Market Segmentation: Critical to Your Success

January, 2007

We often hear from our customers stating that they find it difficult to determine how to evaluate their target market for their product or service and understanding the role demographics play in the process.

The first question in starting a business is to ask the question "Who will be my customers? Who will buy my product? How many can I sell?" Often very savvy business people either have no idea who will buy from them, or they assume that 'everyone' will. Assumptions like this can lead to wrong decisions, wrong pricing, and a wrong marketing strategy - possibly business failure.

The most successful small businesses understand that only a limited number of people will buy their product or service, so the next task is to narrow the market scope to the true prospects. This is where your target market and demographics becomes crucial to your marketing strategy. Try not to be "all things to all people" - become a specialist, because it is easier to market to specific groups.

Market segmentation

The purpose for segmenting a market is to allow your marketing/sales program to focus on the subset of prospects that are "most likely" to purchase your offering. If done properly this will help to insure the highest return for your marketing/sales expenditures. Depending on whether you are selling your offering to individual consumers or a business, there are definite differences in what you will consider when defining market segments.

Category of Need

The first thing you can establish is a category of need that your offering satisfies.

For businesses:

  • Strategic - your offering is in some way important to the enterprise mission, objectives and operational oversight. For example, a service that helped evaluate capital investment opportunities would fall into this domain of influence. The purchase decision for this category of offering will be made by the prospect's top level executive management.
  • Operations - your offering affects the general operating policies and procedures. Examples might be, an employee insurance plan or a corporate wide communications system. This purchase decision will be made by the prospect's top level operations management.
  • Functional - your offering deals with a specific function within the enterprise such as data processing, accounting, human resources, plant maintenance, engineering design, manufacturing, inventory control, etc. This is the most likely domain for a product or service, but you must recognize that the other domains may also get involved if the purchase of the product or service becomes a high profile decision. This purchase decision will be made by the prospect's functional management.

    For the individual consumer:

  • Social Esteem or Pleasure - your offering satisfies a purely emotional need in the consumer. Examples are a mink coat or a diamond ring. There are some products that are on the boundary between this category and the Functional category such as a Rolex watch (a Timex would satisfy the functional requirement and probably keep time just as well).
  • Functional - your offering meets a functional requirement of the consumer such as a broom, breakfast cereal or lawnmower.

    Needs Segmentation

    Then you should establish what the need is and who is most likely to experience that need. Your segmentation will be determined by a match between the benefits offered by your offering and the need of the prospect. Some "need" categories for segmentation include:

    Reduction in expenses
    Prospects might be businesses that are downsizing (right sizing), businesses that have products in the mature stage of their life cycle or individuals with credit rating problems.

    Improved cash flow
    Prospects might be businesses that have traditionally low profit margins, businesses that have traditionally high inventory costs or individuals that live in expensive urban areas.

    Improved productivity
    Prospects might be businesses that have traditionally low profit margins, businesses that have recently experienced depressed earnings or individuals with large families.

    Improved manufacturing quality
    Prospects might be businesses with complex, multi-discipline manufacturing processes.

    Improved service delivery
    Prospects might be service businesses in highly competitive markets, product businesses requiring considerable post-sale support or individuals in remote or rural areas.

    Improved employee working conditions/benefits
    Prospects might be businesses where potential employees are in short supply.

    Improvement in market share/competitive position
    Prospects might be new entrants to a competitive market.

    Need for education
    Prospects might be businesses or individuals looking for books on business planning, or seminars on Total Quality Management.

    Involvement with social trends
    Prospects might be businesses concerned with environmental protection, employee security, etc. or individuals who believe in say 'no' to drugs, anti-crime, etc.

    Specific - relating to product/service characteristics
    Prospects might be businesses or individuals interested in safety, security, economy, comfort, speed, quality, durability, etc.

    Factors that segment prospects

    Having determined the more general segmentation characteristics you can proceed to a more detailed analysis of the market. There are literally thousands of ways to segment a market, but the following are some of the more typical segmentation categories.

    For businesses:

    Industry by SIC code
    This is especially beneficial for vertical market offerings.

    Size - revenues, # employees, # locations
    In general if your offering is highly sophisticated, requires significant resources or provides greater value based on volume, then the target should be the larger enterprises.

    Job position/responsibility
    Examples of offerings might be planning software for managers or cleaning agents for maintenance managers.

    Climate
    Examples of offerings might be dehumidifiers in areas near the ocean or snow plows in northern areas.

    Time related factors
    Some services in this category are vacation related industries in summer and tax planners in the spring.

    Language
    An example of a language specific service is a Spanish TV channel.

    Status in the industry
    You might want to target businesses that are the technology leader or revenue leader or employee satisfaction leader, etc.

    Accessibility
    To minimize promotion and sales expense you may want to target urban rather than rural or local rather than national prospects.

