The science of marketing segmentation

Like so many of marketing’s foundations, segmentation has been rocked by the data revolution, but it’s nothing without the art of good strategy, writes Chris Byrne.


The concept of dividing a market into manageable, understandable and targetable chunks is one of the foundations of marketing and, like so many of marketing’s foundations, segmentation has been rocked by the data revolution. Big data is a double-edged sword for marketers.

On the one hand, it offers a wealth of information with which to understand and segment the market. But on the other, the deluge of data can be a nightmare to wade through.

To add to the uncertainty, marketing technology casts doubt over the need for understanding consumers through a segment, as data makes targeting possible at an individual level.

IBM’s CEO Ginni Rometty believes the shift from segmenting customers into groups in order to understand and target each customer as an individual is already well underway.

“Marketers will say my job has always been to understand customer segments,” Rometty explains. “The shift is to go from the segment to the individual. It spells the death of the average customer. Take data and do things like real-time pricing, omni-channel… bring out the latency in the data.”

This vision entails a shift from reaching out to customers to creating a system of engagement that keeps track of interactions between brand and customer, using insights to maximise value creation at every touch point.

However most marketers are reticent to believe that segmentation is a thing of the past.

Marketers we spoke to all believed that, to some extent, segmentation will always play a role, as it will never be possible to target consumers individually every single time.

“If you’ve got hundreds of thousands of customers, you can communicate with them on a one-to-one level, and learn their behaviours on a one- to-one basis, but they will still fit a particular segment, which will have particular needs that the organisation needs to meet,” says one experienced financial services marketing executive.

While the data revolution has added to the complexity of the science behind segmentation, the art in applying it to the business remains the real challenge for marketers.


Without art, science is nothing

Companies have moved past traditional geo-demographic data as the basis of segmentation, with research, customer and campaign data, and other inputs such as propensity modelling, linking together to form a more holistic, targeted framework.

Bringing these disparate sources of data together is easier said than done and there are still many organisations that lack a single customer view, says Richard Harris, director of client engagement at Inivio. “It’s amazing to me that it’s a conversation I’m still having with clients… linking and matching their own data to get a complete picture of what their customers and prospects are doing, let alone augmenting that with third-party data or behavioural data.”

Connecting and integrating multiple data sources across multiple levels of an organisation to form something actionable is no mean feat. It’s a science and an art. The science is the analysis itself, while the art is defining how you’re going to use the segmentation and why you need it in the first place, says segmentation expert Angela Baker. “You can employ the teams to crunch the numbers,” Baker says, “but without a clear direction to begin with, the result can be meaningless.

“Organisations have so much data, they could have teams tapping away for years, but unless you have an idea of what you’re looking for it can be wasted effort. There’s a real risk of data overload… decisions on groups the audience can conceptualise.

“Often the easiest step is to get them thinking about a smaller group of segments that roughly align with the objectives of the business and then start to get more granular.”

To implement segments across an organisation, each department needs to speak a common language. “The last thing you want is your analytics team working away in a dark room and not talking to anyone for six months. Analysts are the kind of people that are perfectly happy to sit in a dark room and plug away at the perfect answer. But they need to be constantly working with the business to give it bits of information as they go.”

The IT team is the next big challenge. “To gather, capture and access data you need the goodwill of your IT department,” Harris points out. “But marketing is usually quite low on a CIO’s priority list. The challenge becomes how do you build a business case to secure the IT resources you need, which comes back down to ROI.”

Similarly, you need a strong business case to get management on side. “Executives now have an understanding of what data is and what it means… an understanding about the commercial benefits and how much it can cost,” Harris says.

But for many organisations, the challenge of understanding what segmentation really involves is still a barrier.

“Management can struggle with the investment required in segmentation. It’s very easy to understand the pay-off in a traditional through-the-line marketing campaign, but if you’re going to do segmentation properly – the data analytics, programs, propensity modelling systems etc – they’re an investment for the future,” our senior financial services marketer tells us.

“Sometimes organisations want segmentation, but perhaps don’t understand what they need to invest in it to make it successful.”

It’s the CMO’s role to bring management along with them on the road of segmentation.

“Don’t treat it as a one-off project on the side or a piece of technology that needs to be added on to the organisation. It is in many ways a new way of doing business,” she says.

With organisation-wide understanding of target segments, a business can integrate customer-centric thinking into everything it does. “No longer is it just something a few people in the marketing department use,” Harris says. “It can be applied to product development, operations, to run call centres, to prioritise calls into the queue, even to personalise website content in real time.”


Predicting the future

Internet giants, such as Google and Amazon, are experiencing great success personalising in real time. They’re the first to begin to move towards individual segmentation by allowing visitors to self-segment according to personal data.

With consumers now in control over so much of what they see, it’s better to let them choose what’s relevant than to predict it based on any expensively calculated segment identity, according to Michael Fassnacht in AdAge. Few marketers that use a web property as a primary touch point have a focus on enabling the consumer to self-segment. Fassnacht identifies four ways marketers can enable consumers to self-segment:

  • Build correlation clusters between purchased products and services, and serve them up as recommendations (e.g. Amazon, Apple’s Genius feature),
  • offer networking opportunity based on self- acclaimed interests (e.g. Facebook, LinkedIn)
  • design and provide content or a deal-alert function that automatically informs consumers about something new or interesting in the ‘opted-in’ interest domain of a consumer (e.g. Google Alert, Orbitz Fare Alert), and
  • enable sharing of consumer-generated content or feedback in the context of your brand.

If you can have a tailored offer for every customer, do you still need segmentation? “Ultimately, there will end up having to be some kind of give and take between data security and consumer response to different organisations having their data,” Baker believes.

“The possibility of a nirvana of individual segmentation will depend on consumer response to the growing understanding of how many organisations have their data.”

If someone is already engaged in a buying transaction, they’re less sensitive to behavioural targeting, Harris adds. “[Make sure you are] talking to them in a relevant way about the product they’re interested in and focusing on their needs, rather than trying to flog them everything under the sun.”

In data, marketers have the tools to quantify return on investment and finally claim the long sought- after seat in the boardroom. Similarly, segmentation is a tool that, if instilled across an organisation, can provide value in all areas.

It’s an exciting time to be in marketing, most practitioners we spoke to believe.

“It’s becoming more of a science and I think organisations are realising that marketing can be the driver of the organisation, because it sits across the whole customer set, the whole product set… across the market,” one says.

Bridging the disconnection between segmentation and business strategy is a cultural challenge faced by most marketing departments. The science is in getting the right people and systems in place. The real challenge, however, is the art of integrating and applying segmentation organisation-wide.

Chris Byrne
BY Chris Byrne ON 19 January 2015
Chris Byrne used to be research editor of this publication, but now contributes from various locations. He also contributes to The Fetch and has been published in The Guardian, Sydney Morning Herald and The Age.
Tweet him @penseive