Although markets consist of customers with similar needs, customers still differ in many ways, such as the benefits wanted, how price sensitive they are, and the quantity and frequency with which they make purchases.
Therefore segmentation is the process of dividing customers within a market into distinct groups based on these differences.
The process works in the following way:
- Segment your customers into distinct groups based on past actions or preferences
- Develop a relevant communication strategy with each group
- Position your various products or services in a way to appeal to each group
For example, you may separate people based on average spend, how recently they made a purchase, or how often they make purchases. When segmenting your database remember the following advice:
- Make groups the right size – too large and they won’t be focused enough, too small and it won’t be worth going to the effort to target them.
- Have enough groups to suit your requirements.
- Ensure that each group is different and distinct – without this you’ll be unable to develop unique offerings for each group.
If you have a database of members you may want to divide your database into those people who are current members, those who have been members at some point in the past, and those who have some connection but have never become a member.
Having segmented your database you can use the data to develop distinct marketing strategies for each group based around:
- Direct mail
- Individualised email marketing communications
- Product development
The aim is to move people down the marketing funnel: prospects to customers, customers to repeat customers, and repeat customers to high-value customers.
For example, you could send a membership offer to people who were members in the past, inviting them back for a special free trial. Always individualise communications, as Marilyn Latham is the Marketing Manager for Lyris Technologies highlights:
“Sending out a single email message to every address in your database whenever you wanted is so 20th Century now!”
To your most loyal customers you could send out a voucher along with 5 discount vouchers for their friends. This will further strengthen their loyalty and as you know that they’re likely to have a positive opinion of your company they’ll be likely to give the vouchers to their friends.
As a longer term strategy you could look into adjusting current products and developing new ones, with the aim being to make higher value sales and encourage repeat purchases.
Consider the case of the Scotch market. Back in the 1980s there was no differentiation and Johnnie Walker Red was priced at £9 per bottle. What happened next was that Johnnie Walker Black was launched at a price of £16 per bottle to target status-oriented customers. New versions continued to be launched until Johnnie Walker Honour was unveiled, priced at £129 per bottle. In a static market in terms of volume profits grew enormously through segmenting the market.