Smart marketing strategy requires effective market segmentation

Last week I met with the Senior Vice-President of Marketing for a new client.  Having only recently assumed his position, he called me in to discuss possible avenues for growth for his company’s brand and business.

Our conversation quickly turned to the market segmentation study developed by his predecessor and the company’s advertising agency in 2008.  It had become the accepted point of departure for every executive team brainstorming session on this crucial subject.  He astutely observed that this study–the purpose of which had been to facilitate the development of advertising for building brand identity­–was being accorded undue reverence by his peers. Its usefulness for identifying growth opportunities and strategies for the company was tenuous at best.

Unfortunately, I see this situation repeated far too often in my consulting work.  Too many C-Suite executives seem to lack sufficient comprehension of the true purpose and value of market segmentation. This has negative implications on their ability to develop smart marketing strategy for growing their brands and businesses.

We spent the rest of our meeting discussing a number of valuable resources that have more recently shaped my own views on market segmentation to help him make the case for a new segmentation study more suited to the purpose at hand.

Rediscovering market segmentation

Sound marketing strategy is dependent on identifying customer segments that are potentially receptive to a particular product category, and then targeting and positioning a brand in such a manner that it provides compelling value for them–the value they seek given their unique goals and preferences.

One source I recommend to my clients as a starting point for building such a case is Rediscovering Market Segmentation (Yankelovich, Daniel and Meer, David), published in February 2006 in Harvard Business Review.

The authors begin their article by stating:

“There are many different kinds of people that display about as many different buying patterns.  That simple truth is well understood by those responsible for market research, product development, pricing, sales and strategy [I would argue this needs to be given more emphasis in MBA business strategy courses]. But they haven’t being getting much help from a venerable technique–market segmentation­–which, if properly applied, would guide companies in tailoring their product and service offerings to the groups most likely to purchase them. Instead, market segmentation has become narrowly focused on the needs of advertising, which it serves by mainly populating commercials with characters that viewers can identify with…

This is hardly the state of affairs we anticipated 40 years ago when one of us introduced the concept of nondemographic [psychographic] segmentation in HBR as a corrective to the new narrow reliance on purely demographic ways of grouping customers.”

To help the reader understand the rationale and urgency for their intervention the authors cite a 2004 research study conducted by Marakon Associates and the Economist Intelligence unit.  The study that surveyed 200 senior executives of large companies revealed that 59% had conducted a major segmentation exercise during the past two years.  “Yet the evidence suggests it’s not a very effective tool: Only 14% of the executives derived any real value from the exercise.”

They then describe the elements of a “smart segmentation strategy” explaining “how segmentations meant to strengthen brand identity and make an emotional connection with consumers differ from those capable of telling a company which markets it should enter and which goods to make.”  In particular they urge marketers to focus on the form of consumer behaviour that should be of greatest interest to them: “the relationship of consumers to a product or category, not to their jobs, their friends, their family, or their community, all of which lay in the realm of psychographics.”

Identifying market segments and selecting targets

A second resource that I recommend is Identifying Market Segments and Selecting Targets (Tybout, Alice M., and Grayson Kent), just one of the three chapters in Kellogg on Marketing, 2nd Edition, that are each in their own right worth the price of this book. (Chapter 1, Creating Customers and Shaping the Competitive Game and Chapter 4, Developing a Compelling Brand Positioning)

Tybout and Grayson assert that,  “For marketers, segmentation is usually considered to be a strategy of last resort…as most managers would rather attract a single, large universe of potential buyers than partition the market into subgroups and target one or several of these subgroups.”  They acknowledge however that in the real world this is only rarely feasible–for instance, when consumers preferences are “sufficiently homogenous”, or briefly after a category pioneer creates a new product or service category with a “one-size-fits-all“ offering before the entry of competitors–and so smart marketing strategy requires effective market segmentation and targeting.

The authors provide an evolutionary perspective on approaches to market segmentation, demonstrating that the conditions that supported a mass marketing approach immediately after World War II that emphasized, “what people had in common rather than how they differed,” were quickly altered by market and media fragmentation in the 1950’s and 1960’s. This led to increased interest in and usage of descriptive characteristics such as demographics, geography and psychographics for identifying subgroups that might be expected to respond similarly and favourably to a relevant value proposition delivered though a tailored marketing mix.

While they demonstrate the merits of each approach to segmentation they observe that all three suffer from the same weakness: they are frequently “poor predictors of [the] specific behaviours [of their members] related to a category and brand.”   They note, “That as a result, in an effort to segment in ways that help customers set strategic priorities, there has been recent emphasis on partitioning the market based on usage patterns and related behaviours.”

They offer their opinion that an “insightful and actionable approach to segmentation requires not choosing among the different approaches to segmentation but rather combining them.” They believe that “It is important to understand who (demographics and geography) is engaging in what behavior (usage) and why (specific motivations and psychographics).”  And they acknowledge that, “the insight provided by the different bases for segmentation will vary as a function of the decision being made.”

