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value chain marketing-dynamic market segmentation strategies

Dynamic Market Segmentation

by Kenneth Rudich

In today’s high-tech high-touch environment, “one-to-one” marketing has become fairly commonplace.  So much so that it’s enough to wonder if market segmentation hasn’t become altogether obsolete.  Has it? 

Not according to The Direct Marketing Association Research Council.  They note, ‘These days terms such as “segment of one” or “one-to-one” marketing are the rave, but in practice as soon as the number of customers becomes sizable many of these concepts quickly translate into some type of dynamic customer segment.’  When this happens, the deployment of dynamic customer segmentation techniques provides a systematic means for efficiently cultivating the perception of a one-to-one relationship.   

In order to explain the concept of dynamic customer segmentation, we must visit the two main types of customer segmentation techniques that are often taught.  One is A Priori segmentation, and the other is Post hoc segmentation.

a priori segmentation      

A Priori segments split the market according to pre-existing clusters of people with apparently similar characteristics, such as demographic criteria involving age, sex, geography or social economic status.  A slightly more sophisticated version may include household information, like household make up or type; or life stage information (combining information about age, presence of children and working status). 

This approach represents the easiest way to segment a market, and it’s a good starting point for gaining some knowledge about the customer base, especially as it concerns the targeting of communications to different groups.  For some businesses, it may be all the segmentation that is needed.  It really depends on the degree of customer information precision required, what type of data and information is accessible through A Priori segmentation, and whether it will adequately inform the strategic learning cycle.

Having said the above, it can also be stated that A Priori segmentation is crude at best.  For example, it doesn’t necessarily provide real insight about customer motives and usage patterns.  On the other hand, it can offer benchmark data for making the segments measurable within the context of a database, and this can lead to unlocking deeper insights later on. 

post hoc segmentation

A database can be used to monitor customer interactions across time – for example, by customer type (organization or person), customer state (current, former, prospective), customer segment (strategic or tactical) and customer usage (experiences service or uses product).  This is where marketing metrics or measures come into play, as well as some other more advanced techniques (e.g., Conjoint Analysis for one).  These will furnish information that A Priori segmentation cannot provide all by itself.

As the collected data matures, new strategic insights — insights that would otherwise remain concealed from view — will emerge and become available for detection.  Whether based in customer usage patterns, such as product and service affinities, aptitudes, interests, or other value-based concerns such as distribution channel usage, communications or communications channels usage, transactions channels usage, or product development, such insights present opportunities to forge new or better customer relationships. 

One typical example revolves around the often changing status of customers, wherein they may, based on a usage analysis, fall into an assortment of sub-categories that includes prospective customers, new customers, repeat customers, and interval customers (customers who come and go at irregular intervals). 

This is where Post hoc segmentation enters the picture.  By definition, Post hoc segments or groups are identified through gained knowledge about the customer base.  In our present example, the customer base contains four smaller target groups based on trend information derived from a usage analysis. 

Because each of these sub-categories represents a type of customer state, their interactions with the business differ.  Some, for example, may be more profitable.  Others may have the potential to become more profitable.  And still others may yet be converted.  Consequently, the strategy and tactics for handling each should reflect those different states of being. 

This is what it means to dynamically adjust the customer segments — where the purpose is to do a better job of catering to specific customer relationship implications.  It also should be noted that Post hoc segmentation is just as concerned with the elimination of unproductive relationships, products or services as it is with the addition of new ones that are productive and meaningful. 

market segmentation is alive and well

Market segmentation is not a one-off task; it’s an ongoing process of getting to know your current and potential customers better, and leveraging the information to strategic advantage. 

The pay off from staying attuned to the shifting patterns and trends of the customer base include:

  • the economics of managing customer relationships according to target group implications are unequivocally better than either a strictly one-size-fits-all approach or a strictly one-to-one approach;
  • enduring and diverse relationships can foster a stronger customer base  portfolio;
  • such information can be used to bridge customers from one usage point to another;
  • communications can be targeted to groups in a manner that efficiently maintains the perception of one-to-one marketing;
  • it creates a climate of strategic focus and direction across the value chain.

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