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.

Market Segmentation and a Multi-Brand Strategy

Michael Porter of Harvard Business School proposed that there were three basic marketing strategies for any business:

  1.  Cost Focus – a strategy of keeping costs down and offering the best-value to the market
  2. Differentiation – Offering multiple products and brands to different market segments
  3. Niche – selecting the most profitable market segments and limiting you offer to those segments

Porter argued that a company which tried to meet two or more of these strategies would be in ‘no man’s land’ and be at risk of failure.

For small firms this basically means the adoption of a niche marketing strategy as they will often lack the economies of scale for a cost focus approach or the resources to produce products which meet the needs of every market segment.  Small firms need to segment their market so that they can properly target their marketing resources.

However, as firms grow, a differentiated marketing strategy often needs to be developed and a multi-brand portfolio created.  This is particularly true if your market is mature, where product innovation and development becomes an increasingly important element of an organisation’s marketing tools.

A multi-brand approach and a differentiated marketing strategy can provide significant benefits:

  1. It can offer a route to grow and develop your market
  2. |t can increase your market coverage
  3. Differentiation is necessary in mature markets
  4. Having several brands allows the communication of different brand attributes at the same time without confusing consumers or weakening brand identity.
  5.  It can provide a defence. It can be a barrier to new entrants into your market and it can stop competitors from taking your market share..
  6. It can help to maintain a brand image.  For example, Disney owns Bueno Vista and Touchstone; two brands which allow them to distribute movies aimed at adults without harming their family friendly image
  7. It can be a route to innovation.  A product failure will have less of an impact on your primary brand.
  8. It allows market leaders to develop challenger brands in other markets.

So how do you segment a market for a multi-brand strategy?

The most obvious ways of segmenting a market are based on socio-demography.  This is breaking down a market or population on factors such as age or income.  For many years, this was the method used by the UK census with the A, B, C1, C2, D and E categories.  The census system broke the UK population down by profession and social standing.

Ferraro Kinder, Europe’s biggest confectionery manufacturer uses demography as part of its multi-brand strategy. Products such as their Roche chocolates are aimed at adults whilst Kinder products are aimed at children and young adults.

Another common method of segmentation is to use psychographic data. This breaks down the population of a market on the basis of lifestyle choice.  The ACORN segmentation system partially uses psychographic methodology.  The spirit drinks industry often uses this method to segment.  Haig whisky is aimed at ‘affluent greys’, older consumers with significant leisure time and disposable income; Haig Club is aimed at younger fashion conscious ‘aspiring’ professionals and uses David Beckham as a brand ambassador.

However, there are other methods of market segmentation:

  1.  You can segment your market by the benefit your product professes to provide.  This occurs in the mineral water market where Evian segments on the basis of health and Volvic segments in relation to ‘vitality’.  These are defined key criterion for consumers
  2. You can segment on the basis of consumer attitude.  PSA owns two parallel brands, Peugeot and Citroen (it is about to add two more with Vauxhall and Opel). These brands are designed to attract different market segments. Peugeot focuses on driving experience whilst Citroen focuses of utility.  These two brands share a production platform enabling economies of scale.
  3. You can segment by channel.  Distribution channels can be in conflict with one another.  For example you may choose to buy from a company’s web store rather than from their high street shops. L’Oréal segments their brands according to the distribution channel.  They own brands for premium and department stores but sell different brands in supermarkets.  They own specific brands for direct sale to consumers and brands only sold in pharmacies.  They own mail order only brands and brands which are only supplied through professional hairdressers. Until recently they owned brands such as The Body Shop which were only sold in brand specific stores.
  4. You can segment by occasion experience.  Guinness is segmented on the pub experience; Carlsberg segment on the ‘release’ occasion e.g. nightclubs; Budweiser concentrates its marketing on beer as part of relaxation in the home.
  5. You can segment on price through the creation of fighter and trade-up brands.  Whirlpool owns a budget fighter brand, Laden, and an aspirational trading up brand, Bauknecht, as well as mass market brands such as Indesit.  This provides a defence against others taking a market share via ‘pincer’ attacks.
  6. In business to business markets, you can segment on the basis of the purchase decision-maker and other key influencers on the buying decision.  For example, the UK firm Hydro Building Solutions (HBS) owns different brands in different European countries which sell aluminium construction products.  Wicona in Germany markets to Architects, engineers and research establishments.  Donal in Italy markets to installation firms and contract bidders.  Technal in France markets to end-users via TV advertisements and has its own installation network.

As a small or new start business, you need to segment to ensure that you are making the best use of your limited resources.  As your business grows and as your market matures, you can use segmentation tactically and to develop a multi-brand approach.