Best Practices: Considering Segmentation Research? You Might Want To Think Twice.

This Byline was featured with the Marketing Research Association

How to better scrutinize segmentation studies with a primary research component

Months of planning, designing, and executing; weeks of analysis and modeling; time consuming multi-stakeholder work sessions;  the  never-ending debate over catchy, but non-controversial segment names. Yes, that’s right. You have completed a primary research market segmentation study.

But then the VP of Marketing STILL asks: “And how exactly will we use this information?”

We recently asked a sample of market research and marketing professionals about their experiences with segmentation research.  The group categorized  40% of the studies they conducted as having no to minimal impact on business or marketing decision making.

Yikes.

In response to the assumption that segmentation fails due to mistakes or issues with the process itself, many best practice articles have been written to help marketing professionals achieve segmentation success. But even with this information and consultants to help you get it right, why the sustained lack of perceived impact produced from these studies?

As a supplier of segmentation research, part of our job is to counsel our clients on their research decisions and set expectations surrounding outcomes; however, we do not always have influence over when and why segmentation studies are conducted. Over the years, we have observed factors outside of the segmentation process itself which seem to correlate to higher impact of this research method on our clients’ businesses and brands.  

Here are a few questions to answer before signing off on that new segmentation project.

#1. Can you provide a very specific answer for why?

Of course the need to identify different customer segments via primary research segmentation should be connected to a key area of decision making. However, we have found some objectives are better served by this methodology than others:

  1.     Are you looking to create new/separate offers for identified segments?
  2.     Are you looking to revisit pricing strategies?
  3.     Do you need to create/deliver a message to a relevant customer audience to maximize marketing return on investment (mROI)?
  4.     Do you need to identify ways to grow, retain and/or increase the profitability of your current customers?

If your answer is yes to one of the above, then segmentation involving a primary research component may be worthwhile. However, if your objective is more generalized – e.g., “we need to learn more about our customers/prospects” or “we need to identify target segments for Product X” – investing in a complex segmentation study may not a good use of research dollars, and you may be better served via different, potentially less expensive, methodologies.

#2. Do you have any anecdotal or directional indications that meaningful heterogeneous segments exist?

A common saying is that segmentation should produce groups that are “homogeneous within” and “heterogeneous between.” But, we have witnessed robust, well-executed segmentation studies that produced statistically distinctive segments, with no meaningfully different implications from a business or marketing standpoint. For example, a study aimed to optimize mROI with statistically defined segments, but addressing these segments did not necessitate different actions surrounding media buy or communication strategy.

Our clients who have invested in exploratory research (e.g., qualitative, secondary, and/or database analytics) and have created hypotheses around actionable market segments that warrant validation tend to gain the most value from their quantitative efforts.

#3. Do you have access to an existing customer and/or prospect database?

One of the most successful ways to implement learnings from market segmentation research is the ability to classify individuals into your target segments and align your marketing efforts and messaging strategy accordingly. An industry best practice approach for doing this is called reverse segmentation, which focuses on targeting variables that are currently in your database, supplemented with primary research data (e.g., attitudes, psychographics, behaviors), and allows for no misclassification of segments.

Sounds great, right? But if you are a pharmaceutical manufacturer launching a new brand for the treatment of a condition that affects 3% of the population, you probably do not have a solid prospect database to start from. Or maybe you have a list of customers and/or prospects, but your database is incomplete of information about these individuals. The inability to ‘tag’ an existing list of customers or prospects, for whatever reason, is often a red flag, particularly if your core business objective for commissioning primary research segmentation surrounds sales/communication targeting.

#4. Can you track your progress?

As mentioned earlier, one of the basic requirements of segmentation research is the ability to identify your segments – either within your own customer databases or within the population. This is not only critical for targeting purposes, but also for monitoring success.  Segmentation is ultimately about uncovering opportunities where resources such as sales or advertising are optimized. If you are not able to track key business goals (e.g., revenue and profit, or at least usage) by your target segments, it is difficult to ascertain success, and more importantly identify areas for refinement. For example, one segment could be driving overall revenue, but may be more difficult and more expensive to reach and actually purchasing lower margin products. Or a market event may change perceptions and behaviors surrounding your product.

Those organizations that have thought through (in advance) the ability to implement segment level business monitoring, and the resources required to do so, are more likely to recognize ongoing impact of their segmentation research on marketing decisions.

With many marketing research departments trying to make the most of their static to declining budgets, being efficient with research dollars is more important than ever.  Before finalizing next year’s research plan, marketing executives and research professionals should scrutinize the need for executing segmentation studies with a primary research component.  Discussing the above criteria with key stakeholders might improve your chances for success, or maybe give support on why dollars would be better spent elsewhere.

Jaime Hodges is an Executive Vice President at Phoenix Marketing International

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