Customer segmentation

It was Wendell Smith, president of The Marketing Science Institute at the time, who in 1956 first advocated customer segmentation as a means to drive market demand, influence brand preference, and improve overall marketing profitability. Smith’s observations in this now 66 year old Journal of Marketing  piece still holds some views that are largely relevant to today’s marketing landscape.In his article titled, Product Differentiation and Market Segmentation as Alternative Marketing Strategies, he states that, “The theory of perfect competition assumed homogeneity among the components of demand and supply sides of the market, but diversity or heterogeneity is now the rule rather than the exception.” Not much of Smith’s observation differs from what we consider to be customer segmentation today, but when first coined, the term didn’t encompass the magnitude, diversity, density - and often volatility - markets of future generations would be characteristic of.

From the shotgun approach to more targeted marketing strategies

In the early days of customer segmentation, supply chain obstacles such as unequal progress in product design, development and manufacture and the inability to acutely align products according to market expectations led to the adoption of product convergence strategies. These approaches narrowed the consumer’s choice by aggressively marketing limited product ranges that offered little if any diversity, personalisation features or differentiation. But as consumerism, market diversification and demands changed, marketers adopted more customer-centric strategies that would focus more on buyer preferences, habits and expectations. This Harvard Business Review article of 1964  points to the growing awareness for more intense segment analyses that look beyond mere demographic data to determine product and brand positioning. But for the most part, traditional advertising was still rather hit and miss, leaving marketing departments battling to see ROI on often bloated advertising spend. With agency fees and marketing spending taking a serious chunk out of company budgets, the need for more scientific, data-driven customer segmentation methodologies became increasingly clear.

Replacing perception-based marketing with insightful, data-driven decisions

Rapidly supplanting traditional communications media, internet-based spin-off technologies such as e-commerce, social media, mobility, cloud and big data analytics have cast a new light on customer segmentation and the marketing discipline as a whole. We’ve entered what Forrester Research terms the age of the customer where consumers are enjoying a much bigger say than in the days of one-dimensional, and rather static, product ranges accompanied by marketing efforts that seemed more dictatorial than informative. Today, marketers are increasingly looking to apply more granular customer segmentation methodologies as we get to know more about our markets through the various data channels out there. As we attempt to apply greater context to who our customers are, our reliance on the technology that serves as the vehicle that bridges historic gaps between our customers and ourselves will increase.

So what will the future of market segmentation methodologies look like?

For marketers, the outlook is more than a little promising. As technology increasingly becomes an extension of the individual, opportunities to get to know our markets will become more abundant. And as individuals seek more meaningful engagement with their brands, so will the opportunities to collect more pertinent data about them. This bodes well for further curation of granular metrics that will reveal so much more about our customer segments and even reveal new ones we didn’t know existed.

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