The Importance of Market Segmentation to Small Businesses

If you run a small business, ask yourself the following question: Who is my target customer?  Can you answer that question?  Is your response that your target customer is “everyone and anyone”?

If you cannot answer that question easily or if your response is the mass market, you may be wasting precious resources and you may not be identifying significant opportunities to grow.

In developing marketing strategies, there is a set planning process:

  1. You assess the market situation
  2. You segment the market
  3. You select appropriate target segments
  4. You position your product in the market
  5. You develop a marketing mix which reflects the chosen market position and which attracts the selected target segments
  6. You monitor your results and look for changes in market segments.

Market segmentation is a crucial step in this process and in the small business sector can be critical to the maximising of returns and business longevity.

There are three basic segmentation strategies:

  • The undifferentiated market (or mass marketing)
  • Differentiated marketing (or product variety)
  • Concentrated marketing (usually referred to as target marketing).

Undifferentiated (mass) marketing is where a business looks to sell its products to all customer groups.  Often a single product is made and a single marketing mix strategy is used to attract all potential customers.  This is Henry Ford’s “you can have any colour you like as long as it is black” strategy.

This approach may not be appropriate for small businesses.  It takes significant scale of operations and significant resources to market your products to every consumer.  Such an approach may position your company in the market in direct competition to major firms who are far better resourced to defend their market position.  You may also focus significant time and resources on customers who offer your business poor returns and you may attract ‘vampire’ customers who offer low or negative returns at the expense of more profitable consumers.

Also, is a mass marketing approach suitable in today’s diverse market.  Take Coca Cola, a brand which formerly used a mass marketing approach.  The arrival of segmented brands, such as Red Bull, in the soft drinks market has forced Coke to follow a more segmented marketing mix and to develop product options such as Coke Zero aimed at particular customer groups.

Incidentally, Ford’s famous quote about the Model T was a reflection of a contraction in his offer.  Originally, the Model T was offered in three colours, blue, green and black.  Only after several years in production, when the Model T was seen as old-fashioned and technologically out-of-date was the colour choice reduced to one colour i.e. the Model T was now seen as a discount line.

Differentiated marketing is where distinct market segments are identified and separate distinct marketing mix strategy is developed for each segment. This is the approach taken by Kellogg’s in the breakfast cereal market.  Coco Pops are marketed to children; Special K to women; and Bran Flakes to the health conscious.

Differentiated marketing can be expensive.  You have to create several different marketing mix strategies which run simultaneously.  Small businesses may lack the level of resources to run several different campaigns at the same time.  Doing so may result in half-hearted marketing efforts or campaigns without sufficient resources to be effective.

So that leaves concentrated or target marketing.  This is where the market is segmented, target customers identified and a marketing mix developed to attract those selected groups.  This allows small businesses to target resources efficiently and to attract customers which offer the most economic ratio of return to effort employed.

Take the example of Boodles, the jewellers.  Boodles began life as a mass market high street jeweller selling everything from gold chains to retirement clocks.  This placed the business in direct competition with large retail chains such as Frazer Hines and Goldsmith’s.  Boodles owner took the decision to target his business on high-end luxury customers.  The businesses mission was changed to one of selecting the finest jewels to create unique jewellery for the rich and famous.  The firm may no longer sell as many units as when it was a mass market retailer BUT the returns on each piece sold were far higher.  By taking a luxury marketing approach, Boodles avoided direct competition with much bigger competitors.

Some small confuse target marketing with restricting the number of potential customers.  Marketing to a particular group does not mean that you only sell to that group.  Although that is an option.  Ferrari will only sell one of their models to approved customers i.e. customers that Ferrari have decided are appropriate owners.  This strategy ensures that the select image of the model is retained.  Instead target marketing is the concentration of your resources to ensure efficient marketing effort.  If a customer from outside your target group offers a return of appropriate value, there is nothing to stop you selling your product to that person.

There are four main approaches to segmenting a market:

1.  Geographic/ Geo-demographic – This is selling products in a particular area or to a group of customers originating from that area.  For example, in America, you may wish to target the Hispanic community or the individual states where the Hispanic population are most numerous.

2.  Demographic – e.g. by age, income bracket or social class.  This is the traditional A, B, C1, C2, D and E approach which was originally created as part of the UK census.  This split the UK economy by class division.  Consumers in the A category were the upper classes and the aristocracy; Category B consumers the professional classes such as solicitors and the clergy; Category D consumers were the unskilled labouring classes.  This approach to market segmentation is now considered extremely old-fashioned and not reflective of the modern market.

3.  Behavioural – This is segmenting the market by the way certain groups of consumers behave.  A significant example is the targeting of the ‘teenager’ market in the 1950’s.  A teenager segment, fans of pop music and frothy coffee, was created and new and novel products developed to meet that new segment.

4.  Psychographic – This is the modern method of segmenting markets used by systems such as ACORN.  This is a way of grouping customers by a combination of demography and lifestyle choice.  ACORN classifications include groups such as Affluent Greys; older consumers with significant spending power; and Striving Families; low-income families living in terraced housing.  Acorn has upwards of 60 different segments of consumer.

Which ever way of segmenting your customer base you choose, you must select segments which meet the following criteria:

1.  The segment must be measurable: there must be defined parameters.

2.  The segment must be accessible: you must be able to reach your intended customers.

3.  The segment must be substantial:  it must be of a size that makes your business worthwhile.  How often on Dragon’s Den do you see business ideas rejected on the basis that there simply isn’t a market for your products?

4.  The segment must be unique:  It must be a strictly defined customer group.  The term ‘millennial’ is now often heard and refers to the part of the population born either side of the year 2000 (i.e. aged between 15 and 25).  ‘Millennials’ are not a unique segment.  They make up a quarter of the population of the UK.  There are vast differences in lifestyle, income and demography in that group and no business should treat a quarter of the population as a single market segment.

5. The segment must be appropriate:  There is no point marketing alcohol to children.

6.  The segment must be stable:  There is no point planning a marketing mix for a selected segment if that segment disappears in a matter of weeks.

In relation to the last point, be careful of fads (unless you are clearly aware that it is a fad).  Take the example of a certain pound shop retailer and loom bands.  Loom bands were a craft toy favoured by young teenage girls.  They became the toy of choice and retailers could not keep up with the demand for them.  Faced with a crisis in supply, the pound shop retailer went to extraordinary lengths to get them into their shops.  A plane was chartered to bring in supplies from China (at great expense); trucks delivered the bands to the company’s head office rather than the warehouse; rather than bands being delivered to stores with other goods, regional managers were instructed to drive to the head office, pick up stock in their company cars and deliver them to the stores in their area as a matter of urgency.  After great expense and the diverting of managers from the usual roles to act as delivery men, stocks of loom bands were on the shelves: where they completely failed to sell.  The fad was over.

The pound shop retailer failed to anticipate the initial demand for loom bands and failed to recognise that the target customer base for the toys was not a stable segment.  By the time additional supplies were in store, the target customer segment had dissipated.