3 Steps for Market Segmentation

What should we be thinking when defining segments?

The path from consumer interactions to valuable segmentation requires taking a series of steps rather than making one declarative statement about who our market is.

• Step 1: Define why we need segments.   The technical definition of a segment - a group of consumers with a common need that are expected to respond similarly to our messages - doesn't actually help us much. For instance, "web site visitor" is a characteristic, not a segment per se since we have all types of visitors who are there for different reasons.  So I start with the business objective we are trying to improve.

• Step 2: Given a metric that matters, identify what characteristics, attributes or behavioral traits could help identify members of a segment.  Since segments are a mental model for grouping consumers and rarely something people actually call themselves we're left with the challenge of identifying a collection of proxies that indicate membership.   I work through a list of attributes as if they were software feature requests: what traits 'could, should, and do' make a difference.

• Step 3: Report by segment.  We've gone thru the steps necessary to create and target segments, it would be a shame not to report and analyze that way (happens all too often.)  The biggest obstacle is that the things we can track (digital activity) isn't always what we want to report (change in sales or marketing impact.)  And outside of pure-play ecommerce I'm going to be modeling that impact. 

The implications of these steps are:

1. There is more than one segmentation scheme and our first ideas coming out of a conference room probably aren't the best
2. This reality leads to a Test & Learn approach to the definition not just the creative/offer side of things
3. Segments need to be stable over the marketing planning horizon in order assess change and affect budgeting