Why You Shouldn’t Use Customer Demographics to Segment Markets
Effective marketers aim for “the right product, price and message for the right customer at the right time.” Today, technology makes it possible for us to customize and distribute our offerings and messages to very specific, targeted audiences. However, if you don’t understand what drives customer behavior, you can’t develop the right marketing mix.
One common practice can lead marketers astray: the use of demographic variables as the primary basis for customer segmentation.
What Are Market Segments?
Market segments are groups of customers who differ in their needs and their likely responses to marketing efforts. Within a segment, needs and benefits that customers seek are similar.
Between different segments, needs differ. Firms better serve the market and make more money by recognizing these differences and leveraging multiple offerings, price points and messages designed in response to this variance.
Demographic variables like age, income, life stage and education tend to be a cornerstone of market segmentation practice in most organizations. When people think “segmentation,” they automatically think about groups like millennials, baby boomers and tweens — all based on demographic distinctions.
The reason demographic variables are popular is that they're easy to measure, widely published, and commonly accepted in practice. Demographic groups are easy to find through various media. As such, the terms “segment” and “demographic” are often used interchangeably as executives and analysts refer to “target segments” as “target demographics.”
Be careful, there are problems with this practice:
Problem No. 1: Customers Within a Demographic Segment Can Have Very Different Needs and Values
Demographics don’t predict needs and values within a particular product or service category very well. Our needs, values and preferences are much less a function of our demographic characteristics and much more a function of individual hard wiring and developmental influences.
To illustrate the point, consider the hottest demographic segment these days: millennials (i.e., those with birth years between 1981 to 1996). This group has received considerable attention, both on their workplace and marketplace behaviors. Very broad generalizations are often made about millennials (e.g., “they value authenticity”). Some of these generalizations may be true, but they provide very little specific insight into developing new products, setting price or building marketing communications programs.
Furthermore, evidence is beginning to show that millennials do not differ significantly from other demographic groups in many important ways. Most importantly, though, is the recent finding that within this generation there exist several sub-segments that differ dramatically in their brand awareness, purchase drivers and attitudes. This makes drawing general conclusions about the aggregate purchase behavior of millennials suspect at best.
Problem No. 2: Failed Intuitive ‘Best Guesses’ About Preference
Without a deeper study of the meaningful “benefit segments” within particular demographic groups, managers will tend to make broad intuitive generalizations in predicting values and preferences based upon demographics (e.g., “higher income consumers are less price sensitive”).
Let’s say you’re the brand manager for a toothpaste brand distributed throughout the U.S. With fresh demographic data about purchasers in hand (age, income, family size, education), you conclude that large families are an attractive target market. That’s your best guess and it seems to make intuitive sense.
You and your team hypothesize that large families are very price sensitive due to high-volume purchases — they value low price as well as price promotions. Therefore, you travel down a path of building an aggressive price promotion program to increase demand among large families.
However, research demonstrates that brand teams often face a gap in the real reason why customers are engaging with their brand. What’s really motivating customer purchases? What drives a customer to choose their product over a competitor?
An alternative: Rather than starting with demographics, you might have started by considering the benefits that different consumers might seek. Instead of asking “what demographic segments look attractive and what are their needs?” you might have begun by asking “What’s important to consumers in toothpaste consumption? Do different groups of consumers differ on the benefits they seek?”
In almost every imaginable market, the answer is a definitive yes. In this case, there are four primary benefit segments of toothpaste customers:
- Sensory: Seek great flavor and an interesting product appearance
- Sociables: Seek bright white teeth
- Worriers: Seek to prevent tooth decay
- Independents: Want low prices
As it turns out, in this case study, it was the decay prevention segment (the Worriers) that contained a “disproportionately large number of families with children.” This segment likely included a lot of parents who were concerned about the dental health of their children and the large dental bills that would likely follow if they didn't try to prevent tooth decay.
In this case, segmentation by “benefits sought” rather than household size would lead to a very different marketing program for the brand.
Problem No. 3: Demographics Describe But Don’t Predict
Rather than being the primary basis for segmentation, demographics should instead be used to describe benefit segments after they've been identified. In this sense, demographic variables are used to locate and connect with particular benefit segments rather than being used as a weak foundation for identifying differences in customer needs, leading to speculative marketing actions.
The best summary statement about the limitations of demographic variables as segmentation variables was offered by Russell Haley when he was vice president and research director of a leading advertising agency in New York City:
“Unfortunately, a number of recent studies have shown that demographic variables … are, in general, poor predictors of behavior and, consequently, less-than-optimum bases for segmentation strategies.”
Amazingly, Haley’s observation was offered almost 50 years ago, but the point is still relevant today. Use the insight by putting demographics in their proper place: after benefit segments have been identified.
Brands and agencies want to know how to be different and how to create important value for customers from those differences. Effectively segmenting customers is an important initial step in that journey.
Mary Claire Mandeville is business development manager at Vennli, a digital platform for growth strategy. Joe Urbany is the co-founder of Vennli. He's the co-author of "Grow by Focusing on What Matters: Competitive Strategy in 3-Circles," the book upon which Vennli’s business model is based.
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Mary Claire Mandeville heads up Vennli’s agency practice. She believes in the power of understanding customer and consumer insights to provide a competitive advantage for any organization striving to create meaningful and lasting growth. She has focused her passion and harnessed her previous experiences and education to help agencies differentiate in a highly competitive market and increase their win rate by delivering deep marketplace insights in their new business pitches. Mary Claire has a BBA and MBA from the University of Notre Dame. Her experiences span from start-ups to corporations, from social entrepreneurship to financial institutions, and from Central America to back home in the US.