It never ceases to amaze me how many marketing people are hazy on the benefits and techniques of segmentation. I have interviewed a very large number of marketing graduates over the years including one young hopeful who claimed it had never even merited a mention during his 3 years of study. Perhaps this is one of the inevitable results of dumbing-down subjects (certainly marketing and business studies are viewed as ‘soft’ subjects here in theUK). Sadly, this lack of knowledge is also true of many of the UK MBAs I have encountered.
Image courtesy of ResMarkConsulting.com
So what’s so special about segmentation? Why is it such a valuable tool in businesses large and small? Markets come in all sizes from the truly global ones e.g. soft drinks, trainers, smartphones, to the micro ones such as the local health food store, garage repair shop or life-coach. In the national and global markets product development, brand building and advertising costs are simply huge but you succeed by targeting certain key groups of consumers with common characteristics (e.g. Blackberry targeted corporate users who needed email ease of use on the go). The canny local businesses use similar scaled down techniques; for example a local garage set up by Mercedes trained mechanics targets owners of Mercedes cars older than 3 years and out of guarantee who are likely to be quality and price conscious. Some examples of from my own experience:
My first move into industrial marketing was with a global manufacturer of totally non-differentiated mass market products. We had chosen to reach users solely via the wholesale distribution channel but price competition was severe. Using the results of a very detailed, multi-level research project I commissioned it was possible to identify precise groupings of purchasers by the national and regional distributors they used. Armed with this unique information we were able to refine our distribution strategy, targeting only those distributor groups who were not in competition for the end customers we chose to serve. In this way we were able to maximise price by avoiding direct competition between distributors.
In the specialist engineering group I have just sold we found when we bought the company that in our sector competition fought for a decreasing volume of business for engineered components that had always been produced using the same technique; the result was low or no profitability. Analysis of our (at the time) very large customer base showed similar low margins on much work (it being fiercely competitive); however there were groups of customers that generated much higher margins for us. These profitable customer groups shared two characteristics – they were higher up the supply chain (typically tier one or OEM level) and the end product had to have absolute integrity over life. We researched many global markets for components that we could theoretically produce using our process (which offered certain unique benefits) and that were currently produced using a different technology. Having identified certain key segments that matched these criteria (and many others), we began the slow process of reaching and influencing the key decision makers in the targets using an entirely new communications approach we developed. Meanwhile, we made significant investments in new equipment and techniques unique to us. The business was slow to flow but when it did, the volumes were huge and margins were very high; traditional competition simply couldn’t follow us and we became a very desirable acquisition target.
Whilst all of the above was going on, a colleague and I started a business to provide a coaching and mentoring service to the UK SME business owner segment. Now, this was a fine example of one of the key criteria for a segment – it has to be cost-effectively reachable. Problem; small business owners are notoriously difficult to sell to. Research (free online from the University of Strathclyde) showed that the most trusted advisors to small and medium sized businesses were their accountants – a feasible route to market. So, we researched, then targeted a national marketing group for accountants and sold them the concept of offering our service via their members. Result? We had a route to market. This was successful and grew to be a national service but the next phase of development I have to admit was pure serendipity; we quickly found that the service was much in demand from the owners of the accounting firms themselves!
So, choose your segments with care, develop an appropriate marketing mix and you should stand a far better chance of success.