Approach Market Segmentation The Customer-Driven Way  

Most of the business world embraces the concept of market segmentation, the strategy of identifying and targeting the best, most promising parts of your general market.  That, of course, implies choices.

But rather than make the painful, exclusionary choices regarding which market segments not to pursue in favor of which ones to pursue, managers often throw up their hands and nominally pursue them all, rationalizing that the most promising ones will emerge on their own.  That, however, is a formula for disaster.  The last thing emerging companies need to do is to dilute finite resources of time and money by chasing widely divergent market opportunities.  Not only is that trying to be all things to all people, but then everyone seems to be a competitor as well.

Recognizing that market segmentation means making tough decisions is a first step.  But making them correctly is just as important.  Many business people err by using the wrong criteria or variables to select and define which segments of the market they want to address.  The most visible, convenient variables, such as geography, demographics or distribution channels for example, are seldom the best to use.  Employing a customer-driven approach to select target market segments is not only better, it's simpler.

The approach is straightforward:  Create and validate a value proposition for your product or service that constitutes a compelling reason for customers to buy it.  "Compelling" here simply means a "must have" condition where the customer recognizes and receives truly strategic benefits that can be achieved with no other competitive product or service.  "Must have" is critical.  If the customer does not sense a compelling reason to buy your product, no amount of promotion, attractive design, price discounting or other tactics will make it successful in a non-commodity, considered-purchase marketplace.

Just three basic variables determine the strength of your value proposition, and indeed define a market segment:  your product or service, the end-user customer (who will actually use it), and the application (how or for what will it be used).  Varying any one of these factors, such as changing product attributes, changes the value proposition and market segment.  Meanwhile all other variables, from fit with your business and available resources to the size of the segment itself, are secondary here, even though they ultimately will become critical aspects of your overall market strategy.

Let's frame this discussion of market segmentation in the context of a stepwise process.  First, if you haven't done so, specifically define the product, including only bundled features and options.  Fuzzy product concepts yield fuzzy, unreliable results.  Second, explore possible combinations of specific end users and applications for the product.  Using simple judgement and intuition, identify promising combinations which deserve further, in-depth consideration.

Third, use "application scenarios" to characterize these promising segments.  Understand how and why various end-user customers would actually use the product or service for real-life applications or problems, and with what benefits and other implications.  Expect to require additional information or even "domain experts" to fill knowledge gaps.   Fourth, rank the combinations according to the strength of their value propositions, considering only "must have" scenarios as finalists.

Fifth, shape and prioritize target segments according to all the other classic segmentation variables -- target customer accessibility, your market presence/credibility, strength of competing alternatives, etc.  Sixth, use market research to test and validate the top segmentation options identified.  Finally, create a "domino strategy" to capture similar, adjoining segments sequentially once your market beachhead is established.

Throughout this process the key ingredient to success is relevant, reliable information.  And that leads directly to market research, the subject of next month's column.

by James R. Helbig as published in ICCB

9/19/2000