Definition - market segmentation

Market segmentation is the process of dividing a large number of customers into several homogeneous subgroups sharing the same perception of customer value and selecting the subgroups with the biggest potential.

Objective - market segmentation

Provide superior customer satisfaction by differentiating marketing messages and value propositions to fit each customer segment.

Accelerate growth and profitability by focusing resources, marketing, and product development into the areas that are most advantageous for the organization.

A clever, smart, and well-thought-out market segmentation means that the product and its marketing can be adapted and tailor-made for each other in a financially advantageous way.

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The perfect number of market segments

Why is market segmentation important?

​Market segmentation has been taught at business schools for decades, and most people in charge of market segmentations are cast in the same mold. Philip Kotler’s definition of a market segment is what they have learned:

  • “Market segmentation is the subdividing of a market into homogeneous sub-sections of customers, where any sub-section may conceivably be selected as a market target to be reached with a distinct marketing mix.”

 

Most companies, therefore, have a market segmentation made to sell more of an existing product portfolio, which is wrong — the traditional "Product-Out" method. 

 

"Product-Out" segmentation is a method using mostly descriptive segmentation variables to identify new customers for an existing product portfolio.  It may provide some initial benefits but quickly becomes a burden and will hamper future growth.

So, let us get rid of the traditional and standard methods used for market segmentation. And this site will teach you how!

​The market segmentation used is like an invisible hand that either steers your company around problems or into a head-on collision with them.

 

Poor market segmentation can be the underlying reason for a whole range of issues. It is not always easy to understand that it is the root cause of low profitability, lack of growth, or an increasing number of customer complaints.

 

Excellent market segmentation, on the other hand, is reflected in the opposite, high profitability, growth, and unrivaled customer value. 

 

Whether the market segmentation is good or bad, its consequences appear in many different guises.

 

​Defining market segments is one of the most critical strategic decisions your organization has to make. Its consequences shall not be underestimated. It can make or break any organization. 

Signs of poor market segmentation 

Typical signs of poor market segmentation are that the company starts developing one or several of the following type of products:

  • the one size fits all style of products. I call this style of products for tube socks. Featureless products that poorly fits a large number of customers, but perfectly none. Consequently, nobody wants to pay a premium price for tube socks.

  • ​​the over-featured product with everything for everybody included. Every foreseeable functionality is included in an attempt to satisfy all customers in a heterogeneous segment. I call them for the Christmas tree type of products. As nobody uses all the features included, it is tough to get full compensation for the costly design.

 

  • ​​the company starts tailor-making products to individual customers or small groups of customers, so everybody gets exactly what they want. And the company begins a journey that will end up in a variant jungle. The administrative burden to manage all the different variants of the product will eventually eat up the profit. Sometimes is the variant jungle the step companies take after failing with tube socks or Christmas tree types of products.

Featureless – one size fits all

Tube sock

Over featured – everything to everybody

Christmas tree

Tailored – something for everybody

Variant jungle

Classical truths about market segmentation do not longer apply

 

I believe that market segmentation is currently in a transitional period in which classical truths no longer apply:

  • the old worn-out phrase that all business is local needs to be replaced with all business is global. Your future market segments may contain only a few local customers but a sufficient number of customers globally.

  • the old worn-out strategy to focus on making it easy to sell needs to be replaced by making it easy to buy. The internal perspective on market segmentation needs to be replaced with an external – the customer's point of view. Today’s customers have many and cost-effective alternatives available for finding potential suppliers.

​It is both a science and an art to successful market segmentation. It is a complex task that will have a pivotal impact on growth, profitability, and survival for all organizations.

 

Although market segmentation is one of the most critical activities in a company, it doesn’t receive the attention it deserves.

Even more troublesome is that most market segmentations made are cast in the same old mold. If you segment your market in the same way as your competitors, how likely is it that you will identify underserved sweet spots in the market?

Market segmentation as a tool to increase profitability and growth

The key to profitability and growth is always to identify underserved sweet spots in the market — areas where you can grow your business and charge premium prices for your products. Market segmentation should be used as a tool to secure existing as well as future business.

 

There is a clear and direct correlation between customer value and all essential financial metrics in your company. It is a cause and effect type of relationship. A relationship in which unrivaled customer value increases things like profitability, growth, and shareholder value.

 

Your market segments must, therefore, define the areas where you have the highest probability of creating unrivaled customer value. It is the only and the best strategy forward to sustainable business success.

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Forget the traditional methods for market segmentation

 

Let us get rid of the three traditional and standard methods used for market segmentation today:

  • Product – out

A method using mostly descriptive segmentation variables to identify new customers for an existing product portfolio. The most common method used today. It may provide some initial benefits but quickly becomes a burden.

 

  • Marketing – to

A method using mostly psychographic segmentation variables to differentiate and fine-tune your marketing message. Ok, if you want to fine-tune the marketing message, but it cannot be the foundation for your future market segments.

 

  • Customer – in

A method using mostly behavioral segmentation variables to tailor products and services to different segments. Tailor how? It is easy that you are led down the garden path by influential internal voices if you use this method.

And this is what I believe is the method for the future:

  • Value – for

A method using a melting-pot of different segmentation variables creating homogenous segments from a value standpoint and selecting the subgroups with the biggest potential for your company.

Principles for market segmentation

The most commonly used methods are:

Inside-Out

Segments are chiseled out based on the companies observation and experience. A quick and intuitive method that involves key people and get buy-in from the organization. However, the technique requires access to an experienced facilitator as it is easy to get stuck on details or to use the wrong variables making the segments hard to use or very traditional.

Outside-In

Segments are based on collecting and clustering market and customer data. Executed right market segments will be fact-based, and selection of which market segments to pursue can be based on facts. However, it requires axcess to data that can be hard to get and takes more time.  

Hire an experienced facilitator to help you with your market segmentation ...

Market segmentation process

I recommend using a process of four steps as follows:

All potential Customers

Step 1 Form potential segments

Start by identifying possible variables defining potential market segments. Figuratively speaking, the variables used determines the borders of your market segments.

 

Customers fulfilling the variable are part of your segment, and customers not fulfilling the variable are excluded.

 

Avoid the sole use of traditional descriptive variables like countries, applications, gender, age, and similar.

 

Step 2 Describe potential segments

Create a deeper understanding of the potential segments and highlight the major strengths and weaknesses of each segment.

 

Examples of things to investigate and describe include the customer journey, the customer chain, barriers and paradigms, media landscape, maturity curve.

 

Essential is to get a grip on the potential by estimating the total number of customers and the purchasing power.

 

Step 3 Select market segments to pursue

One way is to score the segments against our table of 18 success criteria.

 

A high overall score is desired, but a low score on one single success criteria could be a “killing” factor. You can download the table at the link below.

 

Experience from many organizations has shown that eight (8) is the golden ratio. If you use fewer segments, approaching four (4), will make the segments heterogeneous and, therefore, less useful. The customers in the segments are far too different from each other, muddling the picture. On the other hand, if you use too many, over twelve (12), will make them difficult for the organization to remember and manage, and are therefore also less useful.

 

The crux of the matter is to use subsegments if you need a more finely divided structure.

 

Step 4 Visualize selected market segments

Figuratively speaking, it is to define the midpoint of your segment. A fictional character that has the same characteristics as the typical customer in the segment.

 

The Persona is used to communicate and explain the segments to the rest of your organization. This Persona can be used as a “stand-in” for real customers and guide decisions about product functionality and design, marketing message, sales tactics, and other areas.  

Step 1

Step 2

Step 3

Step 4

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