Mastering Market Segmentation and Customer Personas
What is Market Segmentation?
Definition (Buttle & Maklan)
Market segmentation is the process of dividing a market into homogeneous subsets to create tailored value propositions. The goal is to identify homogeneous needs and common characteristics to group customers effectively.
Segmentation allows companies to:
- Identify meaningful groups of customers
- Focus resources strategically
- Create stronger, more targeted value propositions
The Two Main Purposes of Segmentation
- Segment Potential Markets: Identify which customers to acquire.
- Cluster Current Customers: Offer differentiated value propositions with specific relationship strategies.
Key idea: Segmentation is about finding patterns in people.
The 5-Step Segmentation Process
- Identify the business the company is in.
- Identify relevant segmentation variables.
- Analyze the market using these variables.
- Assess the value of each segment.
- Select the target market(s) to serve.
Segmentation Variables for Consumer Markets
Behavioral Segmentation
Behavioral variables are essential for CRM:
- Benefit Segmentation: Customers buy products for the benefits they deliver. Understanding these benefits is the basis for creating value propositions.
- Volume Consumed: Customers are ranked into tiers by business generation. Companies develop plans to migrate customers between tiers.
- RFM (Recency, Frequency, Monetary): Provides deeper insight. For example, a customer who buys large volumes infrequently and hasn’t purchased recently should be targeted with a win-back campaign.
Extended behavioral methods include: Purchasing behavior, benefits sought, customer journey stage, usage-based, occasion/timing, customer satisfaction, customer loyalty, interest-based, engagement level, and user status.
Demographic Segmentation
Demographic variables are rarely used alone due to high variance within clusters. While they describe who people are, they do not always explain why they buy.
Example: Social Grade Classification (JINCARS System, UK)
| Grade | Status & Occupation |
|---|---|
| A | Upper middle class — High managerial, administrative or professional |
| B | Middle class — Intermediate managerial, admin or professional |
| C1 | Lower middle class — Supervisory, clerical, admin |
| C2 | Skilled working class — Skilled manual workers |
| D | Working class — Semi and unskilled manual workers |
| E | Lowest grade — State pensioners, casual or lowest grade workers |
Psychographic Segmentation: The OCEAN Model
Psychographics capture motivations. The OCEAN model defines five personality traits:
- Openness: Imaginative vs. conventional
- Conscientiousness: Hard-working vs. disorganized
- Extraversion: Talkative vs. reserved
- Agreeableness: Trusting vs. suspicious
- Neuroticism: Worried vs. calm
Note: The most effective segmentation strategies combine multiple dimensions.
From Variables to Personas
By synthesizing different forms of segmentation, you can create personas—detailed profiles that bring segments to life by combining demographics, psychographics, behavioral data, and motivations.
What a Persona Includes
- Demographics: Name, age, occupation, location, status
- Goals: What they want to achieve
- Frustrations: What gets in their way
- Behavior: Technology use and media habits
- Psychographics: Motivations, personality traits, and trusted brands
How to use a persona: Once built, it answers the question: “How would we target this person?” (considering channels, messaging, timing, and offers).