Segmentation is central to marketing strategy but implementing it is fraught with challenges. In this article, Paul Baines, Adina Poenaru and Hugh Wilson explain why managers should reconsider the use of segmentation and how to ensure its successful implementation.
Markets have been segmented and offerings differentiated for as long as suppliers have competed for business1 but some have lost faith in segmentation because of inherent implementation difficulties. In complex environments (e.g. fickle consumers, media/product proliferation), it is difficult to create meaningful segments and achieve marketing effectiveness, usually because of:
1. A lack of understanding of segmentation benefits in each management situation,
2. A lack of resources (e.g. customer databases, information technology, time),
3. Organisational culture issues (i.e. inter-functional communication, managerial enthusiasm and involvement, inflexible culture),
4. Difficulties in controlling the process (e.g. when to revise segments),
5. A lack of quantifiable evidence of business impact.
Consequently, few companies implement segmentation properly2 and, yet, successful implementation is important because performance improvements are only achievable if the process is effectively implemented.3 This means embedding segmentation into the organisation; using segmentation insight in marketing decision making and integrating segmentation schemes within the organisation’s architecture/culture.
Next, five critical success factors for how companies improve their organisation’s performance using segmentation are outlined, based on 25 interviews with segmentation practitioners.[ms-protect-content id=”9932″]
Implementation: Critical Success Factors
Numerous factors improve the likelihood of successful implementation including the need for: market scrutinisation, an integration plan, internal adoption, executing segmentation at different levels, and monitoring the scheme used.
1.Set your segmentation for success through market scrutiny and due diligence
Companies adopting segmentation-based strategies hunt for emerging (profitable) segments, e.g. underserved, dissatisfied, price-insensitive or first-time buyers. Typically, this segmentation task cannot be delegated to research agencies because managers working with the segments on the daily basis must be involved; for example:
“most successful segmentations are when we build 3 alternative segmentations, look at them and go to the client with a recommendation… [as] each one works for different reasons. You then … choose the best one… but they [the company] know their business very well and… what would work intuitively” (Expert, Agency).
Otherwise, the effort may fail, for example:
“we used a consultant and it got quite interesting for 2 months and then people got bored and moved on because it didn’t get subsumed into people’s day to day work” (Manager, Telecoms).
To take advantage of new segments, successful companies should integrate segmentation processes, by:
• Evaluating the ease of implementation of new segments, including their identifiability; measurability, actionability, reachability, manageability. Applying these criteria4 ensures that a segmentation programme has higher internal buy-in.
• Profiling5 the segment, gathering in-depth segment knowledge, providing a detailed picture of customers “as individuals, where they come from, where I find them, as well as what drives their choices” (Expert, Consultancy). Vivid segment profiles enable internal communication and buy-in.
• Evaluating each segment for attractiveness (e.g. size, profitability) and competitiveness. This requires segment matching between organisation and customers, for example: “we take all factors… peculiar to that segment and… we’re mapping our core competencies against what that segment actually wants” (Manager, Travel). This makes resource-allocation more efficient; for example: “[segmentation] can really contribute to profitability… because you only select those people who fulfill the correct criteria” (Manager, Travel).
2. Create a comprehensive integration plan
Segmentation takes time, money and top management support to implement and therefore requires proper planning. Adopting segmentation in organisations used to undertaking undifferentiated marketing programmes takes time because they require a significant change in employees’ mindset/behaviour, for example:
“the biggest challenge we had was making the rest of the organisation walk and talk the segmentation… so that it becomes a single voice of the customer that people refer to” (Manager, Financial).
Various interviewees highlighted embedding segmentation as a critical, but challenging, factor because it is a top-down decision:
“Segmentation, more than anything else, is top-down….once you’ve done the customer satisfaction project, then in the implementation lots of people can get involved so it can really be bottom up. And so it’s quite satisfying in that sense. Segmentation is the exact opposite” (Expert, Agency).
In addition, segmentation initiatives frequently require considerable organisational change (e.g. organising around customer, instead of product, divisions), data systems (e.g. integrating CRM with campaign management) or strategy (e.g. customer acquisition versus retention).
Segmentation implementation plans should include: a) analytical and implementation objectives, linked to the business strategy and culture, b) a team of organisationwide stakeholders, c) boundaries for segment-specific marketing actions, d) provision of necessary resources (e.g. marketing intelligence, relevant personnel), e) a well thought-out ‘business case’, f) required actions for: segmentation analysis/monitoring/re-evaluation and g) specific employee communication and engagement actions.
