The Essential Role of Market Segmentation in New Product Development

Oringally Published 1998, Updated March, 2005

Market segmentation and new product development are essential elements in the development and maintenance of successful competitive market strategies. The brief description in this section illustrates the value of segmenting markets as part of the process of developing new products. These examples were developed by applying MAISY Database software to MAISY Utility Customer Databases.

MAISY database software instantly transforms any spreadsheet or database data into a free-form chart-based data exploration system - data visualization, drill-down, query, and navigation - all with mouse clicks on charts and no user setup. This process is especially useful in marketing analysis where customer information can be sliced-and-diced and visually evaluated on-the-fly to support market sizing, market segmentation, new product development, profitability analysis and many other applications.

In addition to utility customer marketing and analysis, MAISY OLAP applications range from Auto Sales and Hospital Quality Maintenance to Research Institutes and the Federal Govenment. For more information go to MAISY OLAP Software Description.

Utilities, power marketers, energy service companies and new energy-market players are rapidly developing new products to prepare for customer competition in deregulated energy markets. An integral part of new product development is the identification of target markets.

"If you can divide a larger market into smaller segments with different preferences and subsequently adjust your product (or service) to the preferences in the different segments, then you reduce the overall distance between what your are offering to the market and what the market requires. By doing so the marketer improves his competitive position" (F. Hansen, 1972, "Backwards segmentation using hierarchical clustering ad Q-Factor analysis", ESOMAR Seminar, referenced in Graham, J Hooley et. al, Competitive Positioning: the Key to Market Success, Prentice Hall, 1993).

How important is market segmentation? As suggested in the quote above, if markets were composed of homogeneous customers no segmentation would be required. However, deregulated energy markets will be just as heterogeneous as other modern mass consumer markets. Energy suppliers who recognize and respond to customer differences in important market segments with new products and services targeted to those customer will gain market share and profits at the expense of less proactive players.

The value of market segmentation can be illustrated by comparing characteristics of several market segments in both commercial and residential sectors. The data in these examples are taken from the MAISY State-Level Utility Customer Databases.

The table below provides information on two example office segments defined by employee size category. Nationally, these two segments represent $5 billion in electricity sales. Occupancy characteristics indicate that programs targeted to the smaller segment should primarily address the needs of building owners who occupy their buildings while programs for the larger segment will have to be developed to meet the needs of both onsite and absentee owners. Energy audit history and use of energy management systems suggest a significant potential for first-time audits and basic energy service programs in the smaller building segment while the high penetration of energy management systems in larger buildings suggests more advanced energy services offerings.

Customer Characteristics
Segment Definitions

100-249 Employees 500-999 Employees

US Electricity Sales (Billion $)
3.4

1.5

Average Floor Space
62,340

301,276

Electricity Intensity (kWh/Sq Ft)
22.1

20.8

Summer Load Factor
0.50

0.57

% Electric Space Heating
52.7

30.0

% Owner Occupied
83.8

54.6

% Energy Audits
23.5

41.1

% Energy Management Systems
28.2

72.6

Market information is presented for four example residential segments defined by household income in the following table . These segments include 91% of all US residential households. It is interesting to note that while average energy use of the highest income segment is 69% greater than the smallest, air conditioning energy use is 124% greater. As expected, nearly all families with incomes greater than $50k own their dwelling units; however, a surprisingly large number of lower income families are also home owners.

Variations in the importance of price in purchasing energy-using equipment and household familiarity with newer technologies (e.g., compact fluorescent lamps) underscore the need to implement different marketing strategies for different segments. Limited PC ownership, even for more affluent customers, indicates that some new telecommunications-related products may have smaller market potential than often assumed. This same information suggests that leasing PCs to residential customers could overcome this obstacle and at the same time provide a new service to gain customer loyalty and prevent churning.

Customer Characteristics

Segment Definitions (Annual Family Income)

9k-20k

20k-35k

35k-50k

50k+

% US Households

19.3

20.1

18.1

33.3

Average Square Feet

1,432

1,721

2,020

2,722

Average Annual kWh

7,974

9,851

10,918

13,465

Average Annual AC kWh

940

1,301

1,587

2,125

% Owner Occupied

50.4

59.5

72.9

89.9

Average Family Size

2.0

2.2

2.7

3.1

Price "Very Important" in Purchase

55.4

34.3

34.3

27.6

% Households With PC's

8.6

16.5

25.6

43.4

% Familiar With Compact Fluorescent

39.1

52.3

54.1

59.1

MAISY Utility Customer Databases include over 300 commercial customer variables and over 500 residential customer variables which can be used in market segmentation.

Contact Jackson Associates to discuss additonal advantages of applying MAISY Software and/or Utility Customer Databases to meet your market analysis needs