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ALAN COBER
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M A R K E T I N G 7

A segmentation
you can
act on
John Forsyth, Sunil Gupta, Sudeep Haldar,
Anil Kaul, and Keith Kettle

Value-based segments usually don’t fit neatly into demographic ones |

Some solutions step around the problem; others meet it head on

R emember when marketing was simple? Your division operated

in a manageable geographic region. You defined your consumer
targets by age, say, and by income. If you were in a business-to-business
market, you divided up companies by size.

But the wild proliferation of brands and channels in rapidly globalizing

markets now flusters even the most sophisticated marketers. In this envi-
ronment, how should your sales force tailor its strategies to its accounts?
Different customers have different attitudes, needs, and preferences, but the
old distinctions no longer take you very far. What should you be looking at
today? The current purchasing behavior of your customers? The benefits
they seek to obtain? Demographics or its business-to-business equivalent:
“firmographics”?

Ford’s Model T strategy—any color you wanted, so long as it was black—

worked until customers had an alternative. Soon-to-be-deregulated utilities,
among other companies, are now miserably aware of this reality. How will
the utilities build loyalty among the most profitable customers before com-
petition takes them away? Utilities had so little need for marketing in the
past that some know very little about them and have no idea what products
and services might keep them loyal after the coming of choice.

John Forsyth is a principal in McKinsey’s Stamford office; Sunil Gupta is a professor at the
Columbia Business School; Sudeep Haldar is a consultant in the Chicago office; Anil Kaul
is an alumnus of the Chicago office; and Keith Kettle is senior vice president of The M/A/R/C
Group. Copyright © 1999 McKinsey & Company. All rights reserved.
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8 T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

Companies often address this problem by developing segmentation schemes

breaking down markets into sets of customers or potential customers who
share attributes that might be based on demography (income, say, or age)
or on values or needs.1 Consider some obvious examples. Video camera
manufacturers capitalize on the fact that families expecting their first chil-
dren are likely customers. Telephone companies try to sell call waiting to
families with teenage children. The USAA insurance agency targets military
personnel because it has come to believe, correctly, that this group is likely
to be significantly more loyal, and therefore more profitable, than others.

Unfortunately, easy cases permitting marketers to establish meaningful

differences among groups of customers and then to identify them— a
phenomenon we call “actionable segmentation”—are rare. More often,
despite decades of research and many refinements in the basic model, the
segmentation process creates very real difficulties for marketers. No doubt
such methodologies as conjoint or latent-class analyses permit them to use
values, needs, and attitudes to devise groups (for instance, price-, service-,
and quality-oriented segments) that
include almost all customers. Yet it
How do you find customers usually turns out to be very difficult
who care mainly about service to identify the flesh-and-blood people
without interrogating actually inhabiting the segments.
them all? How do you find customers who
care mainly about service or quality
without interrogating them all?
A leading insurance company based in the United States spent a lot of time,
trouble, and money dividing its world into segments, only to run into exactly
this problem. In the end, the company abandoned segmentation entirely.

The basic difficulty is that value-based segments generally don’t fit neatly
into demographic ones. Many companies therefore start with the simpler
task of identifying differences based on demography or on the different
attributes of different companies. Companies in consumer markets, for
example, typically divide their customers into baby boomers, generation
Xers, and so forth. Likewise, many companies that sell to other businesses

1
It has become fashionable to suggest that customer-relationship marketing, the interactive
character of the Internet, and the ability of today’s computers to collect, process, and
retrieve detailed information about huge numbers of customers have moved business toward
segment-of-one marketing and away from marketing by traditional segmentation. But we
think it unlikely that this kind of “mass customization”—for example, custom-fitted Levi’s
jeans—will replace segmentation as the basis of strategic decision making. First, designing
products and services for individual customers probably won’t be cost effective anytime
soon. Second, even if companies have sufficiently large databases to customize services
for their current customers, they rarely have enough information to do so for their com-
petitors’ customers or for nonusers. The information revolution thus will probably strengthen
the tendency of companies to use information about thousands or millions of customers
by organizing them into segments.
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A S E G M E N TAT I O N Y O U C A N A C T O N 9

segment customers on the basis of such characteristics as their size, the

volumes of their accounts, and the industries in which they compete.
Unfortunately, though advertising agencies and sales forces find this
approach easy to understand and to implement, it really is no more
effective than value-based segmentation schemes: by no means do all
baby boomers have the same preferences and purchasing behavior, and
businesses of the same size, account volume, and industry may very well
have rather different values and needs.

