Bases of Segmentation

I recall speaking to a businessman about his marketing goals. I asked him who he intended to sell his services to. He responded, ‘Everyone and anyone’.

I then asked who he intended to market his product to. At first he was puzzled. Surely that question had already been answered: He would market to those who he was intending to sell to, everyone and anyone.

I narrowed the question. Who would the businessman target to receive marketing messages. The word target puzzled the businessman. Surely he would target marketing messages at ‘Everyone and anyone.

So I had to explain the concept of market segmentation and targeting.

Marketing to everyone is expensive in terms of both cash and effort. By marketing to all, you could be reducing your margins and make you marketing messages inefficient. You may have to develop high share of voice, big advertising budgets and bland messaging.

Most businesses do not restrict who they will sell their goods to. If you have the money to buy the goods or the service, they will trade with you. there are exceptions. For example, for some models of Ferrari, you will have to show you have the skill to drive the vehicle as well as having the requisite pot of cash. Occasionally a firm may refuse to sell a product to a particular individual if they feel such a sale will actually harm their brand image (but such occasions are incredibly rare.).

Businesses who follow a diversified marketing strategy will still segment the market and create distinct offers for different segments. the car industry is an example of this Ford create cars from budget city cars through to executive saloons, SUVs, off-road vehicles, sports cars, etc.

Businesses who target a market niche need to segment the market so as to identify the boundaries of their market.

Businesses who are following a cost focus strategy need to segment the market to identify groups of consumers who will be attracted by a budget offer.

Since the concept of market segmentation was created, the methods and techniques used to achieve distinct segments have evolved.

  1. Geographic and Geodemographic: This is possibly the earliest form of market segmentation. You divide your market into different geographic areas and develop marketing materials specifically for those areas. For example, I once dealt with a parallel imports case in relation to branded jeans. The jeans’ manufacturer had complained that the retailer had no right to import the jeans as, they were marketed differently and were manufactured differently. The imported jeans were made to a lower standards and of different materials to suit the price cap of the intended market, Eastern Europe, not the standards expected in the UK. A geodemographic model of segmentation takes a distinct geographic area and then segments that area by different lifestyles. ACORN is a good system of lifestyle types for the United Kingdom and includes groupings such as Affluent Greys and Striving Families.
  2. Demographic Segmentation: Such segmentation splits a market by terms of age and family lifecycle. Currently the UK has an ageing population. We have more older people. So using marketing messages which attract that ageing demographic can be a route to marketing success. Think of the Werther’s Originals adverts and adverts which rely on ‘the good old days’ nostalgia. Also, think of fashion brands and sports clothing which tend to be marketed to under 25 year olds. The family life cycle is analysis of how a family changes over time. There is also the psychological life cycle that recognises that life stages don’t happen to everyone at the same time. We don’t all learn to drive at 17. We don’t all get married at 21. We don’t all retire at 65. Income is also a major demographic factor. Everyone is aware of the A, B, C1, C2, D, E categories used by government which split the population through occupation and income bracket. However, the A, B, C1, categories are now seen as a blunt tool and somewhat out of date. Gender is also a major demographic for segmentation. Think how successful marketing campaigns for male cosmetics have been.
  3. Behavioural Segmentation: this is segmenting a market by identifying how different groups of consumers behave. In the UK a famous example is Professor Malcolm MacDonald’s seven farmer model. Professor McDonald identified seven types of farmer when fertiliser was to be purchased. He found one group of farmers who will always buy the cheapest fertiliser; another group who would buy based on the yield expectations of the fertiliser; a third who would buy based on the science behind the fertiliser; a fourth who would buy only if they felt they had achieved a discount; etc. Behavioural segmentation recognises that people are not sheep tied to their herd. Income and demographics are one aspect of our lives, our beliefs and actions will differ and only be partially affected by the demographic group in which we conform. That is not to say we do not belong to tribes; we do. The football team we support puts us in a tribe. The music we like puts us in a tribe. The clothes we wear, the sports we play, the events we attend, put us in tribes. The important thing to realise is that we can all be members of several tribes simultaneously.
  4. Psychographic and Lifestyle Segmentation: This is complex segmentation techniques based on three factors: Tradition-directed behaviour (easily predictable e.g. My Mum bought Brand X washing powder, so I buy Brand X washing powder); Other directedness (e.g. peer pressure e.g. Jimmy says Reebok trainers aren’t cool so I want Nike trainers); Inner Directedness (I don’t care that others don’t like smooth jazz, I do, so I’ll put Norah Jones on my iPod). Psychographic and lifestyle segmentation is common amongst fashion brands and in the car industry. Firms in these sectors create ideal customer profiles which list a range of lifestyle options.

