THE TABER REPORT
The Voice of Effective Marketing
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"Give them any color they want, as long as it's black" -- Henry Ford In the early stages of an industry, when the key focus is making a reliable product in volume and at low cost, vendors can profitably ignore customer differences. But soon enough, along will come your own personal Sloan who uses differentiation to zap your monolithic "sell to anyone" strategy. And those pesky customers will up and leave you.
Segmentation for fun and profit The first problem with understanding segmentation is the word "segment." The word usually means more or less similar sections -- like a piece of fruit, with fairly discernable dividing lines and patterns. But in markets, segments are often hard to discern and measure, with boundaries that are irregular or even invisible unless you've done some serious research. Really usable market segmentation is pretty hard, so businesses tend to go with a guess. This is incredibly wasteful, and not just in the marketing arena. The wrong sales reps are hired, the wrong products are built, and the company's viability may be called into question. All because the company didn't have the right definition for the target market and customer segment. My favorite example of bad segmentation is Volkswagen, whose CEO wanted to re-brand his company and decided to build the Phaeton: a 12-cyllinder 5.4 liter sedan weighing nearly 3 tons and costing as much as $100,000 before taxes. Thanks to branding effects, his segment was full of contradictions, so customers didn't really exist. The car sold only a few hundred units per year. Auf Wiedersehen, Herr Generaldirektor. If there's one marketing reason why the Republicans won in the 2000-4 elections, it's because they invested millions in defining, testing, and cultivating their segments. Ask Ken Mellman, or Frank Luntz, or even Howard Dean. Segmentation is not an idle "marketing exercise" -- it provides leverage so you can get to and influence the people who will really make a difference to your results. What kind of impact can segmentation have? For individual offers, an order of magnitude improvement. For the overall business, you'll have to settle for just a 3x increase in marketing and sales effectiveness. Segmentation works because it helps you focus on the right things.
Before we get into the "how," let's do a reality check. It's just as
defocusing to have too many market segments as to not have any at all.
Unless you're a giant company, it's almost impossible to effectively execute
more than 3 segments for the whole business. If you're starting out,
seriously develop only one segment at a time, while exploring/experimenting with
one other. All too often, developing a segment is a matter of trial and
error, so you have to be able to cheaply experiment for a few months to see
which specific
segmentation works for you. Segmentation for Fun A segment is a group of potential customers who have similar tastes, preferences, characteristics and buying patterns. Segments are defined by customers and behaviors, not by competitors. A segment can be defined along lots of different lines (age, income, education, geography, profession, company size...). When you have a new business with only a few customers, or you don't even have your product yet, you can only use visionary segmentation. You use theory and external data to develop your segment definition. Nothing wrong with this, but you'll almost certainly need to adjust your initial segmentation after the first few months of sales. Reality trumps hypothesis every time.
One reality check to do about visionary segmentation: how many competitors are vying for customers in a segment? If there are no competitors, you're either way early or have defined a non-existent market. If there are more than 10 direct competitors, you've either made the segment too general, you're way late to market, or a huge war of attrition looms. If your product category has a "standard" segmentation used by industry analysts (like Gartner or Wall Street), you can't ignore that... but this type of segmentation will be far too generic to provide business leverage. For example, "Telecom" isn't a segment: it's an industry that is economically as large and variegated as Costa Rica. In envisioning your segments, there are two huge mistakes to avoid. One is overestimating the customer's interest in or willingness to adopt new technologies: all too often, the crummy product they have now isn't causing that much pain. The second is jumping to the conclusion that because the customer is willing to buy, they're willing to buy from you. The only way to avoid these mistakes is to survey prospective customers and really listen. At the very least, you can quickly figure out what segments you aren't in: what kind of people don't have a need, can't afford to solve it, are too dispersed to be accessed profitably? You can lop off huge sectors of the economy so that you don't fall into the trap of trying to sell to everyone. Segmentation for B2B markets typically goes along these lines:
Segmentation for B2C markets typically goes along these lines:
Generally speaking, the more of these axes you can use in defining a target market, the more you understand the prospective customer. The biggest mistake you can make in segmentation is to make the segment too general, too large. Segmentation for Profit
Of course, you need to have some hard data to analyze. Don't have a customer database or CRM/SFA system? Better get your customer support and marketing people working with surveys so you can understand who your customers are, what they do, who they work for, why they bought, and other basics. If you have a community site, run contests and other promotions to get members to fill out questionnaires whenever they visit your website. No matter what, require registration, use cookies, and run site path analysis so you can get data on what your community is actually doing, because behavior measurement beats surveys every time. Once you have some good data, you'll need to organize it in a multidimensional database (because you can't know in advance how you want to segment). You'll probably want to get a consultant or other sharpshooter to crunch the numbers, unless you have a large enough business to justify this specialization on permanent staff. While you're at it, look for repeating patterns in the people who didn't buy your product or service. Don't have any data on that? Better provide a monetary incentive for your sales reps to put real info into the SFA system about the ones who got away. Doing an email survey of people who lose interest is one of the highest value things a marketer can do. The whole point of the analysis is to find the clusters of members, prospects, and customers that have consistent patterns of preferences and behaviors. So, start from the behavior you're looking for, and develop the segment definition from that. Segmenting along behavioral lines may surprise you:
Using inductive segmentation, you may discover a dozen or more clusters of users...and the danger here is in creating segments that are too small to profitably pursue. You need to find a way to group them (even in unnatural ways) so that you have a manageable number of segments to pursue (3-5, tops). Segmentation -- visionary or inductive -- is most effective with large communities. If you are working consumer markets, viral campaigns, or open source projects, segmentation can be make-or-break for your business. So get some good data on your customers, segment them, listen to what they say, and create an offering just for them: don't let yourself be Sloaned.
Where's the business coming from? -- coming in January
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In
visionary segmentation, the first place to look is your competitors:
figure out what segmentation they are using, and then ask around to find out how
it's working out for them. You'll never find any real numbers on their
segments' performance (even from public companies), but if you discover that
a competitor has recently had a lot of sales reps leave, their segmentation probably
isn't worth imitating.
Looking for segments is a whole lot more valuable and rewarding if you already
have a bunch of prospects and customers to work with. Inductive segmentation
has you look at people who are really in your market, and lets you
understand much better who will be your profitable segments. This is
particularly important for
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