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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


Segments in Time

How to Segment Consumers

Like segmentation of companies, segmentation of consumers begins with the observation that something is changing in buying patterns. Some changes in the market are insubstantial (long or short hemlines), while others are material (self-service gasoline stations encroaching on full service).

How do you know if the change is fundamental? Evolution in consumer markets is more difficult to discern than in industrial markets. Managers must look at the range of customer factors: economics, product/service needs, customer sophistication, fundamental social change, etc. These will suggest what the drivers of change are and begin to explain why change is occurring.

In some cases, leading-edge consumers are followed by their mainstream peers. For instance, sophisticated users of the Internet have led the way for others to obtain music, telephony and product information over this medium. In other cases, one generation of consumers retains its preferences and behavior, but succeeding generations shift to new patterns of behavior. For instance, younger shoppers are often more comfortable with self service than are older shoppers. In either case, harbingers of change should be heeded, for they signal the next stage of evolution for a particular individual or group.

Knowledge Is Required

More information is required to initially develop an evolutionary segmentation than a static segmentation. The latter can often be based on internal sales figures and commercially available statistics. Evolutionary segmentation requires more outwardly focused data: for example, a view of the entire market is necessary to account for segment growth and customer migration. Also, cold statistics will rarely suggest the right ("natural") segments.(9) Thus, as noted, extensive interviews are required -- of both one's own customers and those of competitors. We find that focus groups often help in this process.

Routinizing the process requires that analysts track the histories of customers over time. That means current customers should be categorized by their current segment status. In most industries, the sales force should assist in the classification process. Senior management should not allow this to become merely another unrewarding task done to humor the marketing staff: sales management should use the classifications to allocate resources and set targets.

To capture fully the benefit of an evolutionary segmentation approach, sales management should dynamically adjust its account strategies according to potential sales opportunities. One data communications manufacturer adopted an approach of scouting for signals of an impending segment migration at potential customers. If the manufacturer found such signs of impending migration, then it dramatically increased account resources -- aimed at likely future decision-makers.

Successful institutionalization of evolutionary segmentation will generate a unique store of knowledge of customer trends that won't be easily duplicated by competitors. In contrast to SIC codes, evolutionary segment data bases can be redefined and refined over time. The company can observe new segments and evaluate the customer base for potential migration to these segments. In a few years, the company will have a unique, proprietary insight into the history, transformation and future of the market while competitors will have to constantly start anew with yet another snapshot to be discarded just as the market changes again.

Benefits of Segmentation

There are three benefits: reaching attractive customers, understanding how to appeal to them and designing new products and services for those segments. Most important, the process helps companies recognize opportunities before competitors do.

Being slightly ahead of the competition is a huge advantage.(10) By utilizing evolutionary segmentation, a company can leverage its understanding of the marketplace to deploy products and services in the right way at the right time. Examples of "early is best" include:

Best Buy. Originally an also-ran electronics superstore, Best Buy boldly innovated to address the increasingly sophisticated segment of customers who desire a friendlier, less-pressured purchasing environment. By being the first among specialty retailers to target this segment, Best Buy outperformed its traditional competitors. Best Buy's compound sales growth rate (1991-1994) of more than 75 percent per year outstripped that of industry leader Circuit City. And it contrasts dramatically with one-time peer Silo-Fretter, which recently filed for Chapter 11.(11)

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