    Future potential
    A good example is how Apple Computer supplied products to schools at all levels to condition students graduating into the marketplace.

    Ability to make a quick purchase decision
    Targeting individual purchasers versus business committees can significantly reduce marketing expense and increase the probability of a quick close.

    Access (or lack of access) to competitive offerings
    Cable TV business's significant investment in their service delivery system has allowed a near monopoly for some time. IBM's service reputation insured minimal competition during the mainframe days.

    Need for customization
    Offerings such as police cars, busses for municipalities and specialized computer systems fall into this category.

    Product or service application to a business function
    Examples are data processing, accounting, human resources and plant maintenance.

    For Individuals:

    Physical Size
    Offerings might be big men's clothing, golf clubs for shorter players, etc.

    Creation of or response to a fad
    Examples are hula hoops, Jurassic Park T-shirts, pet rock, physical fitness, etc.

    Geographic location
    Marketers take advantage of location by selling suntan lotion in Hawaii, fur coats in Alaska, etc.

    Time related factors
    You may be able to target vacationers in summer, impulse buyers during the holidays or commuters at 7AM.

    Demographics/culture/religion
    Ethnic products would fall into this category.

    Gender
    Product examples are scarves for women, ties for men, etc.

    Age
    Product examples are toys for children, jewelry for women, etc.

    Social status
    This could include country club memberships, philanthropic contributions, etc.

    Education
    Product and service examples are encyclopedias, scientific calculators, learning to read tools and financial counseling.

    Avocation
    This could include products for hunting, fishing, golf, art work, knitting, etc.

    Special Interests
    You could target cat lovers, science fiction readers, jazz music collectors, etc.

    Accessibility
    Because the individual is more difficult to reach you may want to segment by urban versus rural, train commuters, people who read Wall Street Journal, etc.

    Access (or lack of access) to competitive offerings
    Due to high investment capital requirements or timing of market entry you may be able to capture a significant market share in a specific geographical area. Examples might be a trash service, emergency medical support, etc.

    Need for specific information
    Based on features or content of your offering you can target a market segment. A product might be books on how to start a business or a service might be seminars on how to quit smoking.

    Need for customization
    Product/service examples are home decoration, fashion wear, personal portraits, etc.

    Need for quality, durability, etc.
    Product examples are mountain climbing gear, carpenter's tools, etc.

    Degree of a product/service ingredient
    Segmentation based on prospect preferences is common. An example is dark chocolate for some tastes, light chocolate for others.

    Purchase decision influencers

    Once you have isolated a specific segment of the market on which to focus, then you can consider more subtle influences on the purchase decision. Some of these are:

    Preference for channel of distribution
    Many prospects prefer to buy through a specific distributor or wholesaler. For individuals this may be due to subtle, as well as, economic reasons. For example, an individual prospect may immediately think of Wal-Mart or Home Depot when considering an offering like yours. A business often has a preference so they can have a single communication point for all purchases. This also often results in lower purchase prices.

    Number of decision makers
    When selling to consumers or businesses, the more individuals or groups involved in the purchase decision, the more difficult the sale. Marketing costs for selling bread can stay low because one person normally makes the purchase decision. Car purchases are more complex because the purchase decision normally involves a husband and wife. Business sales to committees often require months to achieve a decision.

    Financial strength of the prospect
    Less affluent prospects may desire time payments versus a cash purchase and Chevrolets instead of Cadillacs.

    Quantity/volume requirements
    Restaurants will want large jars of pickles while individuals want small jars. Businesses use large amounts of electricity at predictable times.

    Ability to use the offering
    Trying to sell to a prospect who lacks either the knowledge or resources to properly benefit from your offering will result in a 'no sale' situation or an unhappy customer. The prospect should have knowledge and resources such as time, equipment, facilities, personnel and complementary products/services.

    Commitment required
    If the offering requires a high commitment in terms of time, resources or money by the customer then the target should be prospects who 'really need' the offering rather than prospects who get some, but not a lot, of benefits.

    Brand awareness/users
    Examples are prospects who ask for IBM compatible PC's or Pitney Bowes mailing machines or Winnebago R.V.s

    Attitude toward a personality or enterprise
    Reputation helps sell AT&T long distance service, IBM computers, Michael Jordan tennis shoes, etc.

    Attitude toward price versus value
    For example, purchasers of collectors items aren't price sensitive while purchasers of commodity items are price sensitive.

    Experience with other products/services your enterprise has offered
    You are looking for a reaction like "I liked your first product so I'll try your second."

    Prospect bias
    Examples are, 'Buy USA', I want a car with a 'solid' feel, fast cars, sweet wines, large print playing cards, etc.

    Affiliation with other organizations
    Such as the U.S. Chamber of Commerce, AMA, IEEE, doctors, attorneys, pastors, franchisors, entrepreneurs, etc.