Segmentation based on demographics or company characteristics thus is

not very actionable; these approaches don’t help you get to your customer
with the right offer. In what follows, we describe four ways of solving the
segmentation dilemma. Targeting and self-selection, the simplest of them,
step around the problem; scoring models and dual-objective segmentation
deal with it head on.

Targeting
Sometimes a segmentation strategy works even if you can’t identify who
is in which segment.

In the early 1990s, price wars at the pump threatened the profitability
of oil companies. To turn the situation around, Mobil Oil queried 2,000
customers in a segmentation study revealing that only 20 percent of gaso-
line buyers were price shoppers,
who spent an average of $700
annually, while customers in other Segmentation schemes
segments spent as much as $1,200. based on demographics or
Although Mobil could not distin- company characteristics are
guish price-sensitive shoppers from not extremely actionable
price-insensitive ones, the news
that 80 percent of its customers
were price-insensitive, heavier users shifted the company’s focus away
from pricing. As a result, Mobil reaped an extra $118 million a year
in earnings from an additional two cents a gallon on its gas—a major
accomplishment.2

In general, selecting targets is the first task of any segmentation strategy.

Before worrying about how to identify and reach individual customers
in any given segment, it is worth attempting to determine whether the
collective traits of a market segment might themselves suggest profitable
strategies.

2
Wall Street Journal, January 30, 1995.
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10 T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

Self-selection
The basic idea of self-selection is to reverse the roles of a company and
its customers: instead of trying to find, say, price-sensitive people, the com-
pany figures out what segments it wants to reach and gives the consumers in
them ways of finding it.

Companies most commonly try to get customers to select themselves by

multiplying stock-keeping units (SKUs); different sizes of cereal packets
or washing powders are the most obvious example. The segments walk
up to the supermarket shelf and buy the most appropriate offering.
Coupons, which allow consumers to select themselves on the basis
of price sensitivity, are another classic mechanism. Although everyone
receiving coupons has the option of getting a discount, only customers
who are both price-sensitive and relatively indifferent to the trouble
of clipping and saving coupons tend to redeem them. As a result, super-
markets earn smaller margins—mostly on the fraction of their transactions
precipitated by the coupons—and get the full price from consumers happy
to pay it.

Similarly, airlines often have lower airfares for people willing to include
Saturday night stays in their trips. These companies realize that consumers
in the price-sensitive segment will sacrifice flexibility for low cost but may
not know who these customers are.
EXHIBIT 1
Sniffing a discount, however, these
Segmentation through product design people come looking for the airline.

The hopefuls The fearfuls

Packaging the same product in
Brand name Conceive RapidVue
Price $9.99 different ways can also do the trick.
$6.99
Packaging Quidel, a company based in San
Pink box, smiling baby Mauve background, no baby
Shelf position Near ovulation-testing kits Near condoms
Diego, California, specializes in
developing rapid diagnostic tests.
One of its products can detect
pregnancies in their earliest stages. Until recently, Quidel undertook almost
no consumer marketing, focusing instead on doctors. In 1993–94, its preg-
nancy and ovulation products had almost an 80 percent share of the med-
ical market but just 18 percent of its consumer counterpart.

Quidel conducted a market segmentation study whose findings prompted

it to target two kinds of women separately: those who want to get preg-
nant (the “hopefuls”) and those afraid that they might be pregnant (the
“fearfuls”). Not surprisingly, demographics and related characteristics
didn’t help the company distinguish between the two segments, so it
created different packages for them. Exhibit 1 shows the correspondence