Grouping customers into market segments is standard business practice. The more a market suffers from oversupply and underdemand—the new status quo in a relentlessly globalising economy for both high-tech and low-tech goods and services—the more vital it becomes to identify, and perhaps help create, attractive sub-markets and provide tailored value propositions for them. This is what Apple has done with the iPod and iTunes under Steve Jobs’ leadership. The iPod and iTunes have not only hugely boosted Apple’s bottom line, and quite separately increased the sales of its Macintosh computers, but have also accelerated the growth of the MP3 player market as a whole.
Yet even business leaders who understand the importance of market segmentation in developing a market strategy often approach the process as ritual. Many use outdated segmentation methodologies (“That’s how we’ve always done it”), or they rely on generic information (government or trade association data), which their competitors are also studying. Pharmaceutical companies are a prime example. They are awash in prescription drug data at the physician level and are able to pinpoint their prime physician customers. They have “what” and “who” data that firms in many other industries would die for—what was prescribed and who prescribed it. But these data tell them nothing about the “why?” of patient and physician decision making—what patient or physician need did the prescription satisfy. Pfizer, however, stands out in the pharmaceutical marketplace precisely because of its ability to track, and influence, those whys. Pfizer innovated by transforming its sales organisation to achieve this, traveling a path different from all its rivals.
Most companies follow the herd. Rather than spending effort to identify sources of unserved or underserved customer needs and then leveraging distinctive competences or unique resources, marketers trot out “me too” products determined by early entrants. Do you have enough choices of bottled water in your supermarket, or would you prefer a few more? Perhaps this is a rational response if firms don’t understand customer needs and can’t figure out how to secure differential advantage. But it’s generally not the route to making profits. Or they spread their resources around, chasing after customer needs that prove to be ephemeral.
Many firms have achieved leadership positions through effective segmentation and targeting. Marriott has done a great job with its family of hotels, each aimed at a different segment—courtyard by Marriott, Fiarfield Inn, Residence Inn, TownePlace suites, Ritz-Carlton, and others. Another great example is automobile rental. Which firm do you think is the market leader? If you said Hertz, you’d answer like most executives, but you’d be wrong. Avis? Wrong again! These firms lead in the segment you know best-busy executives dashing off planes, headed to their appointments and paid for by your companies. And when you go on the family vacation and you’re paying, chances are you switch to Alamo, Dollar, Budget, or other players in the leisure segment. The market leader is none of these established players—it is Enterprise Rent-A-Car, the largest car buyer in the world, at eight hundred thousand annually. Enterprise identified and targeted the market segment of people whose cars are in the garage. The business model is very different with regard to rental locations; key influencers on the rental decision—garage mechanics; and the selling effort. Regardless, Enterprise is the unparallel leader in this segment, and now is number one in car rental overall.
Segmentation is both science and art. It demands a high degree of insight about customers and competitors. You cannot do it well using only methods based on simple demographics. How, for example, would you segment the dog-food market? You might start off, as some have done, on the basis of type of dog—old dogs versus young dogs, big dogs versus little dogs. But think how much greater insight you might gain from examining the relationship between owner and dog, and the emotional relationship embodied in the owner’s choice of dog food: dog as grandchild (indulgence), dog as child (love), dog as best friend (health and nutrition), and dog as dog (cheap/convenient fuel).
In the world’s most successful companies, marketers use a variety of approaches for studying the wants and needs of existing and potential customers. They continually push the boundaries of marketing research techniques to gain fresh insights in their drive to identify and address the most attractive market segments. Some techniques are quantitative (extensive survey data, complex multivariate statistical techniques for analysis, and data mining of transactions), while others are highly qualitative (one-on-one discussions, focus groups, and increasingly popular anthropological methods such as “a day in the life of [the customer],” or DILO).
You must pick your battles well, attacking the most attractive segments within your reach and conceding the others. Choosing the right segments requires a solid understanding of the opportunity represented by each segment and a good recognition of your company’s capabilities versus competition (current and potential).
Execution in segmentation is not just a challenge for the marketing department or using the right tools well. In a world of global oversupply and underdemand, that narrow approach invites failure. It widens the gap between the objectives you set back in January and the results you are achieving in October, and it complicates longer-term planning as well. The integration among market selection, form capabilities, and segment strategies has to be closer than ever.
The best companies know what the organisation can and cannot deliver. Senior leadership gives full attention to the relationships between selected markets, target market segments, and the type and amount of required firm resources. It focuses laser like on the trade-offs between the firm’s opportunities and its resources.
The all too frequent “sales versus marketing” caricature is long gone at the best companies. They inform their thinking with real-world, real-time judgements from the front lines, from the employees who meet and deal with customers on a day-by-day basis. What you don’t hear is this conversation:
Sales: Marketing is just a bunch of ivory-tower idealists who have no idea about what goes on in the world.
Marketing: Sales spend most of its time on expense-account lunches and playing golf.
Rather, intuitive judgments and creative insights from the field often provide the critical difference between success and failure. For example, Pfizer rigorously schools its field salespeople to ask questions and feed information back to the firm. Target expects all employees who travel—whether on business or pleasure—to write reports on trends in other parts of the world. This kind of information gathering can give your business an edge. It can pinpoint needs that customers don’t yet recognise—needs that by definition won’t show up in traditional data gathering. You should be striving to meet and exceed customer expectations not only by solving their current problems, but by anticipating future ones, and then proactively devising solutions in existing and emerging market segments.
One example of segmenting to find the sweet spot in a market is Nokia’s success in the cell-phone market. Nokia’s focus on the standard-setting, fashion-and lifestyle-oriented youth segment was the core decision that drove it to global market leadership. Likewise, Nokia’s slippage a couple of years ago relative to Motorola, Samsung, and LG, and its subsequent gains against the same rivals, testify to the importance of identifying the sweet spot in the market and doing what is necessary to delight those customers.
Reprinted with permission from Random House
Book: The Marketing Mavens
Author: Noel Capon
Price: Rs 840
6 months ago