Aligning Products and Services to a Specific Market Segment

Definitions

Customer base - The total list of customers for a business, as well as the total number of potential customers with specific classification or buying characteristics.

Market segment - A market segment is a subgroup of people or organisations sharing one or more characteristics that cause them to have similar product needs.

Market type - What kind of market you are dealing with. This could make reference to e.g. export vs. local market.

Product range - How many products are on offer e.g. different brands and types of canned foods available for sale in a grocery store.

Market segmentation is the process of dividing a market of potential customers into groups, or segments, based on different characteristics. The segments created are composed of consumers who will respond similarly to marketing strategies and who share traits such as similar interests, needs, or locations.

Segmentation, targeting, and positioning together comprise a three-stage process:

1. determine which kinds of customers exist, then
2. select which ones we are best off trying to serve, and finally,
3. implement our segmentation by optimizing our products/services for that segment and communicating that we have made the choice to distinguish ourselves that way.

Lecturer Broadcast

Click here to view an explanation about customer service and market segmentation.

Klik hier om na ‘n verduideliking van kliëntediens en marksegmentasie te luister.

Explanation by lecturer Johan Kleingeld from Edge Consulting, an expert on customer service.

Segmentation

Segmentation involves finding out what kinds of consumers with different needs exist. In the auto market, for example, some consumers demand speed and performance, while others are much more concerned about roominess and safety. In general, it holds true that “you can’t be all things to all people", and experience has demonstrated that businesses that specialize in meeting the needs of one group of consumers over another tend to be more profitable.

Generically, there are three approaches to marketing.

Undifferentiated strategy: All consumers are treated as the same, with businesses not making any specific efforts to satisfy particular groups. This may work when the product is a standard one where one competitor really can’t offer much than another one can’t. Usually, this is the case only for commodities.

Concentrated strategy: One firm chooses to focus on one of several segments that exist while leaving other segments to competitors. For example, Southwest Airlines focuses on price sensitive consumers who will forego meals and assigned seating for low prices.

Differentiated strategy: Most airlines offer high priced tickets to those who are inflexible in that they cannot tell in advance when they need to fly and find it impractical to stay over on a Saturday. These travellers—usually business travellers—pay high fares but can only fill the planes up partially. The same airlines then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over.

Note that segmentation calls for some tough choices. There may be a large number of variables that can be used to differentiate consumers of a given product category; yet, in practice, it becomes impossibly cumbersome to work with more than a few at a time. Thus, we need to determine which variables will be most useful in distinguishing different groups of consumers.

Targeting

In the next step, we decide to target one or more segments. Our choice should generally depend on several factors.

First, how well are existing segments served by other manufacturers? It will be more difficult to appeal to a segment that is already well served than to one whose needs are not currently being served well.

Secondly, how large is the segment, and how can we expect it to grow? (Note that a downside to a large, rapidly growing segment is that it tends to attract competition.)

Thirdly, do we have strength as a company that will help us appeal particularly to one group of consumers? Businesses may already have an established reputation. While McDonald’s have a great reputation for fast, consistent quality, family-friendly food, it would be difficult to convince consumers that McDonald’s now offer gourmet food. Thus, McD’s would probably be better off targeting families in search of consistent quality food in nice, clean restaurants.

Positioning

Positioning involves implementing our targeting. For example, Apple Computers have chosen to position itself as a maker of user-friendly computers. Thus, Apple have done a lot through its advertising to promote itself, through its unintimidating icons, as a computer for “non-geeks". The Visual C software programming language, in contrast, is aimed a “techies".

Michael Treacy and Fred Wiersema suggested, in their 1993 book The Discipline of Market Leaders, that most successful businesses fall into one of three categories:

Operationally excellent businesses, which maintain a strong competitive advantage by maintaining exceptional efficiency, thus enabling the firm to provide reliable service to the customer at a significantly lower cost than those of less well organized and well-run competitors. The emphasis here is mostly on low cost, subject to reliable performance, and less value is put on customizing the offering for the specific customer. Walmart is an example of this discipline. Elaborate logistical designs allow goods to be moved at the lowest cost, with extensive systems predicting when specific quantities of supplies will be needed.

Customer intimate businesses, which excel in serving the specific needs of the individual customer well. There is less emphasis on efficiency, which is sacrificed for providing more precisely what is wanted by the customer. Reliability is also stressed. Nordstrom’s and IBM are examples of this discipline.

Technologically excellent businesses, which produce the most advanced products currently available, with the latest technology, constantly maintain leadership in innovation. These businesses, because they work with costly technology that needs constant refinement, cannot be as efficient as the operationally excellent businesses and often cannot adapt their products as well to the needs of the individual customer. Intel is an example of this discipline.

Treacy and Wiersema suggest that, in addition to excelling on one of the three value dimensions, businesses must meet acceptable levels on the other two. Walmart, for example, do maintain some level of customer service. Nordstrom’s and Intel both meet some standards of cost effectiveness. The emphasis, beyond meeting the minimum required level in the two other dimensions, is on the dimension of strength.

Repositioning involves an attempt to change consumer perceptions of a brand, usually because the existing position that the brand holds has become less attractive. Sears, for example, attempted to reposition itself, from a place that offered great sales but unattractive prices the rest of the time, to a store that consistently offered “everyday low prices". Repositioning in practice is very difficult to accomplish. A great deal of money is often needed for advertising and other promotional efforts, and in many cases, the repositioning fails.

To position your business effectively, one needs to have a basic knowledge of market types.

Lecturer Broadcast

Click here for an explanation about the characteristics of different market types.