Market Segmentation - 4 easy steps to apply a market segmentation strategy for maximum ROI
Mention the brand name Ford and what immediately comes to mind?
How about Starbucks?
When you think about Ford, most likely you immediately thought, “Built Ford Tough. Trucks.” Ford’s target market is primarily guys who want to haul stuff. Starbucks is targeting people who are willing to pay a premium for a freshly prepared cup of coffee from a company that is focused on eco-friendly and socially conscious business practices. Wal-Mart is targeting those who want a low price. These are three very different target markets.
No business is trying to appeal to everyone! It’s impossible. For one reason, it’s too expensive. Even with a $25 billion advertising budget, Ford cannot try to appeal to everyone. In fact, they are getting out of the car market and targeting its effort on just the truck market and will continue to only build the Mustang going forward. Starbucks isn’t trying to appeal to everyone who drinks coffee. Rather, the company is focused on those who want premium coffee – and are willing to pay two or three times more than they would at Dunkin Donuts, Wawa, Royal Farms, 7-Eleven or McDonald’s. And although Wal-Mart appears to try and cater to everyone, it is only targeting those who care more about low prices, than getting the very best quality. Even Amazon, whose mission is to sell everything from A to Z, isn’t trying to market to everyone. The company is only focused on those willing to shop and buy online.
Will women still buy Ford trucks even if they don’t plan to haul stuff? Will some people buy from Starbucks just because it may be more convenient? Will others buy from Wal-Mart because they may prefer the selection? Absolutely. But those are not the target market segments of those brands.
Marketing is all about discovering AND meeting the wants and needs of your customers. That’s easier said then done. How you go about discovering those wants and needs to convert your prospects into buyers is the challenge every business must face. The goal is to target a segment or even segments with a unique value proposition that will deliver the best return on your investment.
It’s not easy. So why bother at all? Those that do can give themselves a competitive advantage. For more than five decades market segmentation has demonstrated an increase effectiveness in marketing and improved response to changing consumer needs (Quinn & Dibb, 2010). And it is now more important than ever as customers change how they respond (Soberman & Gatignon, 2005), new tools for data capture and management create new opportunities (Dibb, 2001), and market segmentation can help overcome recessionary pressures (Srinivasan, Rangaswamy, & Lilien, 2005).
Here is an easy 4-step process for segmenting your target market.
1. Identify the want or need your product or service addresses. Most purchase decisions are based on wants. Needs are food, water, shelter and clothing – those things that we need to live. Water may be a need, but the difference between Aquafina, Dasani, Poland Spring, and Nestle’s Pure Life are all preferences based on wants.
2. Next, determine the niche segments of buyers who share a similar want or need for your product – and will likely respond to a similar market action. For example, if someone needs a heavy duty truck to pull a horse trailer, they will likely need an F-250 or F-350 and not the light-duty F-150. Although anyone at least 16 years old with a drivers’ license could get behind the wheel of an F-250, horse owners would be a market segment because they have unique want and needs.
3. Once you have defined a target market segment, the next step is to create a profile. There are usually 5 distinct profiling techniques:
Geographic. States, regions, cities, and neighborhoods may have different wants and needs. For example, brands target hot, spicy foods in the Southwest of the United States and more milder versions of their foods in the Northeast.
Demographic. Age, gender, income, occupation, education levels, religion, and a customers’ life stage often determine different wants and needs. It’s no coincidence that the nightly news broadcasts often include commercials for prescription drugs and retirement planning. That is because the median age of viewers is between 60 and 66, according to a 2018 Nielsen survey. Millennials who have less need for prescription drugs and retirement planning are not watching the evening news on TV.
Psychographic. A combination of psychological and demographic profiling yields differences in lifestyle, personality, attitudes and social class that often drive purchase decisions. For example, risk-takers are attracted to extreme sports and travel while extroverts tend to prefer more conspicuous clothing purchases. Ghirardelli chocolate targets successful, upper-income women who want to reward themselves at the end of a busy day with their premium chocolates. To help differentiate their brand, they even position their chocolates on the ends of retail aisles with wood veneer shelving – away from the Snickers, Hershey bars and other low-priced chocolates.
Behavioral. Our attitudes and past buying behavior tends to dictate future decisions. For example, one high-end dog walking client screens prospects by asking them about the type of dog food they feed. Owners who feed premium dog food tend to be better clients. Common behavioral factors to consider are how often customers use a product or make a purchase. For example, frequent business travelers are more concerned about getting to their destinations quickly and less concerned about price. Another factor includes whether a buyer is ready to buy or whether the person still needs more information in the purchase process.
Decision role. And lastly, the profile should determine the role the target market plays in the decision process. For example, is the person indeed a decision-maker or influencer in the purchase process. It’s interesting to note, 80% of household purchase decisions are made by the women in households yet many ads target men. Thankfully, this is beginning to change as you see more women and couples in car ads.
4. The final step in the segmenting process is to research and validate the market opportunities. You can use primary data that is not publicly available such as your own customer survey results, purchase history and focus groups you have conducted. Or, less expensive and more readily available data can be found using secondary sources such as industry research results, Nielsen research data, U.S. Census bureau data and surveys from local, state and federal government agencies. You will want to determine the size of the market segments and whether they are growing or declining in addition to the cost of reaching those segments and whether they are compatible with your organization’s goals.
For many of our clients, they often have more than one segment they are targeting. However, each segment has different wants and needs and therefore require different marketing messages and often require different marketing actions. For example, several clients who train real estate investors offer in-person workshops and seminars that are usually preferred by baby boomers. However, millennials are much more comfortable working online and prefer to receive their trainings digitally and in webinars. Each has different wants and needs in how they receive their trainings so the marketing messaging and training product is tailored for each segment.
It’s safe to say that half of your competitors do NOT segment their markets very well. McKinsey & Company found that 51% of firms surveyed did not focus on customer insights, segmentation or targeting (Brown & Sikes, 2012). In a separate survey, Bain & Co. found that half of the management teams failed to change their products to meet the demands of customers.
Every prospect and every customer is unique. However, there are unifying threads in which people can be grouped together based on similarities, whether it be geographic, demographic, psychographic, behavioral or decision-making factors, or a combination of all these. To keep it simple, only segment markets if you expect to yield a higher ROI using the 4 easy steps: identify the want or need you are addressing, determine the niche markets who share a similar want or need, create a customer profile and then research and validate your market opportunities. Your goal is to generate a greater ROI using market segmentation.
Brown, B. & Sikes, J. (2012). Minding your digital business. McKinsey and Company, Our Insights. Retrieved from: https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/minding-your-digital-business-mckinsey-global-survey-results
Dibb, S. (2001). New Millenium, new segments: Moving towards the segment of one? Journal of Strategic Marketing, 9, 193–213.
Quinn, L., & Dibb, S. (2010). Evaluating market-segmentation research priorities: Targeting re-emancipation. Journal of Marketing Management, 26, 1239–1255.
Soberman, D., & Gatignon, H. (2005). Research issues at the boundary of competitive dynamics and market evolution. Marketing Science, 24, 165–174.
Srinivasan, R., Rangaswamy, A., & Lilien, G. (2005). Turning adversity into advantage: Does proactive marketing during a recession pay off? International Journal of Research in Marketing, 22, 109–125.