Customer segmentation revisited: The case of the airline industry

Although the application of segmentation is a topic of central importance in marketing literature and practice, managers tend to rely on intuition and on traditional segmentation techniques based on socio-demographic variables. In the airline industry, it is regarded as common sense to separate between business and economy passengers. However, the simplicity of this segmentation logic no longer matches the ever more complex and heterogeneous choices made by customers. Airline companies relying solely on flight class as the segmentation criterion may not be able to customize their product offerings and marketing policies to an appropriate degree in order to respond to the shifting importance and growing complexity of customer choice drivers, e.g. flexibility and price as a result of liberalization in the airline industry. Thus, there is a need to re-evaluate the traditional market segmentation criterion. By analyzing the stated preference data of more than 5800 airline passengers, we show that segmenting into business and leisure (a) does not sufficiently capture the preference heterogeneity among customers and (b) leads to a misunderstanding of consumer preferences. We apply latent class modeling to our data and propose an alternative segmentation approach: we profile the identified segments along behavioral and socio-demographic variables. We combine our findings with observable consumer characteristics to derive pronounced fencing mechanisms for isolating and addressing customer segments receptive for tailored product packages.