I have often discussed Porter’s generic marketing strategies in this blog. As you will be aware, Michael Porter of Harvard Business School stated businesses could follow three strategic routes, differentiation, cost focus and niche.
Differentiation means developing an offer attractive to each segment of a market. Cost Focus means targeting your spending on those areas which target customers value and offering the ‘best value’ offer in the market. Niche means choosing a narrow, target segment and developing a product offer which meets the needs of that target group.
Porter goes on to say that a firm trying to carry out more than one of these strategies simultaneously risks death in a marketing ‘no man’s land as they waste scarce resources and develop muddled strategies.
All three of these strategies rely on the management of firms understanding the importance of market segmentation. The process of finding out what segments exist in your market and which are suitable targets for your business is critical to successful marketing.
The methods of segmenting markets sit on a spectrum from ‘descriptors’ to ‘motivators’ i.e. those factors which simply describe your potential customers to those things which actually define why consumers buy.
Using descriptors is a rather old fashioned way of segmenting markets. This is segmentation by race, occupation, geography, gender, age, etc. When you here of businesses targeting ‘millennials’ this is segmentation by descriptor. It is a poor method of segmentation as, in many countries, ‘millennial’ will describe about a quarter of the population. It is not a sensible segmentation category as there will be a huge difference in the needs, wants and tastes of such a large grouping. Another descriptor categorisation is the A, B, C1, C2, D, E, system developed for the UK census. This is segmentation by social class. Alan Sugar may describe himself as working class, but he is a millionaire businessman and member of the House of Lords. I doubt very much that he still desires the needs and wants of someone who collects his bins.
Using descriptors to segment markets can be seen as easy, efficient and cheap. It appears to offer quick wins and requires little change within organisations. But such an approach is tactical not strategic.
The science of market segmentation has moved on from descriptors as the primary method of segmentation. Marketing strategists now rely on motivators i.e. what actually motivates customers to buy particular products.
This approach targets personality, the higher motivators on the Maslow hierarchy such as self actualisation needs, emotions, community and relationships, the desire for experience and perceptions of brand.
The use of motivators is real segmentation BUT:
- It is a more difficult approach than using descriptors.
- It requires more research
- It costs more
- It may lead to process inefficiencies
- It may result in lower economies of scale
- It is a method that thrives on changes to organisational structures and cultures.
However, using motivators to segment markets offers tactical and strategic gains to a business:
- Better targeting of marketing activities on market segments which actually want your products or services
- More efficient promotion of products and your brand.
- Less marketing wastage as your mix is directed at the correct customer groups
- Improved customer retention
- ‘Improved’ service levels as you are targeting those who truly appreciate what you do. You do the ‘right’ things that the segment values
- More efficient production as you are making products which will be sought and bought.
- You are able to achieve price premiums and through higher prices, increase profit margins
- You will achieve more focused new product development.
- You can create unique customer propositions by gaining insights into customer needs, and you are able to act on those insights.
- You have clear market positioning from the customers’ perspective.
- You are able to create a market position which separates you from the offer of your competitors in the minds of target customers.
- You create brand value and personality.
- You develop retention and loyalty through creating relationships with your customers
- You can develop sustainable competitive advantage
- You can influence your market, take the influence Apple has had on the design and functionality of smartphones
- You can develop market leadership, not just in terms of market share but also leadership of thought and share of voice.
- You can develop premium prices and margins
- You can increase profitability.
Modern motivator-based market segmentation is critical to business success in the 21st century. If you are an SME and expect your business to be attractive to all, you may not be making the most of your budgets and resources.