3. Segmentation as internal currency
Integrating segments within the organisation is critical for segmentation to be fully adopted in practice:
“Segmentation is also useful to…talk about our customer base in a more concrete and meaningful way, in concepts more easily understood by stakeholders outside the marketing department, so it creates a sort of internal currency or common language” (Manager, Media).
However, achieving cultural integration is difficult because it represents a shift from how organisations often work. New segmentation schemes change market understanding, challenging existing organisational perspectives. In addition, employees may lack the motivation to use new segmentation schemes. This is often because of a lack of understanding of the purpose/relevance of segmentation, a failure to understand how to use segmentation schemes and a requirement of time and resources to effect change. Therefore, actions to involve managers in analysis, planning and implementation generate commitment to new segmentation schemes and facilitate successful implementation.
All managers and customer-facing employees should share a unified means of perceiving the marketplace and use a common “language” to refer to target segments consistently within the organisation:
“If you go to their offices, they have a segmentation of their [clients]… big maps of each segment are scattered around the office, so they are living and breathing them… People are talking about them all the time, and whenever we are asked to do work for them, we have to do it around their segments” (Expert, Agency).
4. Effective execution
Ensuring segmentation embeds in marketing operations allows companies to tailor marketing actions to segment needs. Successful companies integrate segment knowledge into various levels of decision-making but developing this capability was challenging for some managers and seen as critical by others:
“This is one of those things that people think they should be doing but they don’t know how to do it and they know that if they do it, it won’t get implemented” (Manager, Media).
“If a company just wants to do segmentation: the question is “Do they want to tick a box?” That’s not the right way to work with segmentation. It’s what you do with the segments that counts. The best way …is to build them into company strategy” (Expert, Consultancy).
There is a rich academic literature6 on how segmentation is used, ranging from strategy development to product/media planning to managing individual customers. However, there is a difference in segmentation used for top management concerns to create a strategic intent, compared with managerial concerns for planning/budgeting around identifiable segments and operational concerns to interact with customers.7 Typically, one segmentation scheme cannot inform all concerns. Successful companies frequently operate multiple segmentations:
“It’s about flexibility, understanding that segmentation can be used as a big over-arching thing with set rules and definitions, but also using segmentation as a small, granular thing to understand a business issue, why sales are weak this week, why a promotion didn’t work” (Expert, Agency).
5. Monitor, measure and create a feedback loop
Managers often fail to evidence the business benefits of segmentation and justify the resource needed in annual budgeting exercises. Monitoring segment evolution and the performance of segmentation-based strategies is crucial to providing a feedback loop when developing/changing segmentation programmes.8 Companies that successfully monitor segments can track their evolution/stability, needs/preferences, size and competitive intensity.9 Many interviewees criticised segmentation as static because segments were not updated fast enough to align with market dynamics. This was because they often did not monitor the process, which can lead to developing already-obsolete products, particularly where long development cycles operate:
“…[a] telecommunications company…did a segmentation study, they developed a new line of cell phones for specific market segments and when those cell phones were ready 5 years later, the segments didn’t exist anymore. The whole product line completely failed” (Expert, Author).
Measuring/tracking the success of segmentation-based strategies allows employees to use segmentation in their daily work, particularly if segmentation-related performance indicators are integrated into overall targets. Academic research10 identified a way to measure the impact of segmentation-based strategies circa 30 years ago, measuring segment-level penetration, share and profitability. However, our interviewees identified only the challenge of measuring segmentation results, because typical accounting systems track product- not segment-level indicators and because they perceived segmentation outcomes esoterically.
Outcomes and Performance
To implement segmentation schemes, we identified 8 positive performance outcomes based on numerous segmentation drivers (see Table 1).
When conducting effective segmentation implementation, segment understanding, market structure understanding and customer orientation emerge as key intermediary outcomes (see Figure 1), explaining how segment analysis translates into marketing decisions/activities. Many interviewees referred to segmentation as a means to understand the marketplace and customer needs:
“The value we got from this exercise is that we now know our audience, so my team, whenever they do anything to the site…they now do it with the view of ‘what would [customer segment X] think of this?’” (Manager, Technology).
