The sweeping changes in the composition and growth of particular communities within our markets, driven in part by ethnicity, income level, education and household size, pose major challenges to many industries. Although most companies would like to be able to serve everyone in their marketplace, unlimited resources would be necessary to do just that.

This means new tools and strategies are essential to be able to identify high-priority customers and tailor what to say and sell to them.

There are many ways to segment customers -- by behaviors, beliefs, demographics, attitudes, lifestyles, and other characteristics. However, segmentation by life-stage is an actionable starting point that we recommend to many of our clients. Life-stage segmentation serves as a good model to be used by organizations that are new to segmenting customers because it provides intuitive segments that are easy to create and understand. Life-stage segmentation can also enable more effective allocation of marketing spending with the ultimate benefit of delivering greater ROI.

The basic premise behind life-stage segmentation is that having children is a major milestone that fundamentally impacts the way consumers spend money and their free time. For example, when young people leave the family home, when a couple has their first child, when people retire, their priorities change. This can have a powerful influence on their needs, behaviors and purchasing decisions.

Many advertisers speak in terms of consumer life stages and often rely on life-stage segmentation schemes as the cornerstone of their marketing strategies. For example, automotive manufacturers and dealers often use life-stage analyses to identify growing families that need and can afford to upgrade to more value-added vehicles. They also use life-stage segmentation to find younger, first-time buyers with the funds to purchase luxury vehicles, and to create retention programs for long-term, high-potential customers.

Retailers -- who have hundreds, if not thousands, of customers -- understand that it is not worthwhile to market to every single one. Marketing strategies based on life stages have helped retailers identify customers and prospects with the spending power and propensity to buy their brand; gain share of wallet and improve customer loyalty among families that spend disproportionately in certain categories; and determine which first-time shoppers desire special treatment.

Life-stage segmentation schemes typically divide consumers into three major categories: those who have not yet had children; those who have children under eighteen at home; and those whose children have grown and left the home.

Next, within each group, consumers can be sorted into smaller, and more easily targeted, segments based on their household-income levels: upper, middle and lower. The number of life-stage segments can be adjusted based upon marketplace demographics or the number of respondents within a given data set.

Once life-stage segments have been defined, market information should be analyzed to provide insight about consumer behaviors and attitudes. The goal is to make these segments "come alive" within the organization. Segments must then be prioritized based on their attractiveness within the market (such as size and spending) and the company's own competitive positioning (such as the ability to meet a particular segment's needs). Existing products may need to be modified, while new and differentiated ones may need to be developed to add value to customers’ lives.

Companies may need to dedicate further resources in smart, practicable market research, both quantitative and quantitative. Product portfolios and marketing strategies will also need to be created. Investments should be made wisely to achieve solid reach across priority segments.

When segmenting by life-stage, remember that age, the presence of children living at home, and household income levels are key predictors. Their influence is especially relevant in terms of how consumers spend money and free time.

It is clear there are many likely transformations within the marketplace, as well as major uncertainties that will influence many industries. The next several years can bring great opportunities to those companies that embrace new tactics and tools, and invest to compete in this new environment.

For more detailed information on Kannon's life-stage segmentation work, see Life-stage Segmentation: An Effective Tool for Audience Growth Strategies and Growing Audience: Using Life-stage Segmentation to Drive Strategies.