In business you need to be focused, productive and efficient. So whatever your generic marketing strategy you need to make the best of scarce resources and achieve the most return for the least effort. therefore segmenting a market and targeting the most profitable consumers within that market is critical.

What kind of Business Are You?

What is your state of readiness to supply your market?  Do you anticipate what consumers need or want? Are you prepared to move your customers to the next stage of the market e.g. electric cars or 5G?

To answer these questions you need to know what type of business you are and what is the position of the market life span.

Only with that information at hand can you adopt a market strategy that is appropriate and get that strategy applied with the correct timing.

You need to forecast your environment: Decide at what point you want to grab the market. Do you want to intercept the market at a certain stage of its life span or do you want to lead and direct the market?

This means that there are several types of company in a market. It also destroys the myth that ‘First in is best dressed’. take the early 80’s home video market: Betamax was first to market, and some still consider it a superior quality option, but VHS was able to intercept the market with a cheaper, better distributed product.  VHS won the home video format battle and Betamax was consigned to the history books.

Being the prime mover in a market is not always an advantage.

In every market there will be a number of companies and as the market life cycle progresses different businesses will rise to prominence as others decline. Like everything else, markets have entropy.

Businesses in a market can be classified under one of four categories:

  1. Market Scopers:  These are the innovators who create new markets and who operate at the start of the market life cycle.  they create new product, services and distribution channels. They have a go to attitude and scope out a market rather than aiming to satisfy it. the following lessons can be taken from Market Scopers:
    1. Know the state of readiness of consumers for the market, the product or the innovation.  Sir Clive Sinclair scoped the market for home computers and had extraordinary success. He tried to scope the market for electric vehicles but did so on false assumptions and the C5 was a disaster.
    2. Know how big the market is or could become.  Focus on realised demand not latent demand.
    3. Know how the market wants to buy the product.  For example, who buys carpets over the internet?
    4. Know what price the market will bear, so as to maximise returns.
  2. Market Makers:  These businesses operate in the early growth stage of the market.  They are the creators of a mass market e.g. Henry Ford with his aim to make motoring a practice for the masses.  These businesses generally garner the largest market share and become market leaders.  They create ‘best value’ but are often insufficiently agile to withstand the pressure as a market segments.  Often these businesses are driven by product development rather than market change. These are growth stage market leaders.
  3. Market Changers:  These businesses aim to move the market elsewhere by forcing their competitors to modify their offer.  Market changers are companies like Tesla which has pushed established car manufacturers into the development of electric vehicles.  These companies focus on technology and price/quality analysis.  They look to provide services unavailable elsewhere. They can force the existing market into decline.
  4. Market Exploiters:  These companies are fast followers of technology.  Many ‘market disruptors’ are market exploiters.  They take advantage of market fragmentation as disparate segments emerge.  They develop ‘new best value’ through branding and new service functionality.  Exploiters follow a market follower or market challenger strategy.

Different types of company need to target different market stages for market entry.  timing into the market is critical where consumer needs and market segments are continually changing.  A major factor is the rate of market progress and its taxonomy. This is how quickly consumers adapt to changing market technology: Do you target early adopters or laggards?  You also need to be aware of how quickly consumers change their definition of best value in a market.  For example, how many consumers would now buy a car that doesn’t have Wi-Fi or an iPod dock?

Relationship Marketing Myopia

In the early days of marketing size, the focus of businesses was very much on successful transactions.  The aim of marketing departments was to grow sales.

Today, that focus has changed.  The market is mature. New customers can be hard to come by and expensive to obtain. So the focus of marketers has shifted to creating and maintaining relationships between a business and its customer base.  This is obviously based on the tenet: The longer you keep a customer, the more you earn from them.

This relationship focus has seen the rise of social media as a marketing tool.  Social media in marketing is an unproven and likely poor sales channel. Businesses should not see it as an aid to successful transactions. Social media is about developing relationships, creating brand communities and moving target consumers from prospects to close business partners.  Social media is also about weaponizing your current customer based as part of your marketing team; through the development of E-WOM (electronic word of mouth).

So much of marketing today is about relationship building.