    After sale support expectations
    It is often beneficial to target prospects who have enough expertise that they will require a minimum of after sale support.

    Seller Characteristics that can influence purchase decision:

    Another form of influence is how the prospect perceives your offering and/or enterprise. If you can determine the characteristics your prospects most value in an enterprise they purchase from, you can identify those your organization possesses and promote them to the prospect.

    Unique employee skills, knowledge
    Extensive experience with a specific market segment or field of scientific inquiry can be a powerful promotional tool. For example if an enterprise could sat, "Our scientists knows more about corn silk genetic structures than anyone in the world" they would have a strong sales statement.

    Special relationships with distribution channels
    Product or service accessibility is a critical factor in sales success. If an enterprise could say, "Due to a unique relationship, the XYZ video stores give us more shelf space than any competitor" prospects will likely respond positively.

    Customer service capabilities
    Prospects like to know that they can depend on post sale support from the product or service provider. A statement like, "We have more service outlets in New Hampshire than any competitor" will help secure sales.

    Unique product forms
    Credible uniqueness such as, "Our product is the only one that offers dynamic digi-whirling" is appealing to the market.

    Manufacturing expertise
    The market is always interested in purchasing from the "best". If an enterprise can confidently state, "We are the only enterprise that can manufacture molecular engineered widgets", they have created an image of being the "best".

    Longevity
    Reliability is important. A statement like, "We have been in business for 50 years, so you can count on us to be there when you need us" is usually a strong selling point.

    Purchase Decision Makers

    Finally, a point to consider is, given the characteristics of your offering, what type of decision maker will most likely be interested in purchasing from you. It may be beneficial to rank your prospects based on the following classifications. While you may not be able to make this classification of the prospect prior to the first contact, if your sales personnel are sensitive to these characteristics it can strongly influence your sales strategy.

    Ultra Conservative - don't rock the boat, whatever they purchase must be consistent with their current way of doing things.

  • They are most likely interested in products/services that are improvements to existing offerings rather than something new.
  • Once established as a customer they are seldom inclined to review alternatives.
  • Very negative to technically complex offerings or offerings requiring extensive user education.
  • Cost effective offerings are only of interest if they don't disturb the status quo.
  • They are likely to react positively to any volume purchasing opportunities.

    Conservatives - are willing to change, but only in small increments and only in a very cost effective manner.Will consider new products/services but only if related concept has been proven to be effective. More likely to purchase improvements to existing offerings.

  • Will probably want to review competitive offerings, but will gravitate to best known offering with lowest risk decision.
  • Negative to neutral when considering technically complex offerings or offerings requiring extensive user education.
  • Strongly influenced by cost effective offerings and/or 'best price' opportunities

    Liberals - regularly looking for new solutions, willing to make change (even major change) if the benefit can be shown.

  • Will usually consider new products/services even if the related concept has not yet been proven to be effective, but only if the potential benefits can be specified and understood.
  • Wants offerings that make effective use of technology, but is not interested in offerings just because they use a certain technology.
  • Will always want to review competitive offerings, but will usually choose the one offering the greatest benefit, even if there is some risk involved.
  • Neutral to positive when considering technically complex offerings or offerings requiring extensive user education.
  • Usually concerned with keeping employees informed and educated, so will often consider educational offerings.
  • Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.
  • Often are on social trend bandwagons so react positively to offerings that address these needs.

    Technical Liberals - enamored with the benefits provided by high tech solutions and any purchase decision will be biased by the technical content of the offering.

  • Usually consider new products/services even if the related concept has not yet been proven to be effective.
  • Often consider just because they use a certain technology.
  • Will always want to review competitive offerings, but will usually choose the one offering the most hi-tech features, even if there is some risk involved.
  • Consider themselves technically competent and will expect leading edge use of technology.
  • Positive to fanatic when considering technically complex offerings even when requiring extensive user education.
  • Conversion costs usually not a major concern if technical benefits are there.
  • Not particularly concerned with keeping employees informed and educated, so educational offerings are not of great interest.
  • Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.

    Self Helpers - consistently defines/designs solutions to their problems, likes to acquire tools that help in the innovation process.

  • Will usually consider new products/services, but the related concept must have been proven to be effective.
  • Often consider just because they use a certain technology that is relevant to the development program they have underway..
  • Will always want to review competitive offerings, but will usually choose the one offering the most effective 'do it yourself' features.
  • Usually consider themselves technically competent and will expect very effective use of proven technology.
  • Not especially inclined toward technically complex offerings, would rather have user friendly, but thought provoking, offerings.
  • Conversion costs usually not a major concern if offering promises potential for innovation.
  • Usually concerned with keeping employees informed and educated, so educational offerings are of interest.