What Are The Benefits of Market Segmentation?
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By Aaron Moss, PhD, Cheskie Rosenzweig, MS, & Leib Litman, PhD
Part II: What Is the Purpose of Market Segmentation?
Market segmentation benefits businesses not only by answering the question of what customers want, but by helping businesses understand how to drive sales, explore new directions for product development, find ways to retain current customers, and even develop messages that may persuade a competitor’s customers to cross over.
Without market segmentation, businesses are left to craft their marketing messages based on their instincts and intuition. Both require a brand to make expensive guesses as to what will or will not work. In speaking to one audience, you may be accidentally alienating another. In focusing on what has traditionally been your strongest customer base, you may be missing an untapped set of customers who can drive your revenue to a higher level. In other words, intuition is not data, so intuition can lead you astray.
5 Benefits of Effective Market Segmentation
1. Define a Target Market and Generate Buyer Personas
To begin maximizing your marketing dollars, you need to know who your marketing should target. Which audience is most likely to buy your products? A great example of how market segmentation can answer this question comes from the story of Hummer.
In the early 1980s, the Pentagon commissioned AM General Corporation to build a rugged and durable vehicle capable of transporting troops and cargo. The vehicles were given the concise and jargon-free name: High Mobility Multipurpose Wheeled Vehicles (HMMWV).
The HMMWV became the consumer vehicle called the Hummer thanks in large part to Arnold Schwarzenegger. As the legend goes, Schwarzenegger saw the HMMWV while on a movie set and was so smitten with the idea of owning one that he lobbied AM General to make a civilian version. When the company agreed, Schwarzenegger bought the first civilian Hummer off the line in 1992. And here is where the story gets interesting.
Although Schwarzenegger loved the Hummer, and his celebrity helped promote the vehicle, he was just one guy. AM General needed a much bigger market in order to make money. And, because the Hummer cost around $100,000 and didn’t meet anyone’s definition of practical, a logical question was: Who is going to buy this thing?
The answer was individualists. Market segmentation revealed that the people interested in buying a Hummer were wealthy, macho guys who liked adventure and outdoor activities (or, at least, liked the idea of liking adventure and outdoor activities). Hummer’s target market were men who had achieved professional success and liked the idea of going it alone. This was, in other words, Hummer’s target market.
2. Develop a Marketing Mix Strategy
Beyond identifying a target market, segmentation can help businesses develop a marketing mix. A marketing mix includes all aspects of how the business will market its products to consumers. Typically, the marketing mix is summarized with reference to the four Ps: price, product, promotion, and place. Once again, let’s turn to Hummer as an example.
The original Hummer, known as the H1, sold for about $100,000. Obviously, the number of people who could afford an H1 was smaller than the general market for sport utility vehicles. So, Hummer created slimmed-down versions of the H1 known as the H2 and H3. In doing so, Hummer was adding a new target market: middle-class consumers.
The H2 and H3 started around $50,000 and $30,000, respectively, putting these models in the price range of a much larger group of consumers. The H2 and H3 were still promoted in much the same way as the original H1, with a focus on individualism and the outdoors (see image below). However, the price, product, and promotion were now aimed at a different group of buyers than the original H1.
As a final piece of Hummer’s marketing mix for the H2 and H3, they took control of the physical places where consumers could interact with the vehicle and make a purchase through point-of-purchase, specifically, the dealerships.
All Hummer dealerships were required to build showrooms that adhered to the look and feel Hummer wanted to project. Often, the showrooms were built to resemble a type of hut commonly used in the military. As a result of Hummer’s detailed market segmentation, each time a new Hummer vehicle was launched, the company’s sales soared.
3. Leverage Data-driven, Personalized Advertising and Marketing
Personalized marketing and advertising are exactly what they sound like: It is putting advertisements or other content in front of consumers after considering which messages they might want to consider based on their personal preferences.
Because personalized marketing is tailored to each consumer, it is easiest to utilize in digital formats. For example, email campaigns can be narrowly targeted to specific customers based on what they have bought in the past. Or, after examining which deals have prompted a customer to buy something in the past, a company may choose to target the customer with similar deals on different products. Personalized marketing uses the history of a customer’s own data to make marketing messages more tailored to the customers’ needs and wants.
4. Improve Customer Retention and Reduce Churn
Businesses spend a lot of time reaching out to new consumers and trying to expand their customer base. However, it is much less expensive to spend marketing dollars toward retaining existing customers. Market segmentation can help with this.
By considering the data you already have on customers and then segmenting your contacts in a way that allows you to market the same product or service to people or expand the list of products people might buy from you, your company can use market segmentation to keep customers engaged long-term.
5. Create an Informed, Development Process For New Products
Finally, one of the biggest benefits of market segmentation is finding new directions for product development — directions that, at times, no other method can uncover. To demonstrate, we turn again to Malcolm Gladwell and Howard Moskowitz.
In his 2006 TED talk, Gladwell tells the story of Prego and Ragu. In the 1980s, Prego languished behind Ragu in sales despite, in many respects, having a better pasta sauce. Prego, which is owned by Campbell’s Soup, asked Howard to help them figure out what people wanted and how to sell more sauce.
After extensive testing, Howard came back to Campbell’s and shared his results. Specifically, Howard told Prego that his segmentation analysis suggested all Americans liked one of three types of pasta sauce: plain, spicy, and extra chunky. Importantly, at the time, there was no extra chunky pasta sauce on supermarket shelves. So, Prego reformulated their pasta sauce and came out with a line of extra chunky that sold more than $600 million in the next ten years, leading Prego past Ragu in the battle for pasta sauce domination.
Now, what’s remarkable about the story of Prego isn’t that Campbell’s developed a line of pasta sauce that allowed them to overtake a competitor and become the industry leader. What is remarkable is that in years of focus groups and market research before the 1980s, consumers never expressed a desire for extra chunky pasta sauce. The fact that one-third of Americans wanted a product that did not exist only emerged after Howard conducted a market segmentation. In other words, market segmentation can sometimes lead to answers about what customers want that they are unable to articulate themselves.
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