It’s been said that the job of the strategist is to create little monopolies; to identify segments of the market where the company’s product/service package is so uniquely well positioned that the competition’s offering doesn’t get serious consideration. In effect, it doesn’t exist. From the customer’s perspective, the only real alternative to buying the company’s product or service is to do without.
When products or services are properly targeted, members of the segment are willing to pay significant premiums. For example, American Express has been able to position their platinum charge card as a high end, prestigious card with lots of perks. Platinum cardholders are willing to pay a $450 annual membership fees for the privilege of using this card when they could easily obtain a Master Card or a Visa for free. There can be real value associated with targeting a product/service package to the appropriate market segment.
But, market segmentation isn’t a magic wand that always delivers value. We worked with a manufacturer of electronic connectors that segmented their market by industry (e.g., chemical, machine tool, package goods, etc.). But, the segmentation failed to create additional value.
So, what makes a good market segmentation that will allow companies to profitably target their products and services to customers who will pay a premium for them? There are two criteria for developing a market segmentation that works. First, members of the segment must make the buying decision like each other and differently from those not in the segment. Second, members of the segment must be externally identifiable or they must be willing to self-identify. Each of these requirements will be discussed below.
The key to effectively segmenting a market is to understand how customers make the buying decision. What characteristics of the product/service package are most important to each group of customers? The problem with the market segmentation used by the manufacturer of electronic connectors described above is that the customers in each segment made the buying decision in the same way. The same characteristics were important to each customer. Therefore, there was no opportunity to differentiate the product/service package to specifically meet the needs of one subset of the market. As a consequence, segmenting the customer base by industry wasn’t helpful.
Conversely, market segmentation is often critical. For example, automobile manufacturers must target specific segments. Some people are looking for basic transportation with a low cost of operation (i.e., good gas mileage and low maintenance costs). Other car buyers are interested in a sporty looking, high performance automobile. Still others are interested in luxury and prestige. More recently, a segment has emerged that is primarily interested in a car that is environmentally friendly. One product cannot possibly satisfy all segments. Product design and advertising are specifically intended to position the manufacturer’s offerings closer to the wants and needs of a given segment than those of the competition.
Assuming that differences in the way customers make buying decisions exist, to be useful for market segmentation, the customers in each segment must be externally identifiable. Marketers need to know how to reach the specific segments. Should the company advertise in Sports Illustrated or Cosmopolitan? Alternatively, the members of a particular segment may be self-identifying. For example, if a man intends to buy a suit, those who walk into Sears, The Men’s Warehouse, Joseph Bank’s, or Franco’s are fairly clearly members of different market segments.
Effective market segmentation can be an incredibly valuable tool for increasing profits. However, to gain the benefit businesses must take the time to understand how the buying decision is made and how they will attract the potential customers in their target segment. Although this may sound straight forward, our experience is that sorting this out can be complex. But, the rewards are worth the effort.
Doug White is the author of Let Go to Grow – Why Some Businesses Thrive and Others Fail to Reach Their Potential. His new book discusses how the role of the principal must change as a business grows. He is also a Principal with Whitestone Partners, a firm focused on helping small businesses to succeed. He has twenty-five years of experience helping companies achieve their goals through improved performance.
He began his career at McKinsey & Company where he was a consultant for almost seven years. Subsequently, he held jobs as CEO or COO for several companies over fourteen years ranging in size from start-ups to large midsized companies. Additionally, Doug successfully managed divisions of a Fortune 200 company where he had P&L responsibility. He has successfully worked in fields ranging from heavy-duty manufacturing to sales and distribution to consumer lending to investment brokerage.
Doug holds a BS in Physics from Randolph-Macon College. He earned a BME with very high honors and an MSME from The Georgia Institute of Technology, and an MBA with distinction from Harvard Business School.
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