segmentation

Good segmentation is foundational to marketing success.  In this post we will start our deep dive into segmentation, targeting, and positioning (STP) with a focus on segmentation and targeting. I'll also recommend a couple of next steps to really make the segmentation useful for your marketing efforts.

What is segmentation?

Segmentation is simply grouping customers based on common needs.  Customer segmentation is often based on:

·        Demographics

·        Who they are

·        What they think

·        What they do

The goal with segmentation is to get to customer needs and what benefits they’re seeking from your product/service.  By understanding the segment needs you can start to uncover the motivations behind decisions being made.  This can be accomplished in several ways, but needs might not be clear if you’re focused solely on demographics.  Where the demographics become helpful is in profiling who makes up a segment, and later determining how best to reach them.  This is also true for geography, channel use, and psychographics.  There are a lot of different ways to segment a market but if it doesn’t get down to distinct groups of different customer needs then it’s not going to power the marketing you’re looking for.

It’s also worth noting that different firms will segment the market differently.  This may be because of their market position, timing of entry, growth trajectory, and attractiveness of segments.  It’s not a static exercise because segments can grow or shrink and become more or less accessible over time.

Why segmentation is important

Segmentation is important because it is the basis for connection with your customer and ensuring you provide a winning offer (value proposition) within the segments that you prioritize.  In other words, it’s foundational to satisfying customer needs more closely.  It is also the basis for setting marketing goals, achieving corporate objectives, and building a sustainable competitive advantage.

·        Design products better aligned to customer needs

·        Increase brand loyalty and customer experience

·        Improve sales & marketing initiatives

·        Improve customer retention

·        Gain new customers

How to do segmentation

Running a segmentation that gets to distinct groups based on customer needs can feel like a complex process.  Here we will break it down into manageable steps and provide a framework.

1.       Define the market

2.       Map decision makers

3.       Form groupings of similar needs

When defining the market it is important to include your firm and your competition to have a holistic view of the customer base.  It’s ok to limit the market definition to segments you may reasonably compete in but it should still take a customer centric view (rather than firm or product centric).

Mapping the decision makers is a simple process of writing out each layer of decision maker in the process and what percentage of decision making happens at that level.  The segmentation should take place at the decision makers (or most influential).

Forming groups of similar needs can happen in a couple of ways.  One way is to map out their purchase behaviors, identify decision criteria, and ultimately infer needs based on the criteria selected.  Another way is to conduct primary market research that identifies groups and their respective needs.  Either way you are getting to distinct groupings of similar needs.

Guidelines for segments

These guidelines help lay out the requirements to having a meaningful segment.  They also help to make sure the segmentation is practical when it comes time for implementation.

·        Consists of customers responsible for the purchase decision (or influence it)

·        Large enough to be a meaningful opportunity

·        Distinguishable from other segments (and can have a distinct marketing strategy)

·        Reachable by sales and distribution channels

In practice most companies will identify between 5 to 10 segments.  The segmentation should happen where decisions are made in the buying process.

How to use segmentation

Once you have identified segments this information is relevant across the 4Ps.  This goes to show how foundational segmentation is to marketing (and other functions).  As mentioned earlier, the classical approach is segmentation, targeting, positioning (STP).

·        Product: identify new products and services to better serve targeted segment needs.

·        Place: audit channels relative to your target audience.

·        Price: optimize based on value proposition in each segment

·        Promotion: tailor to segment needs and channels

Having the right segmentation and then executing strong marketing plans against the selected segments is a foundation for sustainable competitive advantage (it’s that important)!

Targeting

After you have identified segments there are 2 steps to selecting which ones to target.

1.       Segment attractiveness

2.       Firm competitiveness

Segment attractiveness could include things like total segment profits, growth rate, accessibility.  A simple approach is to select the attributes you feel are important, weight each relative to how much they matter, and rank each from 0-10 to get a segment weighted average importance.

Firm competitiveness represents your firms ability to compete and win within the segment.  This is an inward look at winning in the external marketplace.  This should be considered not only today but also over the medium term as the firm considers building capabilities in new segments.

Considering both segment attractiveness and firm competitiveness will allow you to decide which segments to target.  Generally it’s not always advisable to target all segments but rather focus on attractive segments where you can compete to win.

A lot of detail goes into the steps outlined here that is beyond the scope of this blog post.  To dive deeper I would encourage you to check out the book recommendation at the end of the post.

Conclusion & next steps

Segmentation informs marketing strategies and planning and supports decision making across the 4Ps.  It’s foundational to success and can lead to sustainable profits if done well or to financial ruin if done poorly.  And since it’s not static I hope you will take the opportunity to review your segmentation and it’s impact on marketing in your organization.

As next steps you may want to consider developing personas to breath life into each segment as well as customer journeys to understand their interactions throughout the purchase funnel.  The segmentation will also help to inform your positioning within each segment.

Book recommendation:

Segmentation truly is foundational to firm and marketing success.  It’s also a rich topic that deserves more time and coverage than this blog post.  If you’re interested in learning more, I would highly recommend you pick up the book below for an expert level dive into segmentation.

Market Segmentation How to do it and how to profit from it

by Malcolm McDonald and Ian Dunbar

https://amzn.to/3Z2KTL2 (paid affiliate link)