Segmentation is critical to your business

If you have ever watched the television programme Dragon’s Den, which has just begun a new series on BBC2, you will see may businesses fail to get and investment from one of the dragons.  Only a minority of the entrepreneurs are successful and many are told, “There is no market for your product”.

The problem is that many of the investors enter the room thinking they can create a market for their product or that they can create new market segments.

These businesses have a problem as the dragons are well aware that markets ‘;just are’. They already exist as an entity and cannot simply be created, however good the entrepreneur thinks their idea is, if there isn’t a pre-existing market for it, it will fail.

Of course, there are exceptions to this position particularly with new technologies, but even then new technologies are usually new answers to old questions.  They represent a technological shift in a market which already exists.

Markets also have a life of their own. You cannot invent a market and you cannot create market segments out of thin air. Busineses do not create market segments, markets segment themselves. Markets and market segments are made up of living, breathing people.  Those people have presumptions, assumptions and emotions and it is very dangerous for you to project you assumptions about market behaviour on a pre-existing market segment.

It is very dangerous to create grand theories as to how a market will segment.  It is also dangerous to prepare ‘ideal’ segmentation bases.  Segments shift and morph they are not set in stone.

Markets do not reform themselves to match your pre-conceptions. it is a real mistake to build concrete boxes and tr try and fill them with the population of a market.

I am reminded of the episode of Some Mother’s Do ‘Ave Them where Frank Spencer faces an RAF intelligence test. Spencer had to fit shaped wooden blocks into a chart on a wall within a set time period. Rather than selecting the right shape for the right hole, Spencer tries hammering any shape into any hole.  The result is disaster.  The shaped wooden blocks are jammed in the chart and when Spencer tries to remove them he pulls the chart from the wall taking bricks and plaster with it.  Spencer’s attempt to force the blocks (pre-existing segments) into his choice of holes (his concrete boxes) is equivalent to total business failure.

Rather than trying to create a market and develop new segments, you need to analayse the existing marketplace and adapt your offer to meet pre-existing segments.

To do this, you must:

  1.  Decide exactly what business you are in.
  2. Do appropriate qualitative research as to the issues affecting market segments and the market as a whole.
  3.  Do appropriate quantitative market research, measured using cluster analysis as to market demographics, consumer attitudes, and product usage (who owns what, who uses what)
  4.  Find common needs so as to define segments.
  5.  Define segments in terms of demographics and usage
  6.  Populate segments in terms of demographics
  7.  Prioritise those segments which are a best fit for your business
  8. Test segments before launch

When considering entering a market segment, You must ask:

  • Is the proposed segment identifiable?
  • Do target customers recognise the segment?
  • Do you have the resources to reach the segment?
  • Is the segment viable over the longer-term?
  • Do distributers and retailers recognise the segment?
  • Is your offer distinctive within the segment
  • Does your offer attract a price premium? If not, is it worth entering the market?
  • Does your offer attract higher than average profit margins? (this is the asset test as to whether a market segment is worth entering).

When marketing to different segments you need to prioritise segments on two factors; the attractiveness of the market segment to your business; and the skills are resources within your business that can be used to deliver customer needs.

This is where tools like the GE Matrix and the Shell Directional Policy Framework become incredibly useful.

In presenting products to market you have three options:

  1. Undifferentiated marketing: where the same offer is made to all market segments
  2. Focused marketing: where you specialise you offer to meet the wants and needs of a single market segment.
  3. Differentiation; Where you develop different marketing mixes (different offers) for different market segments.

In the modern economy, if you aren’t talking in terms of segments, you aren’t talking of markets. For the modern economy segmentation is difficult but necessary.  In may ways, the mass market is dead.

Think of the music industry.  In the early 1960s, you had a few mass markets, Popular Music, Classical Music, Jazz, and Folk Music.  Fans were pigeon-holed into these broad categories. Over time, these mass markets have splintered into a multitude of different sub-genres.  Take rock, you now have classic rock, indie rock, grunge, prog, metal, etc.  Each of these sub-genres have segments.  Heavy metal has thrash, death metal, Nu-metal and even prog-metal.  No one in the music industry talks in terms of pop fans or jazz fans anymore.  (this is also because the music consumer is likely to have access to and listens to many different forms of music).

But you also have to beware not to micro-segment.  Gibson guitars got into real financial trouble last year and part of the reason was the production of a massive number of different products trying to cope with micro-specialist markets.  They did this without putting in place the mass customisation processes common amongst manufacturing businesses.  The result was a confused product offer and huge manufacturing costs which directly impacted profit margins.

Gibson was a prime example that business is a profits game, not a revenues game.

Another important aspect of successful segmentation is to choose segments which are easier to defend. You are defending your ability to maximise profits.

What is certainly true, is that if you don’t have an accurate picture of what your target segments are, you won’t win the game.

So market segmentation is a key tool in the battle to gain customers.

Ask yourself:

  • Do you know the current state of segmentation within your business?
  • What are the key target segments for your business that make up your target market?
  • Do you know what segmentation does for your business?
  • Are your chosen segments durable?
  • Have you prioritised certain segments?
  •  Are there appropriate targets you need to target?
  • Do you want to target multiple segments and how are you going to do that?