Market Segmentation

If you've studied marketing or spent any time hanging around marketing geeks, then you know something, probably quite a bit, about "consumer segmentation". It is one of the fundamental tools of modern marketing.

Segmentation is simply the process of dividing your potential customers into different groups, the notion being that it is easier and more effective to tailor an offering to a relatively small group of people with similar wants and needs than it is to try to mass-market something to the world. (It’s surprisingly difficult to sell worms to people who aren’t fishermen, gardeners, or practical jokers).

Segmenting our potential markets is something that we all do intuitively. We know that most products, or homes for that matter, are not going to appeal to everyone. So, we try to define in our minds the “perfect buyer”. Segmentation models are typically built around demographics (age, income, gender…), psychographics (lifestyle, personality, values…), geography (city, neighborhood, zip code…), and other personal attributes.

It is common to see people segmenting their potential customers based on things like gender and zip code, in part because it is easy to get this information, and get it in a form that can be immediately put to use. There are more than a few list brokers who will sell or rent you a list of women 55 and older who live in zip code 90210.

The big question when looking at segmentation is: Are the segments and the attributes that define them really distinct and useful IN THE CONTEXT OF YOUR OFFERING? A good segmentation model should be based on sound data, give you a sense of what the key purchase criteria for each segment are likely to be, and by extension how best to communicate with them.

Income and net worth are common attributes in segmentation models. Everybody wants a piece of the folks with the fat wallets, and understandably so. Robert Frank, the author of Richistan, the popular book on the affluent, divides the wealthy into three main groups (based on net worth):Richistan

* Lower Richistan: $1-$10 million

* Middle Richistan: $10-$100 million

* Upper Richistan: $100 million-$1 billion

Segmentation by net worth or income is an obvious approach. It is particularly useful for qualifying potential purchasers and looking at potential market size, but it isn’t always as useful as one might think in a working segmentation model.