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A Practical Guide to Market Segmentation, Part 4 of 5


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Groupings - A practical guide to market segmentation

Yesterday we concluded that successful segmentation analysis will often involve identifying the needs of customers and that these needs are often simpler than first appears. Today we continue with our Practical Guide to Market Segmentation by looking at what to do when needs can’t be readily identified. We finish this fourth part by surveying exactly how needs and behaviours can feed into a comprehensive segmentation analysis.

Step 7: Consider a Behavioural Segmentation if Needs can’t be Recognised

There is a half way house between a firmographic segmentation and a needs based segmentation and this is behavioural segmentation. In some markets identifying needs can be truly difficult for the reasons discussed earlier in this paper. The decision making unit is made up of many people; the needs are always changing. If this is the case, an alternative segmentation could be to find a measure of behaviour that provides a good clue as to the hidden needs.

For example, some companies exhibit considerable loyalty to suppliers while others are constantly switching. This simple classification based on behaviour may be a good indication of the needs of the customers. Some preferring a long-term partnerships and being prepared to pay for this while others roam the market seeking cut price deals wherever they can.

Another example of buyer behaviour could be to divide the market between companies that go out to tender with a closely scoped brief of their requirements versus companies that talk about their requirements with suppliers, asking for suggestions as to how their needs can best be satisfied. Not surprisingly, companies that exhibit the behaviour of a tightly scoped brief are more likely to be driven by price and basic transactions whereas those that are more open to suggestions could value service and be prepared to pay for it.

Behavioural segmentation is therefore a strong option if it is too difficult to find a segmentation based directly on needs.

Step 8: Use Cluster Analysis to Group Together Companies with Different Needs

Once customers have been asked the trade-off question or their behaviour has been successfully determined, the answers are analysed using cluster analysis to group the respondents with similar answers. SPSS or some other statistical analysis tool is used to generate two, three, four or five clusters. It is unlikely that a segmentation with more than five clusters will be useful as each segment requires a distinct and different offer. The whole aim of a good segmentation is to find a result which meets the needs of the market but reduces the number of offers so as to maximise the efficiency of the supplier.

It is not unusual in segmentation analysis of this kind to find that a significant proportion of the population (often around 50%) requires the full package of criteria. They want a bit of everything from the list. However, there will be groups of customers who are strongly driven by just one or two of the criteria. For example, some will for sure want low prices and be prepared to forego other elements of the offer. Others may value the quality of products to the point where price is of little consequence. Quite clearly these groups of customers require different offers with different pricing scenarios.

Having achieved a segmentation based on customers’ needs, a procedure is required for placing new customers into an appropriate segment. This should not be difficult as the points spend question can be asked of new customers and their answers will enable them to be classified accordingly. The points spend question should also be repeated every six to twelve months with current customers to ensure that any changing needs are recognised and addressed.


This entry was posted on Thursday, January 17th, 2008 at 10:04 am and is filed under Market Research, Segmentation, White Papers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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