Five Tips For Market Segmentation Success

Have you ever felt like you're shouting your message into a crowded room, hoping it resonates with someone... anyone? Consider this: not all customers are the same. This broad brush approach to marketing might have worked in simpler times, but today's consumers crave personalization. This is but one of many reasons why strategic segmentation studies have become so popular in recent years.

At its core, market segmentation is the practice of dividing your target audience into distinct targetable groups. By segmenting based on attitudes, needs, and behavior, you gain a deeper understanding of your customer base. And with this better understanding, comes a multitude of business benefits.

Studies back the power of segmentation. According to McKinsey & Co., companies leveraging customer behavioral insights outperform peers in sales growth (by a staggering 85%) and gross margin (over 25%).

Bain & Company adds to this by reporting that 81% of executives view segmentation as crucial for profit growth. However, the same survey exposes a critical gap – less than 25% believe their companies are using it effectively. A clear disconnect exists between recognizing the value and achieving successful implementation.

It’s true: A robust successful segmentation resulting in stable segments that are homogeneous within and distinct from one another is certainly not a walk in the park. As method experts in the field, we conduct several strategic segmentations in a year and with this experience, we can pinpoint what makes the practice truly successful. In this article, we detail our 5 factors that make for a successful segmentation and the pitfalls to avoid.

1. Understanding the Objectives of the Segmentation is Key

Just like with consumers, a one-size-fits-all approach simply doesn’t work with segmentation. Before we can dive in, we have to know the exact purpose of the segmentation. Are you informing product teams about what features should be developed? Should the segmentation provide insight into brand positioning to aid direct marketing? Or should it help with growth and targeting specific customer segments?

In addition, we have to think about the segmentation units. Do we want to do a people-based segmentation, an occasion-based segmentation, or perhaps combine them into a demand landscape? One can clearly see how these questions can take the segmentation down several different directions, so the answers to them must be followed to guide the research and survey design.

2. Continuous stakeholder engagement is crucial

A segmentation study serves multiple stakeholders within an organization, each with distinct expectations and goals for the research. To ensure the study fulfills its intended purpose and is actionable, continuous engagement with stakeholders is essential.

That’s why we prioritize integrating them into the research team from the onset. The first step is setting up interviews with key stakeholders right at the beginning of the project and developing clear hypotheses so that these insights can be incorporated into the research design.

By doing so, you enable stakeholders to articulate their specific research needs, thereby ensuring that the study aligns with their objectives. Moreover, every decision throughout the research process can then be guided by the intended use and the needs of end users of the segmentation.

The best practice would be to have various touch-points including workshops with stakeholders throughout the process.

We know the report is not the end of the road. The immersion phase with external stakeholders is equally important, but more on that in the fifth point.

3. As with Everything: Less is More, Especially When it Comes to Input Vectors

One might say that the more variables you include in your segmentation the better, as it presumably sets up your segments to be more nuanced and really stick out from one another, but the discerning researcher would advise otherwise.

The reason is that the more input vectors you include, the less the differences between them will be, making it more difficult for product and marketing teams to create effective interventions. Rather, the input vectors that should be prioritized are precisely the ones that will have the most meaningful impact on those teams.

This highlights the importance of synthesizing existing knowledge from stakeholders and developing clear hypotheses from them prior to conducting the research. By doing so, you ensure that the most valuable input vectors are identified and used, reinforcing the idea that less is more.

4. Use Segmentation-Friendly Survey Question Formats

Do not incorporate rating scales in your segmentation surveys. We repeat, don’t. One of the reasons is that many studies including those by Harzing (2006), Dolnicar and Grün (2007), and Yu & Yang (2015), have shown that there are inherent cultural differences in the way people use rating scales. To quote from Harzing’s study:

“Country-level characteristics such as power distance, collectivism, uncertainty avoidance and extraversion all have a positive influence on response styles such as acquiescence (likelihood to agree with something) and (positive) extreme response styles. [...] Respondents from Spanish-speaking countries show higher extreme responses and acquiescence while Japanese and Chinese respondents tend to be far less extreme in their response styles.”

Instead, ask respondents to rank their preferences or to complete a tradeoff exercise, like MaxDiff or SemDiff. In addition, we also recommend not using multi-select questions on their own, instead asking respondents to pick up to X items or combine multi-selects with pick-up-to-X-items questions.

When writing the survey questions keep the overall goal in mind. You want variables that are as differentiating on meaning inputs as possible, while minimizing the influence of response style and cultural bias.

Also, remember to keep it simple. You want to include simple questions that are easy to follow up on at a later stage.

5. Make the Segment Results Accessible and Understandable

In our experience, one of the main reasons why executives may believe that their companies are not using segmentations effectively is because the insights are not readily available across the organization in actionable ways. Experienced researchers are aware of this and will spend a great deal of effort ensuring that stakeholders of segmentation research have access to insights in ways that let them see beyond the numbers and statistics.

Traditional methods of immersing an organization in segmentation results include persona development, town hall meetings, team workshops, posters distilling segment insights, or other printed or digital material like short videos, but what if you can take that one step further?

Recently, we’ve been experimenting with training custom GPTs with segmentation insights to aid in this regard and presented this research at several conferences. Imagine, being able to interact with a persona chatbot that can step into the shoes of your segments and provide all your answers to your burning segment questions instead of turning to detailed reports.

Though we found that custom personas chatbots are not quite able to reproduce answers with 100% accuracy, even when trained on segmentation data, watch this space. These limitations may soon be of the past as the technology rapidly develops.

Segmentation market research studies may be challenging to pull off successfully, but the potential benefits it poses for businesses are immense. In our experience, these five tips have proved well in ensuring success for us and our clients.