This paper analyses different customer segmentation concepts and its implications to organizations. Key determinants of customer segmentation are identified; consideration of high customer segmentation and its impacts are also discussed. Lastly, consideration of the high and low customer segmentation approaches and its implications to the organization’s market mix are discussed with relevant examples.
Customer segmentation and its impact for business
According to Kumar (2008, p.44) customer segmentation is the identification of customers based on groups such as demographics such as age, sex and income or attributes like customer attitudes/behaviours and psychological profiles. As stated by Fisk (2009, p. 3) customer segmentation is relevant to business management because it enhances strategic prioritization where different elements of the segmentation can be applied to create a customer strategy that comprehends the values of varying customers and ways of addressing them appropriately.
As stated by Tsiptsis (2010), customer segmentation also helps in competitive positioning of a business utilizing micro-segmentation to enhance the values of a brand in order to align it with the target clientele within the market. Outside the market, customer segmentation is essential in setting future strategic plans such as seeking other new markets, establishing new products and even speculating market changes (Wang, 2006).
Customer segmentation also enables holistic management of business through comprehending of essential customer needs, behaviours and profiles. Focusing on high customer segmentation, for instance, allows a business to adopt a market approach strategy with higher chances of success because of the clear identification of the customer needs within the market (Hawkes, 2003). Customer segmentation also allows for pooling of organizational resources and human capital towards the core needs of the target customer and hence an important consideration outside marketing.
Key determinants of customer segmentation
According to Zoltners (2004, pp.60-61), companies can identify key determinants of customer segmentation based on their profiles, behaviours and needs. The profile defines the customer in terms of geographical location and industry. Behaviour defines the customer based on what the customer does in terms of amount of purchases, growth, category of sales, effort sensitivity, response to innovation and loyalty.
Needs identifies what a customer requires, this includes how a customer purchases or what decision criteria do they implement, for instance, service versus technology versus price, buying infrastructure, degree of centralization and product criticality among others (Giltner, 2000).
According to Onufrey (2008, p. 25), other key aspects customer segmentation are demographic consideration and profitability. Customer demographics is an important aspect because of different products targeting different demographics, as an example, new hair products may target female of a certain age and economic status.
The income level of people also plays an important role in that income levels define their purchasing habits and thus an important determinant of market segmentation (Skari, 2006). On the other hand, customer profitability analysis helps in determining what the customers do, watch or belong to.
The important aspect of customer profitability in customer segmentation is the need to address particular motivational aspects of these customers and not motivational aspects of every customer (Stein, 2003).
Advantages of an organization within a high customer segmentation approach
As stated by Shi (2009) an organization with high customer segmentation approach gains abundantly from this approach because of one fundamental reason; they will fully address the needs of the customer and thus encourage repeat customers as a result of their absolute satisfaction. According to Buttle (2004, p.30), strategic market approach must consider various aspects of customer segmentation.
This is because of the information that customer segmentation practices provide to the company. This thus means the higher market segmentation clear the factors necessary in the construction of an effective strategic market approach. Organizations with high customer segmentation are customer-oriented organizations as they make necessary changes to address the needs of its clientele (Grigoroudis, 2009).
As stated by Lee (2006), organizations with high customer segmentation are more sustainable as compared to companies that have low regard to customer segmentation process. As indicated by Fisk (2009, p. 3) Club Med a French company has been sustainable for the past six decades because of its core focus on customer needs and the best way of meeting them.
This has also enhanced its growth all over the world with more than 80 cottages worldwide. Club Med success can be attributed to high customer segmentation approach which has been the building block of its strategic marketing approach, as an example the company surveyed over 165,000 potential customers to establish their needs in order to meet them fully.
In summary, sustainability/longevity in the market, profitability and growth of an organization highly depends on the extent of customer segmentation approach used by an organization (Dahmen, 2004).
High and low customer segmentation companies and effects on market mix
As stated by Hax (2009, p.35) the case of Castrol used to implement a best product strategy which primarily focused on the market mix aspect of product’s quality, but low customer segmentation approach was adopted. This market approach strategy, however, did not last as competitors easily created similar products and thus reducing its overall sales.
When Castrol changed its strategy and adopted a high customer segmentation approach using Delta strategy, its sales began to climb steadily and also sustainable as compared to before. The market mix of Castrol was thus re-defined to reduce dependence on the product aspect but instead, adopt a holistic approach which defined its high customer segmentation.
As indicated by Fisk (2009, p. 3) in the case of Club Med a French company, its high customer segmentation has been indispensable asset of its growth and sustainability. It could have otherwise declined in its business approach if it had failed to segment its market clearly.
According to Hax (2009, p.39), Waste Management Company (WMC) was initially anchored on commoditized products set which was actually a form of low customer segmentation since it primarily focused on how to ensure that its products were of high quality in its market mix approach.
Just like Castrol, it later adopted Delta model, a form of high customer segmentation approach that altered its market mix approach which primarily focused on products. High customer segmentation thus resulted in de-commoditization, an aspect that enabled WMC to grow in profit and scale.
This analysis has identified core customer segmentation aspects and also demonstrated how it affects businesses. Castrol and Waste Management Company have been identified as companies which adopted high customer segmentation approach in order to enhance their market position through a comprehensive understanding of different customer attributes.
This enabled them to create a sustainable market approach strategy. It is thus important to point out that customer segmentation is the key consideration in enhancing sustainability, profitability and growth in a business.
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