Five Pitfalls of Market Segmentation and How to Avoid Them

For such a complex, high profile, and expensive activity, market segmentation has a success rate that leaves much to be desired.  A company may undertake a market segmentation project with enthusiasm, only to find that the report ends up as a thick volume sitting on a shelf.

Other times, the segmentation is undertaken by a function or department that is particularly facile with research, such as the consumer insights group, but is never adopted by the rest of the organization.

Here are five common pitfalls of market segmentation, and how to avoid them.

1. 1. The segmentation was not developed with the end goals in mind. 
      Market segmentation is the search for ways to divide a market into parts, called segments.  It is an exercise that focuses upon choices, such as selecting which segments are worth focusing on and which segments are unlikely to be productive.  For the segments chosen as the focus of the company’s efforts and resources, a proper segmentation also includes recommendations about how to address those segments, including important elements such as which positioning to adopt, how to go to market, and how to deploy vital functions such as sales and advertising. There is no one correct answer to any segmentation, but the best answer will be appropriate to the specific clients who intend to use the results.

      For example, the segmentation that is best for use in selecting advertising may be different than that which will be used by the salesforce. Some clients prefer a simpler solution that is perhaps not as sophisticated, while others may seek something more sophisticated, even if it is more complex.   If the segmentation is to be used by relatively independent arms of a company, such as franchisees, agents, or distributors, that will also affect the “right” solution to the segmentation.

      Before undertaking a market segmentation study, an organization must think through its goals, addressing issues such as who will use the segmentation and for what activities.

   2. The segmentation uses the wrong variables.
      There are a variety of ways to segment markets and each depends on the selection of the right variables.Demographic segmentation uses demographics to divide a market into segments.  For example, a company may target upper-income consumers, or moms with children, consumers who live in urban markets, or dog owners.  All of these segments are based on demographic variables.

      A second type of segmentation uses behavioral variables. For example, a company may target consumers who eat fast food at least weekly, or travel at least once a week on business, or who use financial advisors.  These types of variables create behavioral market segmentation because they rely on behavioral variables.A third type of segmentation, attitudinal segmentation, is based on consumer attitudes.  This is the most complex segmentation but can be the most powerful.  Two consumers may share similar behavioral and demographic characteristics, but maintain very different attitudes towards the product in question.  For example, a provider of home insurance may find that two neighbors live side-by-side in homes of similar value, but one believes in insurance and likes to be well-covered, while the other wishes to have the minimum amount of coverage.  Similarly, one consumer may prefer to have the advice of an agent, while the other may prefer self-service or an online purchase method.

      There are trade-offs across using these different types of variables.  Demographics are the easiest to identify and to target. They can be the focus of direct mail campaigns and are easy to communicate to the salesforce, yet don’t reflect more fundamental differences between consumers.Behaviors are somewhat more difficult to target, but tend to be more powerful because they reflect what people actually do. The most powerful variables in terms of generating segments are attitudes, but they are also the most difficult to analyze and understand.

      The trade-offs between these three types of variables must be considered and designed at the beginning of a segmentation project to avoid choosing the wrong type of variable. The research design must also consider whether other variables should be included, such as those that are used for buying media, locating stores, sending direct mail, or other data-driven activities.

1. The segments aren’t meaningfully different from each other.A third common problem with segmentation is that the segments are not meaningfully different from each other.A common saying is that segmentation should produce segments that are “homogeneous within” and “heterogeneous between”.  In this type of segmentation, all the consumers within a segment are similar to each other, but the consumers in one segment are meaningfully different from consumers in another segment.

   As we mentioned earlier, segmentation is about choices.  It is undertaken so that an organization can select one segment over another, choosing the opportunity with the greatest potential. It can also help a company select methods for going to market that match the needs of different parts of the market.If the segments are too similar to each other, there is no reason to select one segment over another.  For segmentation to be productive, it must help a company either select which parts of the market merit focus, or it must help a company select the right methods to address different segments.  Ideally, it will do both.

2. The segmentation is not linked to profits.
   If segmentation is about choices and about the search for opportunities where resources such as sales or advertising can be applied to yield the greatest opportunity, then the segmentation must yield a way to evaluate the different opportunities.  One segment may be more difficult and more expensive to reach, or may use products that have a higher cost and lower margins.  These considerations must be taken into account as you build a research strategy that maximizes your resources.  Any segmentation should link not only to revenues but also to profits, so that the choices about which segments to address and how to address them, can be made in a manner that boosts the bottom line.
3. The market has shifted. 
   Market segmentation, like any other type of research, ages over time.  Consumers change, markets shift, distribution channels evolve, and products reach new generations.  As these and other dynamics in a market change, the segmentation gradually ages.  To avoid becoming obsolete, any segmentation must be updated over time to stay current with the changing marketplace.