SEGMENTATION

Having been battered by the worst recession in over 50 years and having made across-the-board cuts to survive, don't make the same mistakes again by simply re -building resource and business as it was before. Take this opportunity to re -evaluate the way that you do business, such that you can re -build and grow in targeted and efficient way.

The key to this approach is the segmentation of your markets and activity to secure the best return on any resource applied.

The following guide takes you through the 6 basic steps necessary to change the way that you work and benefit from the lessons you have learned. Adopting these simple steps will give you a better chance of navigating current market conditions, put you in a strong position for growth and ensure that you are able to withstand any future changes.

There are just six steps in the process of developing marketing strategy.

STEP 1 - Identify and select the bases by which the market may be segmented

This is the hardest and most challenging step. You must determine the basis for breaking your total market into customer clusters. It is very tempting, but inadvisable, to do this on simple observable or demographic differences. SIC codes in business markets or age and socio economic groups in a consumer market. These characteristics are unlikely to be drivers of buyer behavior. You are looking for differences in attitude or need. Answering the question ‘why’ different customers buy can be a useful starting point if you want to ensure you are focused on customer need.

Tip: 
Try generating three lists for your market:

• Why do people buy i.e. what benefits are they seeking
• Who buys; this may be who in the decision making unit or it could be a profile of company type
• When do they buy; what are the triggers for the buying process.

Think about your market as though it was a Rubic’s cube with the answers to these three questions defining each cell.

Example:
The example below represents the magazine market.

Each cell represents a different combination of who, when and why and represents  a potential segment. You can screen these to identify those which are worth further research or analysis.

STEP 2 - Develop segment profiles

At this next stage the quality of your own customer data and the data you can purchase will help you build your understanding of each segment. This is the point at which geo-demographic analysis and mapping solutions can be a real asset – helping you identify and later target more customers within a segment.

Start by mapping your own customer data into the different cells – who are your current customers, this will help you identify the segments where you already have a competitive advantage – essentially your market is segmenting itself.

Where are the customers in the segment located, how and where are they making their purchases, how much do they spend and how often.

HOW MAPPING WORKS

In simple terms Geoplan mapping software contains data which is broadly handled as sheets, like transparent acetate layers, one laid over the other, visualisation like this helps show areas of opportunity, difficulty, overlap, market potential, competitive pressure or, waste. In our context we are using them as the framework for segmentation profiles.

The Data Layers typically used in a business orientated mapping system can be broadly categorised as:

• Map base.
• Postcode boundary and point layers.
• Other boundary layers – administrative, media, industry specific.
• Demographic or business data layers.
• Customers own boundaries, territories, catchments or coverage areas.
• Customers own performance data, revenue, cost, margin, KPI's, stores, branches, depots, offices, personnel, customers, suppliers or competitors. 

Starting with your own customer data, the key to linking, visualising and analysing it on a map is through the use of a geocode e.g. Postcode in the UK  or ZIP code in the USA.

The Postcode for example has a specific grid reference. As a consequence any data attached to that Postcode e.g. contact details, sales data, sales representative, can be mapped. Either as individual point locations or aggregated up to higher levels of geography such as Postcode Sector, sales territories or store catchments.
Data managed in this way can be mapped to show areas of opportunity, difficulty, overlap, market potential, competitive pressure or, waste.

As a consequence any data attached to that Postcode e.g. Contact details, sales data, sales representative, can be mapped. Either as individual point locations or aggregated up to higher levels of geography such as Postcode Sector, sales territories or store catchments.

STEP 3 – Evaluate the attractiveness of each segment

As you build up the picture of each segment in your market you will be in a much better position to judge their potential and the feasibility of you growing your business in this customer cluster. There are two dimensions to the decision about where you want to focus your marketing efforts:

1. Does the segment deliver what the company wants in terms of potential sales, profit and future prospects.
2. Does the company have the capability to deliver the benefits these customers value (that is the potential for building a competitive advantage).

To decide which segments to target you first need to think through carefully this decision criteria and it will differ from company to company and market place to market place but it might look like this if we were doing the analysis for a credit card company:

Different segments will have different profiles and so will both value, or judge this companies credit card offer differently but will also be judged differently by them. Not all segments are equally attractive. Weighting these decision criteria enables you to distinguish between the criteria which may not all be equally important. So whilst cost and credit limit may appear on all customers’ decision lists some segments will judge credit availability to be the most important and another will be more concerned with cost.By allocating a weighting for each criterion out of a total of 10 differences between the priorities of the segments become clear.

Now you can rate how well your offer meets the different customer criteria. Scoring out of 5 where a 3 indicates you are as good as the best of breed competitor, above 3 a competitive advantage and below 3 a disadvantage. Multiplying the weighting and rating gives you a notional competitive advantage score for each segment.

You have a significantly stronger competitive advantage with Segment 1 that segment 2.

You can repeat this exercise weighting the management’s criteria and then rating how well each segment delivers against it – giving you 2 scores out of a maximum potential of 50 for each segment.

STEP 4 – Select the segments to be targeted

Using a decision tool like a multifactor matrix you can then plot each segment in terms of its attractiveness to the business and your potential to gain a competitive advantage with it. (Scores above 33 out of 50 count as high and below 17 as low on each axis).

Below you can see 10 possible segments within a market plotted in this way. The size of the circle indicates potential sales volume or value.

TIP:
Remember customers needs and company priorities change so your analysis needs to be kept under review to avoid strategic wear-out.

Segments 1, 2, 4 and 3 are attractive – delivering benefits to both customer and company but note the differences, low potential value from 2 and 3 hasn’t got all that convincing a competitive advantage.

Segments 10, 5, 8 and 6 are not – and we should ignore them.

Segment 9 – delivers what you want as a company but the customer doesn’t like your offer. You can go back to the analysis to find out what they want that you don’t offer and try to find a way of building an advantage with them. If you can’t do not waste your efforts targeting them.

Segment 7 – likes what you have to offer but for some reason you do not like them (this could be a situation like the one faced by Burberry when their products became popular with Chavs). Again your analysis would allow you to review why this segment was failing to deliver the business goals and possibly re-engineer the approach to improve yields or potential in some way.

You can check to see if the potential business from segments 1, 2, 3 and 4 will deliver the target objectives set for this market. If they will fine, if not consider the review segments 7 and 9.

When you consider the differences between segments within a market in this way, the need importance of not adopting a ‘one size fits all’ approach to the market becomes apparent.

STEP 5 & 6 – Identify the best possible positioning for each selected target and Choose, develop and communicate the best positioning concept

Positioning is the blueprint against which all other tactical decisions are based. So which segments to target and how to position ourselves to win business from them (marketing strategy) drives the tactical market and communication mix decisions. It is not just the decision about how to position our offer to each targeted segment that is a critical but so is the communication of that positioning to others internally.

Positioning maps are often used to help managers think through their positioning options and decisions. The axes are based on the key buying criteria in the market.
The example below illustrates some of the positioning map options for the magazine market we considered earlier.

However these simple diagrams are not particularly helpful when it comes to communicating with others – you may find analogies much more useful.

Tip: Using Analogies
People have a real instinct about how well known brands are positioned in the marketplace and if you choose brands your team are familiar with they will be able to translate that positioning into the context of your market. You can use retailers like Harrods or M&S or cars Rolls Royce to the Mini. Which model are you trying to represent in your market – we want to be the Tesco’s or the Morrisons, the Apple or the Microsoft.