The importance of segmentation

Most stage magicians will admit that there are only seven basic forms of illusion.  Many of their magic tricks are simply a variation on a theme.  Similarly, most writers will tell you that there are a specific number of plots.  Michael Porter, the Harvard Business School academic applied such a contention to the practice of marketing goods and services.  He stated there were four generic strategies in marketing; cost leadership, differentiation, focus (niche marketing) and disaster.

Disaster strategy is not quite how it sounds.  It is a strategy for short-term markets where demand exceeds supply.  As soon as demand falls, the disaster strategy fails and often so does the business.  A prime example of a disaster strategy is the fad for cabbage patch kids in the mid-1980s.  These rather odd looking dolls became a must-have toy but they were difficult to get hold of.  As long as demand exceeded supply, the manufacturer could effectively name their price for the toy but when demand for them fell, they disappeared from the market.

So of the remaining three strategies which is the best fit for a small business of a new start-up?

A cost-leadership strategy may be difficult to maintain in a small business.  For no other reason than economies of scale, larger firms may be better able to bear down on costs over a longer period.  For a small firm to follow a cost-leadership strategy there may be a significant impact on profit margins which makes the business unviable.

Many small businesses try a differentiation strategy; selling product similar to larger competitors but presenting that product to the market in a different way.  This can be a risky strategy as consumers may not appreciate the differentiation strategy or competitors may act to close off areas for differentiation e.g. through the use of intellectual property rights.

So most small businesses and start-ups are left with a focus or niche strategy; where appropriate segments of the market are identified and distinct marketing mixes and products developed to satisfy the needs of the target customers occupying those services.

Since most small businesses are left to use a focus (niche) strategy it is worrying that so few small businesses carry out work in relation to market segmentation.  Many design a product and then try to find a customer base.  Others try to be all things to all people.  I remember writing a marketing plan for a small landscaping business and when I asked the proprietor who his target customer was, his response was, “anyone and everyone”.  The concept of vampire customers; those who spend little but expect significant level of service and significant time from a trader; was alien to him.  I suggested he at least try to define his ideal customer to better focus his marketing efforts.

So if it is good practice for small businesses to segment their market and identify target customer groups, how should it be done?

There are many ways to segment the market place.  It can be segmented geographically.  It can be segmented by consumer income and increasingly segmentation is carried out using psychographic and lifestyle characteristics.

In the UK, most people are aware of the Registrar General’s Social Classification index.  This was the original census approach to classifying the UK population and almost defined the traditional UK class system.  The UK population was broken down into six categories.  Category A was the aristocracy, Category E was the unemployed and lower servant classes. Category B was the professional classes, and so on.

This socio-economic system was replaced with the slightly more refined ONS Social Classification Scale.  However, both of these segmentation tools were cumbersome and did not provide enough detail for marketing purposes.

Systems such as ACORN were developed to further define social classes and to try to refine the differing segments of society.  Acorn contains approximately 20 types of consumer based on income and some aspects of lifestyle.  For example, in the Thriving category of ACORN are affluent greys, these are retired people with significant income, the baby boomer generation.

Increasingly, marketers are segmenting the market through the use of lifestyle trends.  Faith Popcorn identifies ten lifestyle trends for the 21st century.  These include Cashing Out (those looking for a slower, less hectic lifestyle); Down Ageing (those acting younger than their true age) and Small Indulgencies (those looking for emotional fixes to distract from the stress of their busy lives).

However a business looks to segment its market, it is important that chosen segments are valid.  A segment must:

  • be able to be measured
  • be big enough to sustain the business
  • be reachable by the chosen communications medium
  • be able to act appropriately to different marketing approaches
  • be profitable
  • be stable (not likely to disappear suddenly)

A recent Channel Four documentary followed an entrepreneur trying to sell the world’s most expensive chocolate bar.  The production run per year was three hundred bars and each bar cost £170.  So, the entire turnover of the enterprise was £51,000.  Assuming a 50% mark up on the cost of production, pre tax profits were only £25,500; the salary of an admin officer.  This product was aimed at the demanding super-rich market. Once their needs and wants have been met, and appropriate service levels delivered, it was clear that this product would not be delivered to a sustainable market segment.  The opportunity for long-term profit and survivability were negligible.

Philmus Consulting Ltd can assist your business define target customer groups and properly segment your market.