Market Segmentation, Southwest Airlines Style

The TMRE session was titled, “Segmentation 2.0: Optimizing a Segmentation Model Using a Range of Tools and Stages.” And sorry to be blunt, but “2.0” was misleading.

Or was it?

The session started off benign enough. A classic segmentation study. Start with some qualitative, proceed to quant. SOP.

Key pointers from the session included:

  • Be sure to spend sufficient time planning the project
  • Be sure to have clarity on objectives (how the segmentation model will be used)
  • Include stakeholders in the process
  • Start with qual as a phase 1

All good, basic points, but certainly not 2.0.

But they did do two things not currently done in all segmentation studies.

  1. For the qualitative Phase, Southwest used ethnography. Tammy Sachs was their partner for this phase, and she shared some great video snippets from their ethnographic interviews.  I must say, it was very compelling to hear customers talk about their attitudes and perceptions of Southwest as well as of other airlines.  Those who felt strongly about getting miles—and listening to their passion about it was impressive. Those who value a good deal were also very articulate and compelling. And so on. There is nothing like hearing—and seeing—people  talk ad lib to really get a sense of their attitudes and values.  So ethnography is cool, and applied very well here…but is it “2.0”? Debatable.
  2. They used an “a priori” segmentation model. Yup, that’s right. They went into the study with a hypothesized set of segments in mind. The segments were based on behavioral data from their existing customer database.  During the presentation, this confused me. We were, after all, in a session on conducting segmentation. The process was defined as qual, leading to quant. But the speaker occasionally referred to the segments they started with. Isn’t a segmentation study usually used to derive segments?  Well, not in this case.

Southwest was concerned about having a model that would be actionable with its existing customer database. So they opted to create a segmentation model based on variables they already have, and build from there.  The market research was then designed to do two things:

  1. See if they missed any important segments
  2. Profile the segments they had created from the database

Now I confess, upon hearing this, I was stunned. This is not 2.0 in my mind…this is 1.0.  But after my initial reaction, I digested a bit. And there is some important merit in their approach.

Consider this:

  • They have a model that allows them to easily tag customers into segments (so no risk of having a model that is academically interesting but hard to apply to real business tactics)
  • They have a model that will likely resonate with their decision makers (since it uses variables that are familiar)

So is it 2.0? I don’t think so. But it brazenly defies a lot of current thinking about segmentation. And that is refreshing.

Southwest is often described as a low frills airline that delivers great value. Perhaps this also describes their segmentation approach.

[For more on segmentation, check out this video preview: Video Link]
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