The Harvard Business Review article by Daniel Yankelovich and David Meer contains some interesting thoughts on the use of market segmentation. Some highlights:

• If properly applied, market segmentation guides companies in tailoring their product and service offerings to the groups most likely to purchase them.
• Psychographics is very weak at predicting likely purchases.
• Segmentation, as currently practiced, takes an excessive interest in consumers’ identities. This distracts marketers from the product features that matter most to current and potential customers of brands and categories.
• Segmentation places too little emphasis on actual consumer behaviour, which is unfortunate because behaviour definitively reveals consumer attitudes and helps predict future business outcomes.
• Practitioners are guilty of an undue absorption in the technical details of devising segmentations. This estranges marketers from the decision makers on whose support their initiatives depend.

Market segmentation, as it’s currently practiced

Companies such as Environics combine census, survey, and third-party data to “segment the Canadian population based on key drivers of consumer behaviour: demographics, lifestyles, and values.” Businesses and non-profits use proprietary consumer segmentation systems (such as Evironics’ PRIZM) to identify and target profitable segments and for trade area analysis, merchandise mix, and media buys.

A few of our clients have had detailed segmentation studies conducted on their customer base by leading Canadian providers. In their (off-the-record) opinion, there’s a disconnect between the promise and reality of the business benefits of this type of work. It comes down to the Yankelovich point above that the modern approach to segmentation places too little emphasis on consumer behaviour and too much on fixed consumer identities — the findings feel pre-fabricated and somewhat lifeless.

It may be the way a market segmentation business is structured: the quantitative talent works on creating the segments and avoids the relatively mundane work of applying these segments to a client file. As a result, their work, seen from the perspective of any one client, feels generic and, yes, routine. I can see how the routine part is necessary for the whole segmentation industry to stay afloat. I just can’t see how it benefits clients.

The problem of faith

One more criticism: consumer segmentation systems are proprietary. The sources of data, the methodology, the criteria for selecting segments are never disclosed. Which leads to less-than-helpful summary lines in (bulky) reports: “Urban hipsters make up 12% of your two most profitable customer segments.”

If I tell you, as a marketer, that 12% of your two most profitable customer segments live in Edmonton neighbourhoods like Glenora (or Windsor Park, or Henderson Estates) I’m telling you a fact. You can confirm it. You know these neighbourhoods exist. Just like you know that caucasian people exist, and single detached houses exist, and males in their 50’s exist. When it comes to behaviour, you know there is a group of customers that visited your store once last year, and another that visited two or more times. Using data in your sales and CRM systems, you can always verify these sort of claims.

You can’t verify claims made about Urban Hipsters. You have to take them on faith. In fact, you have to take the existence of Urban Hipsters on faith. There’s something shamanistic about current consumer segmentation systems. Marketers who rely on them are relying on their mysterious or extraordinary quality or power — which is to say they’re relying on magic.