What You Need to Know About Segmentation

The marketers of Clearblue Advanced Pregnancy Test, a product that can tell you if you’re one-week, two-weeks, or three-plus weeks pregnant, asked a couple of D-list celebrities to tweet out their positive tests back in 2013. As Businessweek’s Jessica Grose reported, the maker of the test, Swiss Precision Diagnostics, has a 25% share of the at-home pregnancy-testing industry and is targeting its marketing efforts at Millennials. Grose quotes IbisWorld researcher Jocelyn Phillips as pointing to the high-tech aspects of Clearblue’s test, also noting that young women might be more willing to shell out more money for such technology — the digital version costs about $5 more than the boring old blue and pink line version.

There is nothing new about this kind of segmenting in the pregnancy test market, however. And it’s actually a really useful (if not slightly unsettling) example of how you might segment potential customers with very different needs and behaviors.

For example, you could segment the market for early pregnancy tests based on demographics such as age and income, or you could segment the market based on consumers’ price sensitivity. But in this situation, it is useful to ask why: Why would a woman want to take a pregnancy test? And are these reasons the same for everyone? A little bit of thought would suggest that there are two groups of women: hopefuls, those who want to be pregnant, and fearfuls, those who are afraid that they might be pregnant.

How would you identify these two segments and market to them differently? Often companies offer multiple products that appeal to different market segments and let customers self-select. That is, the firm does not identify customers in various market segments; instead, the customers reveal their market segment identity by choosing different products. Quidol, a company based in San Diego, California, created two different products to appeal to two segments in the market for early pregnancy tests: the hopefuls and the fearfuls. The actual test products were almost identical, but the two products were given different names and package designs, were placed in different aisles of a drugstore, and were priced differently.

Segmenting, at its most basic, is the separation of a group of customers with different needs into subgroups of customers with similar needs and preferences. By doing this, a company can better tailor and target its products and services to meet each segment’s needs. This isn’t, as McKinsey’sJohn Forsyth says, simply for marketing or retail firms. “We see many, many companies saying, ‘I want to get more consumer-driven and customer-facing. But sometimes the organizations don’t know how to start. I’d say you really start with a basic understanding of your consumers or customers, right? And that’s segmentation.”

It sounds straightforward but often it isn’t. Here are a few pitfalls that many companies fall into when they start thinking about segmentation. One, companies rarely create a segment  — more often they uncover one. Two, segmentation and demographics are very different things. “You have two people, we know they’re the same age, we know they’re British citizens, and we know they’re of royal blood,” explains Forsyth. “One of them is Prince Charles. The other is Ozzy Osbourne, the Prince of Darkness. They’re in the same demographic segment, but I can’t imagine marketing to them the same way.”

And three: you have to ask yourself why you want to segment and what decisions you’ll make based on the information. “Many companies say, well, I think I just need a segmentation,” says Forsyth. “But before you even start the segmentation, you need to really understand why you’re doing it and what some of the actions are that you’re planning to take, based on what you think you might see. It helps you understand what’s actionable in terms of driving a company’s business.”

Once you’ve answered these questions, you have to decide whether you want to start segmenting by needs or behaviors. “If you’re doing something strategic and you’re trying to figure out if you have the right brands, the right value proposition, the right product line, then I would say you should start with needs or attitude segmentation,” explains Forsyth. This is basically trying to identify what needs your product or service is or could meet.

“But if you think you’ve got that pretty much under control,” he continues, “and you need to understand how to go to market or target your digital and TV spending, then I would start with behavior.” This involves trying to identify differences in customer groups based on their buying and lifestyle patterns, for example.

Regardless of your approach, a useful segmentation should include these six characteristics:

1) Identifiable. You should be able to identify customers in each segment and measure their characteristics, like demographics or usage behavior.

2) Substantial. It’s usually not cost-effective to target small segments — a segment, therefore, must be large enough to be potentially profitable.

3) Accessible. It sounds obvious, but your company should be able to reach its segments via communication and distribution channels. When it comes to young people, for example, your company should have access to Twitter and Tumblr and know how to use them authentically — or, as Clearblue smartly did, reach out to celebrities with active Twitter presences to do some of your marketing for you.

4) Stable. In order for a marketing effort to be successful, a segment should be stable enough for a long enough period of time to be marketed to strategically. For example, lifestyle is often used as a way to segment. But research has found that, internationally, lifestyle is dynamic and constantly evolving. Thus, segmenting based on that variable globally might not be wise.

5) Differentiable. The people (or organizations, in B2B marketing) in a segment should have similar needs that are clearly different from the needs of other people in other segments.

6) Actionable. You have to be able to provide products or services to your segments. One U.S. insurance company, for example, spent a lot of time and money identifying a segment, only to discover that it couldn’t find any customers for its insurance product in that segment, nor was the organization able to design any actions to target them.

Now you can start breaking down segments by who buys, what they buy, and why they buy (or use or view, etc.) it. The pregnancy test interactive above is a great example of how this works.

There are also prominent failures that companies should heed. One of the most infamous is when Bic decided to segment its young female consumers. The “Bic Cristal for Her” writing utensils were thinner, designed with more pastel colors, and priced higher than other pens. Women, in general, were offended, taking to Amazon to write some very creative reviews. The pen market, in other words, was not as heterogeneous along gender lines as Bic had thought.

When thinking about how you segment, John Forsyth has several suggestions. For one, he notes, “focus groups are dead. If you’re still using focus groups, you’re using 30-year-old technology.” A much better way to understand customer needs and behaviors is to spend time with people in their homes, stores, or health clubs. “You watch them, you talk to them while they’re doing the kinds of things we want to be observing.”

This type of qualitative research is all the more important because it showcases real stories that are key to convincing stakeholders. “When we illustrate things with qualitative research, we get CEOs going, ‘Wow, you’re really telling me my marketing strategy is all wrong and I need to change it,’” says Forsyth. “It’s very powerful, and it’s really exploded in the last 10 years.”

Big Data and technology have changed how companies approach segmenting. “The old model, particularly in the market research world was, ‘I understand people’s needs and attitudes, and behaviors will come from that,’” Forsyth explains. “Today, in many situations, [marketers] have flipped it to say, ‘I’m going to do segmentation based on their behaviors, and then I’m going to try to understand the needs that drive behavioral differences.”

He warns, however, that this type of segmentation is “a lot harder to do than people think, and I don’t think we’re anywhere near being good at it yet.”

Forsyth’s also seeing a lot of movement in the area of segmenting emerging markets worldwide, which poses a number of challenges. For one, scales marketers use to measure needs or behaviors in one country may be way off in another due to different cultural norms.

He also notes that affordability is still a huge factor in developing countries, too, whereas it may not be elsewhere — as the $20 pack of digital pregnancy tests demonstrates nicely.

Harvard Business Review