Tybout and Grayson recommend that companies always begin the segmentation process “by creating subgroups based on patterns of usage” as, “In general, current usage is most likely to predict (albeit imperfectly) future usage.”  The authors suggest that users of the category be separated from nonusers and that these be grouped according to the brand they use.  “Users of each brand may then be further segmented based on their frequency, occasion and motivation for use.” These usage segments should then be, “analyzed and understood in terms of their demographic, geographic and psychographic characteristics that distinguish them from each other because these characteristics can help marketers estimate the current size and potential of each segment from population data, select media that reaches a particular segment in a cost-effective manner, and tailor communications to the general lifestyle, values and attitudes of the segment.”

Setting targeting priorities

Tybout and Grayson then demonstrate the value of their approach to segmentation by helping readers understand how the selection of target segments for a marketing strategy “should be based on a firm’s current position in the market as well as its goals and resources” and requires knowledge of the awareness and behaviour of consumers towards the category and brands within the category.

They discuss three targeting options for growing established brands in existing categories, and three targeting options for successfully launching a new product.

Targeting for established brands in existing categories:

  • Targeting current customers and convincing them to increase their current spending on the brand.

Two important questions should drive targeting decisions and strategies related to these customers.  First, how loyal are customers based on their retention from one year to the next? Second, what proportion of the customer’s spending within the category does the firm capture? Depending on the answer to these questions the authors suggest two possible strategies. “If retention is low or customers spread their category spending across multiple brands, the firm should implement strategies designed to increase loyalty…if retention is high and the firm captures the majority of spending, then growth might be achieved by identifying new use occasions for the product or by persuading loyal consumers that their needs would be better served by a more expensive, higher margin version of the product.”

  • Targeting competitors’ customers and persuading them to switch their purchasing to the firm’s brand.

“One approach is to target customers of competitors’ brands who are similar to the firms’ current customers or have aspirations to be like the firm’s customers”, as they are most likely to be vulnerable to these efforts.

  • Targeting noncategory users with the intention of persuading them to consume the category and to choose the firm’s brand when doing so.

This must be the strategy of choice when there appears to be very few opportunities for increasing category consumption by the existing customer base.  Two possible strategies are possible: First, “point of entry” strategies to attract “nonusers who are likely to enter the category coincident with some life stage or life event.”  Second, “building the category” strategies that target consumers who have no intention of using products from a category because they are “unaware of the category and its benefits” or because of their “failure to recognize the problem for which the category is a remedy” or because they “may desire to consume products from the category but perceive barriers to their consumption.”

Targeting when launching a new product:

  • Targeting current customers to persuade them to “try” the new product in a new category.

When a firm chooses to launch a new product as part of a brand portfolio that is intended to satisfy the unmet needs of current customers in a related category then targeting should focus on existing customers with the intention of “persuading them to consume the firm’s brand in a new category.”

  • Targeting new customers based on the firm’s capabilities.

Sometimes, “entry into a new category is motivated more by the opportunity to leverage the firm’s competencies and resources to attract new customers than it is to serve existing customers.” Although the customers targeted may share some common interest in the value offered across categories they may/may not be users of the new category and therefore show some /little interest in the firm’s new offering.  The authors discuss the launch of BIC in pens, lighters and razors as a case in point.

  • Targeting new customers with a “new to the world” offering.

According to Tybout and Grayson it is useful for firms to consider nonusers (everyone is a nonuser) “who are achieving the goal served by the new product with products from a different category that serves the same goal.” To make the point they demonstrate how TIVo might have been compared to TV viewing or to VCRs in helping consumers to achieve their goals in new and better ways, how the Kindle might have been compared to books in helping consumers to achieve their goals in new and better ways and how “Procter  & Gamble built the sweeper mop category and the Swiffer brand by targeting homemakers who sought a more convenient way to clean floors.”

A final thought

The HBR article by Yankelovich and Meer and the chapter authored by Tybout and Grayson in Kellogg on Marketing 2nd Edition provide valuable insights for marketers and business executives about the true purpose and value of market segmentation for building strong brands and businesses.

I commend both to you and recommend that you read them in depth if you desire to extract the true value that effective marketing segmentation and targeting can provide for your brand and business building efforts.

About ashleykonson

STRATEGY CONSULTING | EXECUTIVE COACHING | CORPORATE TRAINING | KEYNOTE SPEAKING | Ashley Konson is the Managing Partner of Global Brand Leaders Inc., a new kind of brand consulting company dedicated to making brands and their teams leaders across the globe. He is a Brand Leader, Business Consultant and Award-Winning Educator, and a recognized thought leader and fervent advocate of the premise that strong brands and businesses achieve and sustain their market positions because they are strong Inside out™.
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One Response to Smart marketing strategy requires effective market segmentation

  1. Most brands have several target groups they want to attract, and ordinary people tend to fit into several categorizations. These simple truths are often overlooked. By sorting out if the segmentation aims to identify user/new consumer groups and use this data to create offers that fit – or – identify what the common nominators or traits are that could be transformed to brand driving messages via an human insight, you are doing it right. Selling is managing how to make different target groups buy. Branding is making all your potential target groups want to buy. To few actually act on the difference. /T

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