Which Consumer Segment Do You Want to Play in?

In this series so far, we explored aspects of what you should do if you’re starting a product or service, elements of what a product manager does and ideation. Let’s discuss about consumer segmentation and research as part of market and opportunity analysis. I’ll take on consumer research in the next article; for this one, let’s look at segmentation and why it’s important for tech companies.

(Note: this will be useful if you’re building a consumer product, website, app or service. Enterprise products operate on different principles).

Consumer segmentation involves building subsets of consumers who display similar characteristics, and may interact with your product largely the same way. Once you have segmented your potential consumer space, you can pick a primary segment to pitch your product to.

This influences the DNA of your product - what features do you build in your product, what minimum viable product you could ship, plans for product differentiation, marketing and PR plans and messaging, customer support requirements, brand identity , etc.

Basics of segmentation

Consumer segmentation is an evolved discipline in marketing. All MBA courses teach segmentation, marketing and positioning (STP) in first year marketing. In addition to building and marketing a product, these are vital to figure out branding and pricing.

FMCG companies like HUL own many products in the same category (eg: Sunsilk, Dove) and they brand & market them differently. Each is targeted to a different segment of consumers, and everything around the product - branding, messaging, media choice, pricing, etc. are targeted towards that consumer segment.

In an ideal case, the targeted consumer sees the value a product brings him and is willing to pay for it - if your pricing strategy is right, you can set a price close to the maximum amount he is willing to pay, maximizing your profits. If your segmentation is off, or your price estimations are off, you risk building a great product that people check out but never buy. Or, you price is so low that you miss making profits (leave money on the table, in marketing jargon) or worse, cut into a different product segment with better margins.

The most common basis for consumer and market segmentation are:

• Demographic segmentation

Segment your market based on age, income, expenditure, gender, race, nationality, disposable income, etc. This is the most common form of segmentation, partly because the parameters are elements where data is more easily quantifiable.

In India, most markets use the socio-economic class (SEC) system to get the first stab at consumer segments they want to target. This gives a breakup of the Indian market based primarily on occupation, age and education of chief family wage earners. The recent version, that refines this further, is available for download here.

• Psychographic segmentation

This involves building segments based on lifestyles, attitudes, values, etc. - this is more qualitative than quantitative, as it includes consumer aspiration and outlook to life.

(If you come from the ordered world of engineering, this is also the place you’re likely to feel uncomfortable with, as this is not a data based exercise.)

Psychographic segmentation is usually the starting point for the technology adoption life cycle.

From the site:

“The model has five divisions of an idealized bell curve, each representing a group of buyers or market segment to whom a product is sold during its life cycle: Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. These categories describe market segments which distinct psychographic characteristics and buying patterns. When a new product is released, it typically moves through the Technology Adoption Life Cycle, until its useful life is expired. Although products are not guaranteed to follow this logical path, most naturally will.”

This is crucial for buildinga hypothesis about growth and revenue potential.

You could also try behavioral segmentation. This involves understanding occasions when consumers will use your product, how loyal are they, what key benefits do they enjoy – in short, how consumers behave when they use your product - but the demographic and psychographic segmentation is a great starting point.

Picking up the example we started with in the previous article, here’s a simple segmentation chart for looking at weekend travel potential.

The target customer is from a middle class background, single, male, between 20-30 and owns a two wheeler.

For the demographic segmentation, you could get data for most of the parameters to build a segment potential.

Of course, you could refine the demographic segmentation with parameters like urban migrants vs. natives of the city, population spread and density across parts of the city, etc.

For the psychographic, I have retained a simple assumption that we target the user who loves outdoors, rather than one who is inclined to movies and culture.

Based on the segments you want to target, you can then come up with target profiles and personas to guide product development and marketing.

Segmentation and analytics

While we could assume that the segmentation is primarily useful for online/offline or purely offline use cases, sites like Pinterest are already showing how the web is evolving to better serve customer segments. Young women form a huge part of the Pinterest traffic.

Better online segmentation and analytics also mean that you can offer more refined segments to advertisers, part of the Facebook and Google ad machinery. Facebook goes one step further in trying to mine customer interests (better psychographic information) than Google, though even in the online space, this is more difficult to analyse.

Data analytics will be a huge component of any product/service and in future will have a key role in valuation.

Do you already have a product/service where you service a segment of consumers? Let us know in the comments.

Note: Views in this article are personal. Author can be reached at @shrinathv.