Market Segmentation Analysis

"It is not possible to develop marketing strategies for every consumer- the smart marketer attempts to identify groups of consumers with similar needs and preferences needs and that respond similarly to marketing actions". Segmentation is indispensable for Micro-Marketing Strategies.

Segmentation has many objectives and purposes. For Product Development and Innovation, segmentation allows identification of differences in customer preferences that can be leveraged to enhance customer experience. For Marketing, segmentation allows the identification of differences in purchase behavior of large subgroups of customers that can be targeted separately to enhance response. It also allows the identification of the most profitable customers and their characteristics. This information can be utilized in acquiring more of this profitable subset. For Risk Management, segmentation is utilized to identify subsets of customer population that have a riskier profile and a heightened risk of default (for financial Services products).

To Segment or Not To Segment?

Market segmentation allows managers to better serve the needs of a diverse consumer population, but a segmented market can also very quickly become a 'fragmented' market. How far should you go in segmenting your consumer market?

Managers need to determine:

• If the target segment is big enough to support customized strategies.

• Are there sufficient resources to pursue individual segments and does the estimated return justify the outlay?

• How can the segment be reached with a Marketing program?

There are different sophisticated statistical methods of segmentation, for Product Development and Marketing, Classification & regression Trees and Cluster Analysis are more popular. For Risk Management, CHAID Analysis (Chi Square Automatic Interaction Detection) is more the industry standard. Data for segmentation consists of customer-level cross-sectional data (Age, Income, Family Size, Marital Status, Number of Children, Zip Code etc. This data can be obtained from Customer Databases if one has been maintained, or from data vendors like Claritas or Acxiom and governmental Agencies like the Census Bureau.