What is segmentation?

People or organisations with one or more characteristics that cause them to demand similar product and/or services - based on the qualities of those products such as price or function, can be grouped into what is termed a segment. A true market segment is distinct from other segments (different segments have different needs), is homogeneous within the segment (exhibits common needs), responds similarly to a market stimulus, and can be reached by a market intervention. The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts.

People in a given segment are supposed to be similar in terms of criteria by which they are segmented, and different from other segments in terms of these criteria. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups.   

Segmentation is a form of critical evaluation rather than a prescribed process or system, and hence no two markets are defined and segmented in the same way. However there are a number of foundation criteria that assist segmentation:

• Is the segment viable and can you make a profit from it?

• Is the segment accessible?

• How easy is it to get into the segment?

• Is the segment measurable?

• Is realistic data obtainable to consider its potential?

The are many ways that a segment can be considered, and some of the basics include:

• by geography - such as where in the world was the product or service bought.

• by psychographics - such as lifestyle or beliefs.

• by socio-cultural factors - such as class.

• by demography - such as age, sex..., and for business, size, turnover, industry type..., and so on.

A company should evaluate each segment based upon potential business success. Opportunities will depend upon factors such as the potential growth of the segment, the state of competition within the segment, how much profit the segment will deliver, how large the segment is, and how the segment fits with the current direction of the company and its vision.  

What is scoring?

For those of you new to the concept of using scores for database segmentation, profiling and to then select individuals for targeting, the following example should help.

Most people have at some time applied for an insurance policy or credit of some kind - a loan, mortgage, finance for a new car, etc. - and during the application process have been asked questions such as age, length of residency, how many credit cards, health history, etc.

For each of the answers given, data will have been entered into a computer program that assigns a number (or score) to each piece of information. This is usually termed a score card. The way the numbers are then added together will depend on the formulae used, but will greatly influence the decision to give you what you are requesting.   

The important thing to remember is that whilst each separate piece of information may in its own right not be seen as important and might otherwise be ignored, only when these items are combined does the resulting information and its score become significant and predictive.  

A predictive model would usually be created by a statistician and used to compare the characteristics (or profile) of individuals who are known to represent, for example, a good vs. bad risk. This produces a formulae and computes a value (or score) for each individual. Depending on how high or low the final score is, the lender or insurer can determine the most appropriate offer for that individual and be fairly confident in the degree of risk.  

The picture to the right shows an example of how important various pieces of information are in predicting who might respond to a specific type of mailing or email campaign.  

Direct marketing - using scores to target prospects

In direct marketing, to find the most likely responders for your offer could well involve making hundreds of separate or combined counts and selections, and then only using only the information you believe is important - i.e. maybe missing key predictors!

However, by using a scoring process, the selection task can be greatly simplified. Each individual can be allocated a single score based on their propensity to take the kind of action you desire. 

There will never be a single model or formulae that meets all your targeting or profiling needs however.

A separate model and scoring formulae may need to be created to optimise the targeting and response to each different offer you make, or to achieve the results you desire. And remember, customer needs' change over time as do the activities of your competitors. What works well today may not work so well in the future, so the art is to continually test, learn and refine to get the most from your marketing spend!