Industry Commentary

Segmentation: The value of a category-centric approach

June 25, 2020

Neda Iranmanesh
Data Science & Analytics Manager

As the world gets more complex and marketing budgets get tighter, marketing spend must become more efficient. Market segmentation is the most common tool used to gain this efficiency. Segmentation involves dividing consumers into distinct groups. Depending on methodology, consumers in each group share common characteristics, behaviors and needs.

Strategically, segmentation forms the first part of the marketing process: segmenting the market, targeting profitable segments and then positioning your offer against them. If you segment effectively, success in targeting and positioning will follow. This enables marketing activity to be both efficient and effective – making segmentation a powerful tool.

Segmentation isn’t a one-size-fits all approach across product categories. This is because consumers behave differently in different categories. For example, a premium car driver may also be a value soft drinks buyer. Furthermore, generic segmentation approaches offer marketers very little competitive advantage when different categories are competing for the same consumers.

Understanding what unique segmentation considerations must be made by sector type will help to leverage segmentation’s full potential. To show this, I’ll focus on how category considerations can maximize segmentation’s value across the consumer package goods (CPG), finance and technology categories.

Consumer package goods

CPG refers to products ranging from household staples to clothing. Therefore, saying one segmentation solution exists for CPG is unrealistic. However, there are ways to identify the best segmentation approach for different CPG categories:

  • Demographics are useful, but not definitive. For example, 39-year-old dads with three children don’t all have the same buying habits.
  • Defining factors are more likely to be behavioral. Some dads will be value-driven, others will be conscious consumers.
  • Look more broadly than a specific CPG category. A great deal of overlap exists between CPG categories. For example, the pizza and beer categories are linked just as the cheese and the wine categories are.

Determining what to include in your segmentation should be done on a case-by-case basis, while keeping in mind the category as a whole as well as the business decisions you are looking to base on the segmentation.

Finance

Most countries have a few core financial institutions. However, the finance category has changed greatly, with new challenger brands entering the market – fintechs. These new entrants often position themselves as being tech-oriented vs. traditional finance. This is a significant move away from the brick-and-mortar business model of core financial institutions. Core financial institutions have responded to the rise of fintechs by expanding their offerings online.

Despite being in the same category, fintechs and core financial institutions should be using different segmentation approaches.

Fintech segmentations should focus on:

  • Attitudes toward technology, to understand adoption rates.
  • Confidence in using technology, to understand level of support needed.
  • Ability to self-manage finances in the absence of physical banks, to understand information needs.

Core financial institutions, meanwhile, should focus on:

  • Loyalty – many of their customers will be long-term.
  • Physical reliance – to what extent are expensive, physical banks still needed?

Technology

Technology is arguably the fastest-moving and most data-rich market category. This has implications for segmentation. Given technology’s fast-moving nature, creating long-lasting segments is challenging. A segmentation’s value is limited if it’s only valid for several months. Any segmentation should therefore be based on the most fixed of human characteristics, such as:

  • Adoption behaviors: An early product adopter will always stay informed about the latest products.
  • Wealth: Those with less to spend on technology tend to look for the cheapest products.

Technology companies’ data wealth means they can target consumers in a more focused way vs. a traditional segmentation. But this data is often behavioral – useful for the functional elements of selling, but less useful for communications. In this instance, understanding attitudes and emotions to append to behavioral data offers more value vs. simply adding new layers of demographic and behavioral data.

Maximizing value

Segmentation is a powerful tool that can provide significant value to marketers. To maximize this value, we must make segmentation approaches category specific, often to the point of questioning if segmentation is relevant to a category at all.

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