Piercy (1999) warned that businesses need to avoid relationship marketing myopia; the naïve belief that every consumer wants a deep relationship with their suppliers.  This is why I often laugh when necessary but embarrassing products have social media accounts. For example, who wants to become part of the John Smith haemorrhoid cream community?

Piercy goes further and states that different consumers want different forms of relationship with their suppliers.  Piercy states that to ignore this as a reality is an “expensive indulgence”.

In Piercy’s model, there are four types of relationship that consumers have with a business:

  1.  Relationship seekers:  These consumers want long and close relationships with a supplier.  So a local authority will likely want a close relationship with an ICT supplier.
  2. Relationship Exploiters:  These consumers will grab at all free services and offers provided.  They are also fickle and will move their custom when they feel like it.  They may well be ‘zombie customers’; customers who will cost more to service than you will earn from them.
  3. Loyal Buyers:  These consumers are happy with a long-term relationship but they do not want a close relationship with their suppliers.
  4. Arms-length Transactional Buyers:  These consumers actively avoid long-term relationships with suppliers.  This may well be transactions based on price, technical specification or innovation.

What these four categories highlight is that relationship strategies for marketing MUST be based on market segmentation.

Investing in relationships with profitable relationship seekers is a good thing. Relationship development with exploiters and transactional customers is a waste. You need to develop different marketing strategies to suit different relationship needs.

Some argue that there is a link between customer loyalty and customer satisfaction.  surprisingly there is little evidence to support this. As I have often written customers are fickle and so is their loyalty. What is much more likely is that there is a link between customer dissatisfaction and customer disloyalty.

In many markets, such as utility provision and retail banking, there is significant customer inertia.  Who reading this article has been a customer of their bank since childhood?

Today businesses spend billions on customer relationship management. But is a radical rethink needed?  Should we be looking at managing customer relationships with our business or should we be giving customers options as to the type of relationship on offer? Is it time for the customer management of relationships?

Customer management of relationships  represents a new power balance where customers choose the relationship they want based on:

  • What they are interested in,
  • what information they want,
  • what levels of service they want,
  • what way they want to communicate.

In this process you need to recognise the real value of relationship development tactics and target consumers who are interested in those relationships.  For example, what is the point of a loyalty card scheme if everybody can have one regardless of their level of loyalty?

The advantages of market segmentation

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:

Tactical Gains

  • 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.

Strategic Gains

  • 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.

The importance of market segmentation

It was Napoleon who said, “England is a nation of shopkeepers”.  This referred to the expansion of Britain’s mercantile class in the eighteenth century but it is clearly a simplification of the true nature of the British economy and something of a stereotype.

Wellington, in xenophobic mode said, “We have always been, we are, and I hope always shall be, detested in France.

Both these statements lump whole nations into a homogenous mass. Clearly not everyone in England was a shopkeeper and not every Frenchman, even during the Napoleonic wars, hated France. In fact, during that part of history, London was filled with the refugees of the French revolution and the descendants of the Huguenots victims of the oppression of French protestants.

Both Napoleon and Wellington were living at a time when the mass market was developing. It was the start of the mass production of goods and the Industrial revolution. Products went from the artisan to the mass produced.  The mass market was king.

But in the 21st century, the mass market is long dead.  A one size fits all approach is no longer valid in many markets. In today’s markets, to succeed, you need to be aware of the needs and wants of different customer groups.

Some firms create profiles for individual target customers e.g. An architect with three children who plays guitar in a band and enjoys Rugby League.  Such individual profiles often seem bizarre and ridiculous; but they are not designed to represent an actual person but a group of people who may be attracted to a particular product.

Describing profiles of ‘perfect’ customers and of distinct groups of customers helps these companies the clarity and depth of customer focus required to remain relevant.  This process is market segmentation.

There are numerous ways to segment markets, using demographics, lifestyle markers, by income or by psychological markers. Which segmentation tools to use will depend on:

  • The sophistication of the market
  • The level and nature of competition in the target market
  • The stage of market development
  • The strategic sophistication of your organisation
  • Your ability to implement strategies and tactics.

Most consumers no longer want standardised mass-produced items.  Many firms now embrace mass customisation. For example Mini offer thousands of vehicle variants and both Nike and Brompton Bicycles allow consumers to customise their footwear or bikes. Increasingly people desire something special to meet their self-actualisation needs. Much of this desire is driven by internet shopping and the development of cross-border, continental markets.

