The legendary Harvard Business School marketing guru Ted Leavitt says, “If you’re not doing segmentation, you’re not doing marketing.”
He is pointing out that segmentation increases the effectiveness and efficiency of your initiatives. It enables you to target, communicate, and sell accurately. It reveals untapped market niches and opens the door for new product development or product enhancements. It provides insight into how to be a stronger competitor. It identifies who your real competitors are. It is the cornerstone of positioning.
The essence of market segmentation
The essence of market segmentation is: “Different strokes for different folks.” That is, different groups of customers hire your product to do very different jobs. Using Clay Christiansen’s milk shake, the commuters hire the milkshake to entertain them on the way to work; the teenagers who just have acquired their drivers license and Mom’s car for the evening, hire the milkshake as the focal point of a date; the family of four hire it for a family activity on a hot summer’s evening.
The importance of this insight—different strokes for different folks—is that segmentation is a marketer’s tool, a way they think about marketing problems and focus resources to get the biggest result, most efficiently.
Markets use segmentation thinking to address a range of problems—short term and long; tactical and strategic.
An example of a tactical problem segmentation can help with is this:
Suppose a product has an annual revenue goal of $25 million, but by the end of the second quarter, it is projected to fall short of that goal by $5 million. The product manager can use segmentation to identify which types of customers need their product and are most receptive to current marketing approaches. They can do research to learn what barriers these most-likely customers are facing that prevent them from buying. And they can develop promotions to overcome these barriers. Segmentation is all about effectiveness and efficiency in closing the immediate revenue gap.
For a step-by-step procedure for solving this very common problem with segmentation click here.
The balance of this article will focus on the use of segmentation in a long-term, strategic context. Unlike the short-term context where the product, the offering, the job-to-be-done are fixed, in the long-term, strategic context, the focus shifts away from the product as currently defined and onto customers and what jobs they need done.
Segmentation is still useful, but in this context, it sorts customers according to jobs-to-be-done. Because if you really do have two different segments—customers who hire your product for different jobs—and you serve them with a single product and marketing strategy, you will miss at least one and probably both. We say you will miss both because the politics of your meetings with sales, communications, social media, etc., will reveal different benefits sought by the different segments, and the politically correct answer will be to compromise and provide an offering that is incomplete for both segments.
What it takes to be a segment:
To be useful for marketing strategy development, a segment must be:
- Identifiable – we must be able to spot and reach these kinds of customers.
- Have distinctive response – the clients in the segment must respond in a distinctive way to the offering and marketing programs.
- Large enough – the segment must present a viable business opportunity.
With these criteria in mind, we turn to…
The seven secrets of segmentation
Segmentations, especially those based on superior products or applications, do not last forever. They need to be updated and overturned by new, more current ways to divide your market. Here are the seven secrets of strategically creating, using and updating market segments:
- Create a different marketing mix for each segment
- Identify who not to call on
- Start with firmographics but finish with jobs-to-be-done criteria
- Nail the numbers
- Go beyond rigid definitions to situational segmentation
- Know your limits
- Update and innovate regularly
1. Create a different marketing mix for each segment
If you do not have a different marketing mix, you do not have a different segment. Segmentation is not a sterile, intellectual exercise. Rather it is a way to gain marketing leverage, both advantage and efficiency. Gaining leverage requires using different strategies for different prospects— different strokes for different folks.
2. Identify who not to call on
A large professional service firm’s Wholesale Industry Practice Area wanted to increase its client base. Their research indicated that more technologically savvy wholesalers were most likely to be high potential customers. Using industry codes, the company determined that there were more than 10,000 wholesalers in their geographic service area. How could they identify which of these were technologically sophisticated and which were not (calling on them would waste resources)?
First, they used publicly available information to rule out many potential targets. They reduced the potential targets down to 500 or less in four major metropolitan markets (just under 2,000 total). For example, the company eliminated smaller companies because they could not afford the sophisticated services the firm was selling.
The company then turned to market definition research, using three questions to determine each company’s attitude toward innovation: Do you calculate profit per customer? Do you perform strategic planning? Do you have a strategic plan for using information?
These questions could be answered by a telephone interview of lower level, hence easily accessible managers. By focusing only on companies which answered all three questions affirmatively, the firm further reduced the number of targets to 100-150 per major metropolitan area (under 500 total prospects) .
The company then rolled out their targeting program. In each of the four cities, four partner-manager teams contacted 20 to 25 targets per team. Almost half of the companies contacted accepted visits, and almost half of these eventually became clients. For every 100 sales calls, over 20 projects per office were sold—more than 10 times the usual success rate when the firm used the traditional sic- and size-based approach.
This example illustrates several market definition approaches to developing business-to- business segments and targets that lead directly to greater revenue and more efficient use of marketing resources. Arguably, the single most valuable contribution that segmentation made to the professional service firm was in identifying the 9,700 wholesalers in each city NOT to call on.
