Experts offer six guidelines for reviving its ability
to identify and target profitable new customers

NEW YORK, February 1, 2006– One of marketing’s most widely used and venerable tools – market segmentation – needs fixing, according to newly released research.

A previously unpublished survey of 200 executives worldwide, conducted by management consulting firm Marakon Associates and the Economist Intelligence Unit in 2004, found that 59% from large companies (sales of $500 million or greater) had carried out a major segmentation exercise during the previous two years. Yet only 14% said they derived real value from it.

The survey also confirmed that segmentation is considered an important tool for developing growth strategies. Exactly half of the 200 respondents cited "customizing offers to meet the needs of specific customer segments" as very important to their growth plans, despite broad disappointment with the results of segmentation at their companies.

Since gaining wide acceptance in the 1960s, segmentation has become a hugely popular technique among marketers for identifying potential new customers and justifying proposed initiatives with hard data. The findings of the Marakon-EIU survey, however, indicate that despite its popularity, segmentation is not delivering on its promise to uncover new opportunities for profitable growth.

"Market segmentation has become synonymous with psychographic profiling and that’s a real problem," explains David Meer, a partner at Marakon who oversaw the survey. "Psychographic segmentations are useful for advertisers looking to embellish a brand, but they have done little to enlighten the companies that commission them about which markets to enter, what kinds of offers to make, how products should be taken to market and how they should be priced."

In a new article entitled "Rediscovering Market Segmentation" in the February 2006 Harvard Business Review, Meer teams up with marketing research pioneer Daniel Yankelovich to tackle the challenge of how to fix segmentation so it can fulfill its earlier promise.

Yankelovich introduced the idea of nondemographic segmentation in the pages of HBR four decades ago. His landmark 1964 article, "New Criteria for Market Segmentation," demonstrated that the then-prevailing narrow reliance on demographic traits such as gender, age and family size hid from marketers the very insights they most needed to grow their brands and develop new products. Yankelovich presented a variety of case histories focused on values and characteristics such as willingness to pay for quality and added features, variations in stylistic preferences and susceptibility to switching brands.

"Non-demographic segmentation began as a way to focus on the differences among customers that matter the most strategically," says Yankelovich, noted for his innovative work in forecasting social trends. "By rediscovering segmentation’s original tenets, organizations will be able to respond more quickly and effectively to rapidly changing market conditions, develop insights into where and how to compete, and gain maximum benefit from scarce marketing resources."

To halt the drift from its original purpose and power, Yankelovich and Meer suggest six guidelines for ensuring that segmentation inform strategic decisions on such issues as product innovation, pricing and choice of distribution channels. Meaningful segmentation, they assert, should:

• Reflect the company’s overall strategy;
• Indicate where sources of revenue or profit may lie;
• Identify consumers’ values, attitudes and beliefs as they relate specifically to product or service offerings;
• Focus on actual customer behavior;
• Make sense to top executives;
• Accommodate or anticipate changes in markets or consumer behavior.

In addition, they suggest marketers begin by understanding the expectations consumers bring to different kinds of transactions. To assess how deeply to probe consumers’ motives and concerns, they recommend a tool called the "gravity of decision spectrum." For low-stakes purchases like toilet paper or razors, companies will want to investigate day-to-day factors such as price sensitivity and brand loyalty. For high-stakes purchases like a home or medical treatment, deeper factors like consumers’ values and beliefs should be explored.

For additional background or to arrange an interview, please contact Aviva Tropp at Marakon Associates, +1 212 377 5084.

About Marakon Associates:

Marakon Associates is an international management consulting firm that works with senior executives of large companies on the issues that most drive corporate performance and long-term value. The Economist has called it "a consultancy that has advised some of the world’s most consistently successful companies." Marakon has offices in New York, London, Singapore, Chicago and San Francisco.

About the Authors:

David Meer is a Partner in the New York office of Marakon Associates and head of the firm’s Customer Value Group. Previously, he served as Worldwide Chairman of the Advanced Techniques Group, the marketing science unit of media-buying agency MindShare. Daniel Yankelovich is Chairman of Viewpoint Learning, a firm that promotes problem solving through dialogue, and DYG, a market research firm that tracks social trends. He is based in San Diego. In 1958, he founded the research firm of Yankelovich, Skelly and White and in the 1970s initiated the New York Times/Yankelovich Poll, which evolved into the New York Times/CBS Poll. He is the author of 10 books and hundreds of articles and speeches. He and Meer have known each other since the 1980s, when they worked together at DYG.