Market segmentation is one of the most critical decision a company makes in planning its overall strategy to achieve its growth goals. Market segmentation’s goal is to divide customers into groups that share unmet needs that are different from those in other groups. These groups of customers with similar unmet needs that differ from the unmet needs of other customers represent unique segments of opportunity.
Market segmentation is both analytical and a creative process, requiring the collection and analysis of data about the potential market and the imaginative interpretation of those data by the marketing and innovation team. It takes hard work, reflection and a willingness to explore beyond the current or obvious segments. This is especially true for early market opportunities.
Done right though, segmentation provides the foundation and game plan for developing products and services that will align with the demands and wants of the targeted segments. In addition, segmentation provides the positioning strategy and direction to the ongoing marketing and sales activities.
So you would think market segmentation would be an integral component of product strategy and planning. That companies would invest the time and resources to really understand potential market segments. After all, when we discover and define our segments into unique groups of user needs, we can target them with new product platforms, disruptive and sustainable innovations. Our probability of commercial success improves dramatically.
Overreliance on demographic or geographic segmentation schemes
Then why is it that many marketers and innovation teams still apply superficial market segmentation strategies? Well there are a couple of reasons:
1) That’s the way they have always done it. And that’s the way most marketing books tell us how to do it.
2) It’s easy to get this data. Product data is typically very easy to get, as is geographic data, and often demographic data – since this data is typically included as part of the transactional records.
3) Thinking about market segmentation strategically is hard work! While simple to understand, market segmentation can be hard to do.
Demographic and geographic information might help us locate customers to form a communication strategy, but it won’t tell us the problems and pains people inside these broad segments really want solved.
Think about, just because a person belongs to a certain age group and ethnicity, doesn’t tell us much about a person’s unique situation, pain, wants and values. Daniel Yankelovich in his classic HBR article “New Criteria For Market Segmentation” (HBR March/April 1964) had this to say about using demographic data for segmenting markets:
“[…….] finding marketing opportunities by depending solely on demographic breakdowns is like trying to win a national election by relying only on the information in a census. A modern census contains useful data, but it identifies neither the crucial issues of an election, nor those groups whose voting habits are still fluid, nor the needs, values, and attitudes that influence how those groups will vote. This kind of information, rather than census-type data, is the kind that wins elections—and markets.”
What segmentation schemas should we use to segment the market?
There are several ways that you can cut and aggregate markets into segments. There is no one right way and it will probably take you several iterations before you come to a good clear and useful definition of what the market is.
Again referring back to Yankelovich:
“The point at issue is not that demographic segmentation should be disregarded, but rather that it should be regarded as only one among many possible ways of analyzing markets. In fact, the key requirement of segmentation analysis is that the marketing director should never assume in advance that any one method of segmentation is the best. His first job should be to muster all probable segmentation and then choose the most meaningful ones to work with.”
Other common market segmentation schemas are:
Behavior segmentation is based on variables such as usage rate and patterns, price sensitivity, and brand loyalty.
Psychographic is based on variables such as values, attitudes, and lifestyle.
Product type/category is based on product attributes like entry level, premium products, price pointes, functional set, etc.
And for business markets, additional schemas often applied:
Geographic segmentation – based on regional variables such as customer concentration, regional industrial growth rate, and international macroeconomic factors.
Customer type – based on factors such as the size of the organization, its industry, position in the value chain, etc.
Buyer behavior – based on factors such as loyalty to suppliers, usage patterns, and order size.
These schemas tell us something, but not what we really need to know to innovate. Specifically, what products and services do people really want and are willing to pay to solve a pain.
J2BD Marketing Lens Schema: Viewing Segmentation From The Customer’s Perspective
Using our J2BD marketing lens, we know that people execute jobs to get “things done.” And they hire products and services to get their jobs done. We also know that people do these jobs to achieve specific outcomes, the reasons they embark on executing a job in the first place.
And that within any given job, where multiple steps are involved in executing the job, there are a set of desired outcomes associated for each step. Outcomes along the job chain in the order of 50 or more are common.
Further, job executers have constraints and circumstances they face in getting their jobs done. These circumstances and constraints directly affect the satisfaction levels of achieving desired outcomes.
People struggle differently when executing their jobs-to-be-done
When we look at the full spectrum of people trying to get a specific jobs done, we discover people struggle differently when executing their jobs-to-be-done. Using opportunity scores to analyze outcomes and constraints, we uncover natural segments within the data set by clustering opportunities scores into logical subsets.
These logical subsets define viable market opportunities that we base our innovation and NPD activities around. When we address these important outcomes, we will have a high likelihood of market success.
The point is, a more relevant market segmentation schema for the innovator is based around J2BD marketing lens – specifically finding natural clusters of underserved outcomes using opportunity scores for important jobs people are trying to get done.
Once a targeted job segment or segments are identified, and the innate characteristics of the customers’ characteristics within the jobs segment are understood, then it makes sense to apply other segment schemas to complete the segment profile. From here, the NPD and marketing teams can develop a winning marketing strategy to capture the customers loyalty.
Final words from Yankelovich on Market Segmentation Strategy:
“Markets should be scrutinized for important differences in buyer attitudes, motivations, values, usage patterns, aesthetic preferences, or degree of susceptibility. These may have no demographic correlatives. Above all, we must never assume in advance that we know the best way of looking at a market.”
Know what important jobs people are trying to get done, and how groups within the target job struggle differently. Then tailor products and marketing strategies to address the unique needs of your targeted job segment, and your odds of launching a successful new product are almost guaranteed.
Go do your job and innovate to win!