Free «Marketing Report: Customer Segmentation» Essay Sample

Advertising is meant to have a profound effect on customer’s behaviours and thoughts, which would influence the customer to purchase a particular service or product. Advertising, however, is often wasted when it does not target a particular segment of people. Companies recovering from the recession realized that most of their advertising expenses were being wasted since they did not influence the majority of the viewers to purchase. It was found that out of all the customers exposed to advertising, only 25% of them accounted for most of the profits of the company. For example, advertising high-heeled shoes to males would not lead to purchases or influence their buying decisions. It may not even be relevant to older females. If the company were to focus their advertising efforts on those females who would eventually purchase their product, they would be able to yield profits. It is very important to provide the right message to the right persons at the right time. This need to identify your potential customer is the most important step in customer relationship management. The company needs to have an accurate knowledge of its customers and their purchasing behaviours (Thorson & Duffy 2011).

Customer segmentation is based on the idea that all customers are not equal. Some customers do not care about particular brands or products, while other loyal customers cannot live without it. Companies need to identify those loyal customers and focus their marketing resources on them. Segmentation entails the identification of groups that are as similar to each other as possible and highly differentiated from other groups. These similar groups may have the same age, ambitions, aspirations, requirements or purchasing behaviours (Barry 2006). Companies usually identify their target customer segments based on two criteria. Thorson and Duffy (2011) describe these as either demographic or psychographic.

Demographic Segmentation

Demographic segmentation is the simplest form of segmentation. It usually entails the classification of customers based on age. This type of marketing, however, usually appeals more to the younger generations. Pepsi, for example, marketed a “think young” campaign which had favourable results. On the other hand, life insurance or medical creams may be targeted at older customers. Profiling customers based on age can be simple and effective, but companies must be careful not to negatively cast their customers into stereotypes and cause the opposite effect. Other demographic aspects that may be used to focus marketing efforts on can be gender, income, social class, education and family size (Thorson & Duffy 2011).

Psychographic Segmentation

Not all products or services, however, can be marketed based solely on age. People belonging to the same age group may have different interests, needs and lifestyles, which affect their purchasing decisions. Companies must identify these customers through research and data mining.

The benefits of identifying these customers are as follows:

ü  Increase in customer loyalty through more focused communications

ü  Revenue Generation through better cross-marketing, cross-selling and up-selling.

ü  Making marketing campaigns more effective by customer profiling

ü  Reduction in cost of marketing by elimination of redundant mailings (PB Insight 2010).

Customer Profiling

Another important step in customer segmentation is to do customer profiling, which is a more in-depth way of understanding and identifying the customer. Customer identification needs to be narrowed to focus more on the target segment. Thorson and Duffy (2011) stress the need for customer identification, which has been reiterated by Shaw, Subramanian, Tan & Welge (2001). Customer profiles can be built based on the factors given below.

Frequency of Purchase

This deals with how often a customer purchases a product. A more frequent buyer can avail various offers or discounts targeted at frequent buyers.

Size of Purchase

This refers to the average amount of money that a particular customer spends per visit. Estimation can allow companies to understand and provide schemes for those customers that spend more.

Recency of Purchase

This deals with identifying the last time a loyal customer purchased a product or service. The company must understand why the customer has not purchased since the last visit and if he/she has transferred to another product or service and why.

Identifying Typical Customer Groups

As explained above, a customer may be defined according to their age groups or other defining characteristics such as interests or lifestyles (Shaw et al.2001).

Customer Lifetime Values

The lifecycle of a customer can be divided into three areas, acquisition, optimization and retention. Acquisition deals with marketing research, marketing and customer on boarding. The optimization phase is that part of the customer lifecycle where profits are maximized and relationships are enhanced. This part helps companies to understand their customers better and to customize the services and products that they provide according to their needs. The last phase is the retention phase, which deals with the implementation of retention programs based on previously done customer profiling. This is the part of the downward curve of the customer and the company needs to identify ways in which they can keep their customers from transferring to other products (PB Insight 2010).

Prospecting

Customer profiling allows companies to identify prospective customers. Potential customers with the same profiles as that of existing customers can be focused on and attracted towards services or products.

Success or Failure of Marketing Programmes

Past information contained in company databases allows marketers to track and identify various policies and strategies that have been implemented. The marketer can see which marketing strategies have worked efficiently towards attracting customers and which have failed. The marketer may then delve deeper and try to understand the reasons behind their success or failure, and then develop a future plan based on this past data.

Challenges in Segment Identification

It has been established that identification of target customer segments is an imperative task for companies. However, there are various challenges that a company must face when trying to obtain accurate data that reflects their target customers. It is not enough to simply focus marketing strategies on segments based on age or interest. The company must ask itself important questions, the answers of which will allow it to better target their customers. These are:

ü  “Who are my best customers?”

ü  “What products and services do they require?”

ü  “How does their product needs vary across regions and branch trade areas?”

ü  “How can I package products, based on these needs, to maximize value and corresponding fee revenue?”

ü  “How can I cultivate a better relationship through communication?”

ü  “Which communication channels do they prefer?” (PB Insight 2010, p. 4; Thorson & Duffy 2011, p. 41).

Answering these above questions will help marketers to identify their target customers and to recognize their style, interests and buying behaviours. Since most companies have begun working towards the establishment of working relationships with their customers, it is important for companies to not only identify but also know and understand their customers and their needs.

Conclusion

Once customers have been identified, it is important for companies to deliver to these segments in the best possible manner and to retain them. It is through this research and segmentation that companies can identify and target future potential customers. Even though there are various challenges that companies may face when identifying customers, it is important for them to overcome those challenges and get better results based on focused target segments. Fewer marketing resources and increasing competition has made it crucially important for companies to identify their target customers and to retain them.