People want the products they buy to reinforce their internal idea of their own identity.  Increasingly people do not want to buy a product, they want to buy an experience.  They focus not only on the product but the ‘halo’ around it e.g. customer service, how goods are packaged etc.

People want to separate themselves from ‘the herd’.

We also live in a time of mature markets. This has led to increased competition as firms compete for each others customers.  Markets offer increased opportunities for consumers to switch suppliers.  The demise of Nokia is a fine example of switching as what was seen as a large loyal customer base switched to the perceived better offers from Apple and Samsung.

We are experiencing markets where the supply side of the graph is becoming as chaotic as the demand side.

This is why market segmentation, the targeting of consumer groups in terms of similarity of need,  is critical.  You need to identify homogenous sub-sets of customers. You need to know if the selected group can be classed as a target market. You need to know if you have the resources and ability to develop a distinct marketing mix to serve that group.

The use of segmentation tools to target market groups improves you market penetration. Segmentation can improve volume sales.  Segmentation allows you to leverage higher prices improving profit margins. Such improvements can pay of the additional costs of a diversified market position.

Market segmentation creates a compromise between bespoke production (individualisation) and mass marketing. It is a process critical to strategic success and long-term survival of businesses.  It is also an on-going process to reflect changes in consumer attitude and taste.

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?



Why Market Segmentation is Important to your Business

Philip Kotler and other gurus of marketing science see three factors as central to world-class marketing:

  1. A deep understanding of your market.
  2. Correct market segmentation.
  3. Product development, positioning and branding based on that market segmentation.

Market segmentation is key to all successful marketing and the creation of sustainable competitive advantage and shareholder value.

These three factors, combined with:

  • Effective marketing planning
  • Long-term integrated strategies
  • Efficient supply chain management
  • Market-driven organisational structures
  • Careful recruitment, training and career management
  • Rigorous line management implementation

Leads to a successful, customer-focused business.

The marketing writer Ted Levitt once said, “If you’re not talking segments, you’re not talking marketing”.

Marketing segmentation is important because if you don’t understand how different parts of your market think, everything else you do is flawed.

If you aren’t segmenting your market and are treating it as a homogenous mass, you will only survive if your competitors are as equally ignorant.  Relying on your competitors being incompetent is not a sustainable business strategy.

Markets are not homogenous.  Consumers do not all have the same motivations and needs.  If your data shows a homogenous market, it is probably wrong or poorly analysed.

Segments should be distinct.  Consumers shouldn’t cross over between different segments.

Your chosen segments should be accessible.  There is not point targeting a segment if you cannot get your goods and services to it.  Segments should also be viable.  They should be big enough, stable and worthwhile entering financially.

Professor Malcolm McDonald examined the market for Global Tech and described the following market segments.

  1. Koala Bears – Like to use extended warranties and won’t repair tech themselves; they prefer to call a service engineer.  Often small offices.  28% of the market.
  2. Teddy bears  – Require lots of account management from a single service provider.  Prepared to pay a premium for service and attention. Larger companies. 17% of market.
  3. Polar Bears – Teddy Bears but colder. Will Shop around for cheap service.  Will use third-party engineers rather than those of the tech provider. Expects freebies e.g. training. Carries out ‘serious’ annual reviews of contracts. Requires a supplier who can cover several locations. Larger companies. 29% of the market.
  4. Yogi bears – A ‘wise’ Teddy Bear or Polar Bear.  Will train their staff to carry out their own service needs.  Needs a skilled product specialist via distance communication (probably on the phone 24 hours.  Requires different service levels in different parts of their business.  Can be large or small companies. 11% of the market.
  5. Grizzly Bears – Will bin tech rather than repair it.  Wants tech that is so reliable that when it breaks, it’s already obsolete. Won’t pay for training. Not small companies. 6% of the market
  6. Andropov Big Bears – Their business is totally dependent on your product.  Claims to know more about your product than you do.  You will do as they instruct.  Expect you to ‘jump to it’ when called. Not large or small companies. 9% of the market.

What is important to note about McDonald’s segments is that they are not based on traditional demographics or financial data.  They are based on attitudes and expectations.

It is also important not just to segment by product category.  For example, you may wish to segment by expected distribution channel.

Segmentation is matching your offer to meet consumer needs.  It is not easy.  It is a complex and critical task to appropriately define consumer groups, which can be fickle.

