Customer Segmentation

One key legacy of the Industrial Age was the trend of mass production. Henry Ford said that following about the people waiting to buy his company's Model Ts, "Any customer can have a car painted any color that he wants so long as it is black." In reality, not every customer would have wanted to purchase a black car, but this was the only choice, given Ford's initial concept of mass production. For many decades the idea of mass production was associated with he concept of mass markets. 

Market segmentation has it roots in the marketing concept generally attributable to Philip Kotler. The basic premise of the marketing concept is that a company should determine what consumers need and want and then try to satisfy those wants and needs.

Alvin and Heidi Toffler offer clues on trends relating to mass production, mass market, and the changing workplace. They used the term demassification to describe these changes, including a trend in which organizations' homogeneous customer groups begin to splinter into many groups with unique needs and expectations. In 1996, Alvin Toffler used the term mass customization to further characterize this trend, suggesting that nearly every customer has unique requirements that product and service providers need to address on a customer-by-customer basis. The implication of such a trend is staggering for many organizations, especially in view of their current practices used to serve their customers.

"The biggest single barrier to the development of an effective corporate strategy is the strongly held belief that a company has to appeal to the entire market."

An organization must be able to meet or exceed the needs of key customers to remain in business. An organization that neglects to explore the ways in which customers needs and wants vary across market and customer segments misses an opportunity to maximize customer satisfaction in segments vital to the organization's well-being. Scarce resources can be better allocated to maximize satisfaction among the most critical customer segments.

Customers can be broken down into the following segments: Core Customers/Key Customers, Noncore Customers, and Potential Customers.

Core Customers/Key Customers: are typically those customers that are vital to the organization's economic success.

Noncore Customers: may or may not have unique requirements from core customers. It is generally beneficial to serve noncore customers, as long as the cost of service is less than the economic benefit.

Potential Customers: are not currently on the customer list but could be  in the market for the product or service offered. A strategy to reach appropriate segments of potential customers needs to be developed and implemented as the business grows.

The Process of Segmenting Customers

Segmentation differentiating factors can be considered in creating customer or market segments. Examples of some commonly used differentiators are:
- Purchase volume
- Profitability
- Industry
- Type of organization
- Purchasing organizations' size
- Type of purchases made
- Buyers' organizational structure
- Geographic
- Demographic
- Psychographic
- Language spoken
- Decision-maker
- Occasion for purchase
- Potential or past customers

Segmentation Concepts
Key segmentation concepts are:
- No segmentation: customers are completely undifferentiated
- Complete market segmentation: each customer has a unique set of requirements
- Segmentation by a single criterion: segmentation based on a single differentiating factor.
- Patterns of segmentation: segmentation is done by demographic or psychographic criteria. Customers' likes and dislikes indicate their preferences.
- Homogenous preferences: customers with homogeneous preferences have roughly the same preferences.
- Diffused preferences: no natural segments exist, but customer preferences vary greatly
- Clustered preferences: distinct preference clusters exist, and competing products are expected to be dissimilar between clusters and similar within clusters.

Choosing a Segmentation Strategy

Best practices in customer identification and segmentation include the following:
- Creating and maintaining a customer information system to provide data on customer identity, potential segmentation criteria, and, if possible, data on customer needs and requirements.
- Using SWOT analysis as a preliminary indication of competitive position.
- Using customer and market surveys to evaluate customer and market perceptions of the organization and comparing these perceptions to those held toward competitors.
- Choosing a segmentation strategy that fits the organization's strategic intent in the context of opportunity.

An organization's marketing strategy must take into consideration whether the organization is interested most in pursuing more customers or in targeting the right customers.
- Direct the marketing efforts precisely.
- Tailor marketing plans/campaigns to meet the needs of core customer segments.
- Use appropriate marketing performance indicators to monitor and guide the relative success of segmentation initiatives.

Some other topics include: 

Considerations for effective customer identification and segmentation.

Process for working with external customers.

Excerpted from "The ASQ Certified Manager of Quality/Organizational Excellence Handbook", edited by Sandra L. Furterer and Douglas C. Wood. Fifth Edition, 2021.