Customer segmentation analysis is key to competing in the shifting CPG industry

Communications and Distribution Writer

Customer segmentation analysis can give consumer packaged goods (CPG) companies vital insights into how to compete more effectively in an industry that is undergoing some fundamental transformations.

Market segmentation involves the use of analytics to better understand the unique characteristics of different segments of consumers. It enables organizations to separate consumers based on demographics, psychographics, purchasing behavior, channel preference, lifetime value, price sensitivity, product affinity and other traits and attributes assembled from the wealth of internal and external data so they can be targeted more effectively with the right products at the right time.

The limitations of traditional market segmentation

Age, income, gender, location and ethnicity are just a few of the ways CPG companies have historically segmented consumers when setting strategic development goals and introducing new products: Apparel manufacturers can tailor their clothing to specific age groups and demographics; food and beverage makers can create lines for diet-conscious shoppers and calorie watchers; detergent manufacturers can create products for the budget aware; and shoe companies can design lines for active teenagers.

While such segmentation analysis has helped CPG companies target consumers more efficiently over the years, it is no longer enough. To remain competitive in an evolving industry, CPG brands need to take consumer segments to the next level and embrace micro-segmentation.

The case for micro-segmentation

Several trends are driving the need for more granular segmentation analysis in the CPG industry.

First, consumers are more empowered than ever before with a world of information at their fingertips. AdWeek highlights the growing tendency to use the Internet and mobile technologies for product searches: 81 percent of shoppers do online research before purchasing, and 61 percent read product reviews as well. Consumers who embrace these shopping tactics may make choices based on factors that are different from what broad categorization suggests.

Consumers are also becoming increasingly heterogeneous in their product preferences, as there is growing ethnic diversity and broadening income disparity. CPG growth in this climate can only come from targeting smaller customer segments and perhaps even offering customization options, as Dassault Systémes says consumers are coming to expect. Granular segmentation and targeting are vital to a company's survival and growth in such a climate.

Finding profitable consumer slices

According to marketing research firm IRi, companies that can establish closer and more direct relationships with consumers that will be the ones that come out on top. To grow and compete, CPG companies need to leverage their data analytics capabilities to identify and micro-target niche opportunities. Organizations need to realize that underneath broad market segments are smaller, more profitable segments, and these groups of consumers are who they should be marketing to.

IRi points to food manufacturing giant Frito-Lay as a company that has adopted this type of strategy. Increasingly, Frito-Lay has been using analytics to identify what it describes as smaller "pockets of demand" within the snack industry. This strategy helped it uncover a growing group of heavy snacking consumers, which it has dubbed the "Young and the Hungry," and to market successfully to them.

Targeting the "triers"

The fact that a bare 1 percent of shoppers drive sales for new CPG products is another powerful reason that segmentation analytics is becoming essential to competing in the CPG space. Catalina, which delivers personalized digital media promotions to shoppers, analyzed the shopping behavior of 45 million shoppers at 11,000 stores around the country and found that just 0.7 percent of shoppers accounted for some 80 percent of the volume of new products sold. Importantly, only 11 percent those who tried new products were still engaged with the product a year later, pointing to the enormous retention challenges that CPG manufacturers face.

According to Catalina, the study makes clear that brands have to find that narrow segment of new product triers and engage with them in an ongoing manner to forge more sustainable relationships and compete in their market space.

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