The Challenger Credo

Business is about competition.  It is therefore often compared to sport.

Take the Premier League in football.  You have leaders, teams which year after year compete for the English title.  These are teams like Manchester United, Liverpool, Chelsea and Arsenal.  If they do not win the league, they usually obtain the qualification spots for European competitions.

Also in the league, you have ‘Strivers’.  These are teams who are competing not to get relegated.  Their goal is survival.  Some succeed and stay in the league another year: Others fail and exit the league.

There is a third category of team in the league.  These are teams who look to challenge the established order by becoming one of the league leadership group.  In recent years such teams include Watford, Leicester and Bournemouth.  Often these are teams previously seen as unfashionable but which have received significant financial power through a new billionaire owner.

In business the term challenger is often used to describe businesses ‘in the middle of the league’.  Such a general description is an incorrect definition of the concept of a challenger firm.  There is more to being a challenger than being ‘of the middling sort’. Being a market challenger is as much a state of mind as it is a statement of intent.

I can think of sport’s clubs who are happy to maintain a mid-league position.  Owners want a club which breaks even financially and meets its role as a form of entertainment but who do not want to incur the significant costs associated with being in a leadership position.

Similarly there are businesses who do not want market leadership as being a leader costs in terms of defending that position.  Being a market leader is often not a position in which profits can be maximised. It costs to be a leader.

To be a market challenger, is to have ambitions which exceed your conventional marketing resources.  This means being strategically and tactically bold to overcome the resource gap.

So what are the core challenger characteristics?

  1.  Challengers embrace intelligent naivety.  They do not accept the historical norms of a market or its traditional process models.  The rules written by others aren’t the challenger’s rules.
  2. Challengers build a ‘lighthouse identity’.  They take and communicate their own position and they are clear where they stand on issues affecting the market.  They project that sense to target consumers like the beam of a lighthouse.
  3. Challengers take thought leadership of their category.  Apple isn’t the leader in the mobile phone market; Dyson aren’t the leader in the vacuum cleaner market; but both these companies lead their sectors in terms of design and thought.
  4. Challengers create symbols of re-evaluation.  They seek to continually shake up the consumer’s view of the market or brand category.  So Apple and Dyson continually add functionality and features to their products which alter the consumer’s expectations of the category.
  5. Challengers are willing to sacrifice.  Rejection isn’t the fear of challengers.  They fear indifference.  Be willing to sacrifice that which does not present a strong position to your target audience.
  6. Challengers are willing to over-commit to build a market position.  This over-commitment could be in the form of guerrilla marketing or to go a step further than your competitors to gain a market foothold.
  7. Challengers use PR and social networks to enter social culture.  the use of communications is strategic.
  8. Challengers become ideas-centred.  they need to continually come up with new ideas to keep their presence fresh.  They don’t do the same thing over and over again.

Research has shown ten potential challenger narratives.  These are:

  1.  The Feisty Underdog:  This is the classic challenger narrative.  It’s David versus Goliath.  It is often the position of the initial market disruptor.
  2. The Peoples’ Champion:  Challengers can develop a market position where they are seen as fighting to make the consumer the real winner.  They fight against the market’s ‘cynical fat cats’.  Take the mobile phone network Giff Gaff as an example.
  3. The Missionary:  These challengers want to bring a new way of thinking to a market category.  An example is The Body Shop which promoted natural and environmentally sound cosmetics manufacturer.
  4. The Democratiser:  This is the Robin Hood challenger wanting to take from the few to give to the many.  For example, H & M, the fashion retailer looks to give high fashion looks usually only available to those who can afford designer prices, to the mass market.
  5. The Enlightened Zagger:  These are challengers who divert from the cultural current in a market.  When competitors ‘zig’, they ‘zag’.  This is a brand by opposition to expected norms not matching the propositions of others.
  6. The Real and Human Challenger:  These challengers are clear to show that there are people behind the brand, not just AI and algorithms.  They promote human to human communication.  They aim to make a human and emotional connection.  There is personal commitment to quality and service.
  7. The Visionary:  These challengers aim to transcend the category.  An example is Whole Foods, the American grocery chain which uses the vision statement “Whole Foods, Whole People, Whole Planet”.  This statement reflects the triple bottom line of People, Planet, Profit. That business is more than the aggregation of wealth.
  8. The Next Generation:  These challengers look to get consumers to re-evaluate the market.  Tesla are an example as it gives an image of the future through alternative energy production and electric vehicles.
  9. The Game-Changer: These challengers offer a significantly different proposition that changes the market.  Such challengers have included Airbnb, and budget airlines such as Ryanair.

