Sorting out customers: a valuable technique for enhancing top-line revenue growth is to classify and pigeonhole your customers by various categories and demographic subgroups--and then focus on meeting the specific needs of these clusters.

• Author: Thamara, Thomas
• Position: Market Segmentation - Cover story - Company overview

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Research has shown that Hispanic and Afro-American customers prefer a fragrance in their laundry detergent. Using this information, Procter & Gamble developed a new fragranced detergent and marketed this product in communities that were heavily Hispanic or Afro-American. The result was that Procter & Gamble displaced its competitors, Colgate-Palmolive and Unilever, in this product category among these ethnic groups. This is how market segmentation works in the retail industry.

We can define market segmentation as "the recognition of the diversity in demand among customers, and the clustering or partition of their needs into reasonably homogenous subgroups, as well as the rational alignment of products/services/marketing/delivery channels to meet customer's coherent needs." Market segmentation is the opposite of trying to be "all things to all people," or the "one size fits all" approach.

Market segmentation, therefore, provides fresh information that is useful for marketing (including timing of promotional efforts), new product selection and pricing. Market segmentation also helps to uncover new and emerging customer needs that currently are ignored or are not being adequately met. If you am selling investment and financial advice, you might want to use market segmentation to identify those prospects who are recent beneficiaries of life insurance--or winners of lotteries. Resistance to buying these products is lowest among prospects who have recently received a financial windfall (the equivalent of targeting a community in winter for the sale of snow shovels, especially when a snow storm is forecast).

Segmentation, in short, allows you to detect untapped or emerging market opportunities, so that a differential advantage can be gained over competition--by spotting trends/microtrends, such as second-home buyers, working retired, commuter couples, and those in need of tax refund or tax anticipation loans (a most profitable product offered by a California bank).

We also know that segmented focus is likewise applied, with excellent success, in our political campaigns. Hence, customer segmentation helps to enhance top-line revenue growth, which is as critical as bottom-line cost reduction--even though most of senior management focuses on the latter.

PRINCIPLES THAT SUPPORT SEGMENTATION STRATEGY

Research at the Harvard Business School on strategy at the business unit level shows that businesses with a higher share of their target market segments are more profitable than those with low shares. Target market is that part of the total market that an institution chooses to focus, making a concerted marketing and promotional effort by offering products and services tailored to that segment, in order to maximize profits and growth. Large shares provide an institution: economies of scale in processing, servicing, marketing and other business functions, and lower costs via greater experience curve impact and bargaining power with service providers such as technology vendors. This result is not a simple matter of large businesses earning greater profits than smaller businesses. HBS research on business strategy, for example, also shows that large banks with a small share of a large market segment are generally less profitable than smaller banks with a larger share of a much smaller target segment. What matters most is not how large a frog you are, but how you rank in your particular puddle. Another relevant research finding in marketing is that by trying to drum up revenue growth of a business through increased marketing of a low-quality service will wind up in further depressing its profits, since customers will become more aware of how bad the service is.

SEGMENTATION VERSUS DIFFERENTIATION

Segmentation is not differentiation. Segmentation is based on the demand side of the target market, which requires tailoring of your products/services and supporting needs to various clusters of customers' product and service needs, since your target market consists of heterogeneous groups of customers, with different combination of such needs. In other words, segmentation is a merchandizing strategy that strives to customize products and services needs to each slice of the total market pie, ensuring greater customer satisfaction, helping to build a more loyal and secure customer base. Differentiation, on the other hand, seeks to secure a larger share of the total market space, without regard to its component segments.

It is important to remember that cost information...