Stage 1 - your users

Start here: How to Segment a Market

This document will help you approach market segmentation. Use it as a guide to put together your research plan. The notes are based on the book:

Market analysis

Market analysis is about understanding the needs and desires of the consumer and matching them up with your product. You can understand their needs and desires by digging into your data, conducting interviews, collecting feedback etc.

"Despite the heavy reliance of market research on survey methodology, a wide range of sources of information are available to explore, and gain detailed insight, into what consumers need or desire, including qualitative research involving focus groups and interviews, observational and experimental research."

Segmentation and positioning

Once your base-level research is complete, you need to decide which customers to focus on (segmentation and targeting) and what image of the company to create in the market (positioning).

Segmentation is a crucial decision-making tool for marketing departments. It lets them decide what to focus on with different programs. At its core, segmentation should help you understand what customers
actually
want, the differences between consumers, and the benefits that your product offers.

Ideally, people in the same market segments are very similar to each other on a handful of different characteristics, like:
age
location
stage of life
income
benefits sought
spending patterns

Usually you build segments on many characteristics. Great segments should allow you to be really clear about where each new customer falls; there shouldn't be people straddling two segments. Segments need to have very distinct differences.

Once you develop segments, you can use them to develop a marketing mix for each of your segments and frame messaging and channel strategy around their unique needs.

Segmentation criteria

Before extracting the segment you need to choose which segmentation criterion to use. Here are the 4 most common segmentation criteria:

Geographic
- Typically the consumer’s location of residence serves as the only criterion to form market segments.
Sociodemographic
- Typical includes age, gender, income and education.
Psychographic
- When people are grouped according to psychological criteria, such as their beliefs, interests, preferences, aspirations, or benefits sought when purchasing a product (most psychographic segmentation studies use a number of segmentation variables)
Behavioral
- Search directly for similarities in behavior or reported behavior. A wide range of possible behaviors can be used for this purpose, including prior experience with the product, frequency of purchase, amount spent on purchasing

How to approach segmentation

Segmentation is going to be either proactive or reactive. If it's reactive, you're taking the data that you already have and maybe stumbling upon segments or characteristics based on unrelated research. You're assuming characteristics of the market that you learn on the way.

Proactive is the way to go. It lets your data do the talking: you don't define any characteristics unless they're revealed in the data. You're allowed to have certain assumptions but they need to be backed up by research and grouped into real segments.

There are a few schools of thought in data-driven market segmentation:

Natural segmentation
means that you believe there are already trends and patterns that exist in the data and it's your job to find them. Note: natural segmentation is rare.
Reproducible segmentation
means natural patterns don't exist, but that there's enough recurring data that appears in different characteristics that you can repeatably find people who fall into the same categories—even if they aren't perfect.
Constructive segmentation
happens when you don't have patterns or natural segments appearing across data. It's still valuable, though: Even if your customers are evenly split across many segments, it's more efficient to target these groups and subgroups in a repeatable way.

How to use your segmentation

When it has been decided which market segment you're going to address and how you'll present your product to this segment, the work on tactical marketing begins. Tactical marketing planning usually cover four areas—the 4Ps:

Product
: development and modification of the product in order to meet the needs or desires of your market segment.
Price
: willingness to pay for your target segment
Place
: the best channels to use to get the word out about your product
Promotion
: making the communication of the offer attractive for the target audience.

The 10 steps of market segmentation

Deciding to segment: Is this the market where you want to play? Can you win long-term?
Specifying the ideal target segment: What would your ideal consumer look like?
Collecting data
Exploring data
Extracting segments: How can we put people in buckets based on patterns we identify?
Profiling segments: How can we determine the key features of the segments we extracted?
Describing segments
Selecting target segments: Which ones will be best for the long-term growth of your company?
Customizing the marketing mix: Use the segments to choose your channels and messaging
Evaluation and monitoring: watch to see if they segments are working to grow your business, if they grow, if tastes change


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