As challengers often lack the resources to compete against market leaders head on, they have a duty to be flexible, fleet-of-foot and imaginative.  As the  nuclear physicist Sir Ernest Rutherford said or UK scientific research, “We have no money, therefore we are obliged to think”.


Aligning Organisational Capabilities

Every organisation has specific assets and capabilities.  Your skills, knowledge, equipment, staff capabilities and finances will differ from those of your competitors.

It is therefore critical that once you have carried out the process of market segmentation that you target specific segments which align with your assets and capabilities.  In particular you need to pick market segments where your assets and capabilities are stronger than those of your competitors or of potential new market entrants.

So what is meant by assets and capabilities?

Assets are organisational attributes which can be both tangible and intangible and which can be used to gain a competitive advantage in the market.

Assets can be:

  1.  Scale Advantages – Such as high market share; media weight (high share of voice); leverage over your suppliers; International presence; Sales/distribution/service coverage; specialist skills due to scale.
  2. Production processes, plant, machinery and information systems – Level of contemporary practice e.g. robotic production line versus small workforce; level of flexibility; economies of scale; capacity utilisation; unique items of technology.
  3. Customer franchises – Brand name and reputation; brand franchises; CRM databases; relationship with customers; unique products and services; intellectual property including patents.
  4. Working Capital – Quantity of; ready access to; location of; access to credit.
  5. Sales/Distribution and Service Network – Area of coverage; Relationships with external distributors; size; quality.
  6. Relationships with other organisations – Suppliers; financial institutions; joint ventures; and joint exploitation of assets such as distribution capabilities and technology.
  7. Property – Type; location; ability to expand and quality of premises.

Assets should not be viewed in isolation and the competitive advantage that they provide must be clearly identified.

One method of identifying the value and strategic usefulness of assets is value chain analysis.  Such analysis can identify areas of your business that provide competitive advantage.  In particular it identifies where customers see value in your business.  Competitive advantages can originate in both primary activities and support activities.  Normally, value chain analysis is used to identify where investment should be made in the eye of your customers.  This often means that the focus is on primary activities i.e. your production chain.  This leads of investment being focused on these primary activities and resources being shifted away from secondary, background activities.

For example in relation to a business consultancy, primary activities would include service configuration, marketing and sales, data collection, data analysis, data interpretation (the conversion of raw data into specific, useful information), development of recommendations, reporting and communication and the implementation and evaluation of advice.

Support activities for a business consultancy would include ICT, human resources functionality and procurement.

Key competencies are often split into three broad categories:

  1.  Marketing – including activities such as new product development, PR, advertising, business analysis, Customer service, customer relationships and brand extension.
  2. Selling – Including activities such as supply chain management, partnership building, merchandising, negotiation.
  3. Operations – Motivation and control, process engineering, productivity improvement, total quality management and purchasing.

Competitive advantages exist in all three of these three categories.

Targeting is the process of the strategic alignment of assets and competencies with the most attractive market segments.  Targeted segments should fit within your chosen generic strategy i.e. cost focus, differentiation or niche.

It is therefore critical that your chosen market segments allow you to maximise your organisational strengths. Is your marketing presence able to create successful situations within your chosen segment?

Are there cost advantages in the chosen market segment?  Would entering a price sensitive segment be consistent with your capabilities and your desired brand and corporate image?

Do your technological strengths give you an advantage in your chosen segment(s)?  Is your technological ability consistent with your desired segment?

Do you have the required managerial capabilities and commitment to enter your chosen segment? If you do not have the appropriate skills, can you easily acquire them at a reasonable cost?

Is entering a particular target segment consistent with your long-term goals and objectives?  If not, your strategy may be weak and it will be a waste to divert resources.

Tools such as the Shell Directional Policy Matrix or the GE Matrix, which use weighted criteria for corporate abilities and segment attractiveness can be useful in target segment selection.

Market segmentation is a strategic process where both qualitative and creative judgements need to be made.  opportunities need to be evaluated on the basis of strategic fit.  Your aim is to build synergies.  You also need to consider if a competitive advantage is sustainable and compatible with your organisational mission. Is it consistent with your organisational values and culture?  Does the chosen segmentation challenge your prevailing corporate values.  Are there power struggles in your organisation which may be exacerbated by your chosen segmentation?  Will such struggles hinder entry into a chosen segment?

