CONSUMER MARKETING
At its heart, the role of marketing is to provide strategic direction to the firm, and ultimately, make it more efficient. Of course CFOs looking at ad budgets and promotion spending probably don’t see marketing quite the same way. However, when marketing is done well, it keeps the firm out of margin-killing competitive battles, helps drive product innovation that leads to revenue growth, and points the way in an uncertain future. Yet, the one area where marketing can create the most efficiency, customer segmentation, has so far produced only mixed results.
Segmentation is a simple idea with big implications. By grouping ‘like’ customers, companies can serve them better. They can make products that will appeal to different interests, move pricing up or down depending on income and desire, and address other variables such as geographic location, technological sophistication, even culture and perception of self. Indeed, because we can cut the customer pie in so many ways, segmentation has become highly complicated and is often painted onto existing strategies rather than being the core of the strategy. Let’s take a quick look at the problem and then examine a more reliable form of segmentation.
Segmentation as an add-on
Segmenting customers into like categories happens quite naturally in the B2B world. Customers are logically broken down by size, industry type, and location. This logic is often reflected in how the sales force is oriented and sometimes even makes it further into the organisational structure of the firm.
Segmenting the consumer market is neither logical nor natural. In some cases we may need to separate males and females, in others we may divide people by religion (for dietary and holiday reasons), ethnic background (clothing and literature), and in still others we may focus more on their income or education. Underlying all of these segmentation approaches is the desire to group customers meaningfully, and it is the concept of meaningful that needs to be examined.
By meaningful, most marketers are focused on predicting what customers will do – how they will respond to particular mixture of the four Ps. But in our efforts to group customers by how we expect them to respond, we rely on predictor variables, attributes we expect (hope) will correlate to what customers do in reality, instead of criterion variables, what actually determines what they do.
Demographic variables assume people who are the same age, have the same education, or same income will behave similarly. Sometimes they do, most times they don’t. Psychographic segmentation tries to peel the outer layers of the customer and assess attributes relating to personality, values, attitudes, interests and/or lifestyles. While significant insights can be gleaned by such an approach, it is very difficult to categorise customers accordingly—very few of them are willing to submit to psychological testing for our convenience.
Behavioral segmentation has long been used as a starting point, a way to get a handle on customer behavior until better insights are developed. Using behavioral segmentation, marketers attempt to understand the situations that prompt use and group customers by similarities in occasion of use or purchase. Sophisticated marketing efforts attempt to link behavioral segmentation with the corporate database leading to much higher levels of predictive reliability. While this is a good start, marketers are hard pressed to separate out the reason for behavior. One customer buying a six-pack of beer might be planning on inviting friends over to watch a soccer game while another customer might be simply stocking up for the weekend.
Customer Context and Behavioral Segmentation
In a prior article, I discussed the idea of situational context and that customers purchase and use products and services along three dimensions of context: a high level of meta-context that determines thresholds of perception, the context or task level which allows the unconscious mind to form habitual mastery of oft repeated behaviors, and the sub-context that can alter previously automated behavior as new variables arise to conscious awareness. By understanding that customer behavior evolves over time and reflects changes in how the brain is wired (in regions of both the executive and habitual minds), behavioral segmentation takes on a radically different look.
This insight is of particular importance in the current economic upheaval. Customers’ habitual purchase behavior is being disrupted as a sub-context of affordability/customer confidence intrudes on what were once habitual behaviors. As customer behavior changes, marketers need to evaluate if their old segmentation strategies are still relevant. Not only have the make-ups of segments likely to have changed, but what motivates their behavior has gone through an evolution as well.
For example, one of my clients reports that cookie sales are down, but candy bar sales are up. Behavior analysis indicates that while in the grocery store aisle, customers are separating out necessities from luxuries and only purchasing necessities. However, the candy bar by the cash register elicits different behavior, either because the price falls below some perceptual threshold or the cues at the register are different than the cues in the aisle. Without analysing this behavior based on the customer’s perception of meta-context, context, and sub-context, marketers are unlikely to craft appropriate responses either in pricing or messaging.
Ultimately, developing behavioral segmentation with a context-based approach will give marketers not only unique insights into customer behavior, but also the ability to influence behavior with far greater reliability. The key is to understand that customers act similarly when they perceive a situation as being within a similar context, and when they repeat their behaviors under the conditions of that context, they form predictable habits.
By Neale Martin