Does this mean there were no prospects among the 9,700? No. But sending out partner-manager teams—a very expensive direct sales force—would be the wrong way to sift through this huge number of potential clients. If the firm subsequently decided they did want to look further for new clients within this group, a much more efficient and cost-effective approach would be to use less expensive social media and promotions to get these prospects to self-select.
3. Start with firmographics but finish with jobs-to-be-done criteria
In the professional services firm example, firmographics played an initial role: industry and size reduced the target set from “all firms” to 10,000 wholesalers and to 500 prospects in each city that are large enough to buy the firm’s services.
But the real accuracy and efficiency came from the three jobs-to-be-done questions: Do you calculate profit per customer? Do you perform strategic planning? Do you have a strategic plan for using information? The answer, “yes, we do all three,” was a strong indicator that the firm used management practice innovation to improve results. Half we open to discussion. Then the in-person dialogue refined the targeting and selling process even further.
4. Nail the numbers
Estimating the number of potential customers and the potential revenue in each segment is a critical step in creating marketing strategy.
A segment must be big enough to justify the expenditures required to target it, so getting an accurate feel for how many companies are potential customers in a given segment, is essential. Identifying too many, or too few targets can be a major problem. Exact precision isn’t needed. Colleen Taylor, head of treasury services for Capital One bank, has her people create estimates that are in her words, “directionally correct.” By this she means they are close enough to lead to the correct marketing decision.
Overestimating the size of a segment leads to unrealistic sales projections. Underestimating size can be just as bad. If marketing programs are at all successful, the company can quickly face out-of-stock problems or an inability to deliver desired services and end up alienating customers.
5. Go beyond rigid definitions to situational segmentation
There is something almost irresistible about the idea that segments should be mutually exclusive and that any given customer should be assigned to one—and only one—segment. But this approach is bad marketing.
Any given customer could be in more than one segment at different times. Two people in a single Fortune 500 company could be in different segments at the same time. And even the very same person could have two distinct needs—two different jobs-to-be-done—simultaneously, making her a prime target for two different marketing mixes.
Leverage comes from defining the situations that create need and then targeting prospects who find themselves in those situations, not from sorting prospects into mutually exclusive categories at all costs.
For an illustration of situational segmentation, just look at the package and letter delivery function of a major corporation or professional service firm. On any given day, some outgoing packages are tagged for special pick-up and delivery by 8:30 am the next day. The decision maker who selected this premium delivery service did so to solve a problem or take advantage of a time- sensitive opportunity; cost was relatively unimportant. But the same functional area contains letters and packages that are going to be delivered by second day express and others that will go out first class mail.
The decision makers in these cases (perhaps the same people who chose the premium service just mentioned) have judged that they can save a little money by accepting a later delivery time.
Should this company be included in the price insensitive segment? The answer is yes. Should it be included in the price sensitive segment? Again, yes. Clearly it is the situation, not the industry or size of the company, that determines which service-price combination will close the sale.
6. Know your limits
Most products or services can target two or, at most, three segments. Cluster analysis that produces 23 poetically-described groups of respondents may be statistically correct, but the organization that can take advantage of that many targets has yet to be formed.
If the number of targets absolutely must go beyond three, subdivide into new products or a new set of segment teams and look for new channels so your traditional channels don’t get overloaded. If you identify five attractive segments with significantly different needs, creating a second, flanking product for a set of segments can greatly expand your potential targets, while avoiding the confusion of offering exactly the same product or service to different target groups.
In consumer marketing, Procter & Gamble has long been the leader in taking this tack. Is there truly a profound difference between one laundry soap and another? Usually the answer is ‘no’. But by fine-tuning product characteristics, pricing, packaging, advertising and brand identity, products that are basically the same come to occupy quite different niches in the minds of consumers.
7. Update and innovate regularly
Today’s high leverage opportunity is tomorrow’s mature market.
When all fire trucks were made out of steel, Emergency One introduced the first lightweight, rust-resistant, aluminum trucks and carved out a segment of fire departments that were innovative and preferred superior performance and economics to tradition. As the attractiveness of aluminum became apparent to those fire departments that were more hesitant to make changes, competitors imitated E-One and offered similar products.
E-One responded by designing the next innovation in fire trucks: passenger areas that kept firefighters safe and let them ride in a quieter cab so they could plan their strategy on the way to a fire.
Today, E-One puts computers on board fire trucks so departments can track traffic in real-time and know the location of hydrants and hazardous materials.
Although some fire departments like Phoenix’s are just plain innovative, each of E-One’s new truck concepts sliced the market a little differently and appealed to a different target: first on rust-prevention and shiny looks, then on fire-fighter safety, and finally on availability of information.
Learn more about the role of market segmentation in achieving best-in-class, human marketing.