreational …

  • Payment method – cash, credit, installments ….

How the customer buys and uses the product.

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Pros:

  • Capture current customer behavior

Cons:

  • Does not predict future behavior

Value-based – segmentation variables

  • Describes why the customer buys

In 8-step-VoC, customers prioritize needs. Provides the unique possibility to use customer needs and resource concerns as segment variables. For example:

  • a subgroup of customers selecting a specific need or resource concern as the most or least important

  • a subgroup of customers who have low or high degree of fulfillment of a specific need or resource concern.

We believe this is the future in market segmentation. Focus on what is important to customers and the sweet spots in your market. Areas where you have the biggest opportunity of creating unrivalled customer value. 

The best strategy for sustainable growth and profitability.

Why the customer buys

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Pros:

  • Focus on real customer drivers, needs, problems, and concerns.

Cons:

  • Requires "Voice of the customer" study

Internal data – segmentation variables

  • Describes the relationship with the customer

Relationship

  • Connection – weak, strong, partnership …

  • Loyalty – detractor, passive, promoter …

Status

  • User – nonuser, first time user, frequent user …

Business

  • Profit margin – weak, medium, excellent …

  • Volume – 10 units, 20 units, 30 units …

  • Turnover – 1 million, 2 millions, 3 millions …

Pros:

  • Describes the business case.

Cons:

  • Requires use of "sensitive" internal data

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Relationship with the customer

Practical example use of variables for market segmentation

Market segment for Endotracheal tubes

Emergency Ed

  • Ed works in an emergency hospital

  • He is newly graduated with relatively low experience

  • Ed works often under stress and time pressure so a tube that is “Quick to enter and secure” is the most important value statement.

© Andrey Malov / 123RF.com

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1st Variable Descriptive

Type of hospital:

  • Children’s hospitals

  • Oncology hospitals

  • Psychiatric hospitals

  • Rehabilitation hospitals

  • Emergency hospital

  • Surgical hospitals

  • ….

2nd Variable Descriptive

Medical practitioner experience:

  • Low

  • Some

  • Extensive

3rd Variable Value-based 

Most important customer need:

  • Safe to place and remove

  • Increased ventilation

  • Convenient for the patient

  • Quick to enter and secure

  • Economical to buy and use

  • Reduced secondary infections”

  • ….

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