Understanding must come first before the firm can use it: “All successes that came from product/service development or rebranding only came from initially reviewing the market and understanding how it broke down into customers [segments] and developing a strategy for those segments you’re best suited to serve” (Expert, Consultancy).
Marketing efficiency (efficient operational targeting with winning propositions), organisational focus (the matching of target segment needs with organisational capabilities) and winning value propositions (through new proposition development and customisation) are only achieved once market understanding is integrated into the firm’s marketing decision-making. For example, using segmentation insight for targeting suggests the firm can choose media outlets selectively, thereby using their marketing budget more efficiently (Expert, Agency). Segmentation insight also provides organisational focus: “we are very clear, we don’t get distracted … Segmentation really helps us stay focused on what we really do best” (Manager, Technology).
Our research concludes that companies need to execute and integrate the knowledge arising from segmentation analysis to see positive performance outcomes because using segmentation insights in all marketing decision-making is critical to obtaining performance improvements. Managers should ensure segmentation is properly implemented by building segmentation capabilities, not just a segmentation research orientation, within the organisation around analysis, integration and execution. In this article, we provide an understanding of the critical success factors and performance outcomes by which managers can measure/track their segmentation projects. Given the implications and costs of segmentation strategies, in doing otherwise, managers could be courting market failure.
The authors would like to thank Cranfield University School of Management for providing the seedcorn funding that allowed this qualitative study to be undertaken.
About the Authors
Dr Adina Poenaru is a Specialist in the Marketing and Sales Practice at McKinsey and Company and, previously, Lecturer in Marketing at ESCP Europe Business School. This research comes from her PhD at Cranfield School of Management on market segmentation capability and its impact on performance.
Professor Paul Baines is Professor of Marketing at Cranfield School of Management. His latest book (with Chris Fill) is Marketing (Oxford University Press, 2014). Consultancy experience includes research/strategy development projects for various enterprises in both the public and private sectors. He operates his own strategic marketing/research consultancy, Baines Associates Limited.
Professor Hugh Wilson is Professor of Strategic Marketing and Director of the Customer Management Forum at Cranfield School of Management, a syndicate of leading firms. Hugh’s academic interests are in marketing planning, multichannel management, CRM and sustainability marketing. His most recent book is Marketing Plans 7e (2011, with Malcolm McDonald).
1. Dickson, PR and Ginter, JL, (1987), “Market segmentation, product differentiation, and marketing strategy”, Journal of Marketing, 51(2):1-10.
2. Yankelovich, D. and Meer, D. (2006), “Rediscovering market segmentation”, Harvard Business Review, February, 122-131.
3. Dibb, S. and Simkin, L. (2009), “Implementation rules to bridge the theory/practice divide in market segmentation”, Journal of Marketing Management, 25 (3-4), pp. 375-396.
4. See Kotler, P. (1994), Marketing Management: Analysis, Planning, Implementation and Control, 8th edition, Prentice Hall and Wedel, M. and Kamakura, W.A. (2000), Market Segmentation: Conceptual and Methodological Foundations, 2nd edition, Boston, MA: Kluwer Academic Publishers.
5. See Badgett, M. & Stone, M. (2005), “Multidimensional segmentation at work: Driving an operational model that integrates customer segmentation with customer management”, Journal of Targeting, Measurement and Analysis for Marketing, 13 (2): 103-121 and Yankelovich, D. & Meer, D. (2006), “Rediscovering market segmentation”, Harvard Business Review, February, 122-131.
6. See for examples: Badgett, M. & Stone, M. (2005), “Multidimensional segmentation at work: Driving an operational model that integrates customer segmentation with customer management”, Journal of Targeting, Measurement and Analysis for Marketing, 13 (2): 103-121; Bailey, C., Baines, P.R., Wilson, H. & Clark, M. (2009), “Segmentation and customer insight in contemporary services marketing practice: why grouping customers is no longer enough”, Journal of Marketing Management, 25 (3-4): 227-252.
7. Piercy, N.F. & Morgan, N.A. (1993), “Strategic and operational market segmentation: a managerial analysis”, Journal of Strategic Marketing, 1: 123–140.
8. Goller, S., Hogg, A. & Kalafatis, S.P. (2002), “A new research agenda for business segmentation”, European Journal of Marketing, 36: 252–271.
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10. Bonoma, T.V. & Shapiro, B.P. (1984), “Evaluating market segmentation approaches”, Industrial Marketing Management, 13: 257–268.