Segmentation processes can act as a focal point for action and future organisational development.  The selection of and entry into a chosen segment can facilitate innovation.  You need to consider whether you have the ability to meet the innovation challenge and create an innovation culture which is compatible with your service capabilities and infrastructure.  Does entry into a segment fit within your existing information flows and reporting lines.

Factors such as those outlined above are critical to successful strategic implementation of new segment strategies.

Remember, successful market segmentation strategies depend on the alignment of your organisational assets and capabilities and the creation of sustainable competitive advantages.

Going Beyond Porter’s Generic Strategies

Recently, I was fiddling about with my car radio and I caught the long-running Radio 4 soap opera, The Archers.  This tale of ‘everyday country folk’ has been running since World War Two.  It was set up as a vehicle to give the farming community advice on farming practices.  The agricultural content has diminished over the years but the show still retains an agricultural consultant and often storylines debate current issues with the UK country scene, such as ecology (the Grundy’s have accidentally loosed their pigs onto a site of special scientific interest) and disease outbreaks (a recent breach in biosecurity has spread disease across several herds of cattle).

In the episode I caught, Pip Archer, who works for an agritech company was speaking to her father David about the use of satellites to monitor the application of fertiliser.  This conversation reminded me of the work of Professor Malcom Macdonald at ICI’s Fertiliser division in the 1980s.

At the time of Professor Macdonald’s work with ICI, no fertiliser manufacturer in the world was profitable.  Fertiliser was seen as a generic product sold on the promises of price and increased yield.  The marketing approach was the same to all farmers.

Professor Macdonald examined the farming community and found that there were seven types of farmer and that using these types to segment the market, greater sales could be achieved.

The farmers in the Archers exemplify three of the seven types identified by Professor MacDonald.  Brian Archer is the tech farmer interested in the most modern farming techniques and the application of new technology.  For instance, he has recently purchased a drone so he can monitor his fields from above.  Pip’s talk of applying fertilizer scientifically using satellite technology directly matches his high-tech approach.

However, if Pip was talking to Tony Archer, Brian’s brother, it is unlikely that the technological approach would work.  Tony’s approach to farming is that of the eco-farmer interested in preserving nature and using organic methods.  If Pip was selling a fertilising system to Tony, the best approach would be to talk up the green benefits of the product and its low impact on the natural world.

Brian Aldridge, a friend and confident of the Archers is a different kettle of fish.  Aldridge is a traditional, ‘if it ain’t broke, don’t fix it’ farmer.  He is after the best deal possible and focuses on the best yield for the least money.  If selling fertiliser to Brian Aldridge, Pip would be best to highlight the value her products offer.  If she speaks about ecology or technology, she is unlikely to make the sale.

Michael Porter described three generic marketing strategies, cost focus, differentiation and niche.  He also states that following several of these strategies at the same time can result in a firm sitting in no man’s land and wasting marketing spend.

A big company like ICI can afford to spend on a differentiated strategy.  They can afford to spend on different marketing mixes to attract different farming segments for their fertilizer products.  Small producers cannot.  Small traders are often left with a niche strategy as they cannot meet the volumes required for a cost focus strategy or the extensive budgets needed for a differentiated strategy.

Rather than trying to attract David, Brian and Tony, their approach may only be to sell to one of the segments, the eco-farmer, the tech farmer or the yield-focused farmer.

However, even with niche marketing, there may be an overall issue to be addressed.  All three of the Archer’s farmers want the same thing.  They want to maximise their income and reduce the running costs of their farm.  They simply disagree as to how this should be done.

So if following a differentiation strategy, the solution to the problem may start in the same way.  I have never met a farmer who will willing waste money.  It is the emphasis of how they use money that will alter.  David will want a technological solution so he does not waste fertiliser.  Brian will want a traditional answer.  Tony will want an eco-friendly way of getting the best-bang for his buck.

So each segment identified can be broken down into micro segments.  The prime motivation of the segment may be the same but the message must be tweaked for each micro-segment.

Car firms do this by creating ideal customer profiles.  These can be very detailed listing the ideal customers family make-up, their job, the stage of their career, where they live, their hobbies, etc.  A range of these ideal customer profiles are created for each market segment and the marketing mix tested so that different attributes can be highlighted to different micro-segments.