Every company has a definition of their market and every company also identifies certain segments in that market; even if it’s in someone’s head. But it’s becoming painfully clear that the old and convenient ways of doing this are ineffective and significantly limit the potential of your business. All we need to do is look at the results and we can see that both dollars and efforts are wasted in the more traditional ways of viewing and getting to the market. They simply don’t work if your goal is to create enduring value for your customers.
As new channels – such as social media – emerge, marketers flock to them in droves, hoping this new access point will drive more valuable outcomes for their businesses, or their careers. Unfortunately, one-size-fits-all doesn’t work any better in social media than it did in email, print or another other media you can think of. In fact, one-size-fits-none!
Defining your Market
Most companies define their market by product
category. That is, they limit the market to those customers who purchase the category of software they make, or the category of service they offer, or the category of personal hygiene product. This makes perfect sense to them, because it’s the way all of their competitors define the market and it’s the way analyst firms define the market. It’s also the way the street defines the market, and everyone knows that you must live up to the short term expectations of the financial markets (excluding innovation premium theory).
I recently read something that mentioned the buggy whip market which was referred to by Ted Levitt in Marketing Myopia. They knew that the buggy whip market was going to disappear, but were frozen with an inability to see that the transportation industry, which is the market they were actually in, would continue to grow. They missed an opportunity to add a new kind of value to their transportation customers because they were focused on buggy whips. You can keep improving them, but if there are no more buggies, there will be no one to sell them to.
We all face this dilemma, regardless of the industry we are in. For instance, I am in the CRM software market…or am I?
CRM Software Industry
Growth Management Industry
When you perceive the market differently, it can suddenly become larger, which offers you additional avenues to create value. Focusing on your product has a finite life, and in this age of technology, those lifespans are shrinking dramatically. Failing to realize this new reality was forgivable in the past, but it will prove itself deadly to the firm in the not-too-distant future. I’m not being pessimistic because there is actually a path out of this reality, if you choose to follow it.
Locating Value-based Segments
We’re all familiar with the traditional ways to segment your market. First, you limit your market to the product category (see above) and then you come up with ways to communicate based on things like:
- Demographics – the assumption that consumers of the same age group or gender will somehow all have the same needs.
- Firmographics – the assumption that all companies in the same industry (vertical), or with the same functional operations, or the same maturity will have the exact same needs.
- Behavioral – the assumption that usage rates or loyalty equate to the same value to your firm, or the same need
- Psychographics – the assumption that consumers with the same lifestyles, personalities or interests will have the same needs for your product or service.
The fact is that most companies don’t even get past the first two methods, which are, obviously, the least valuable tools for segmentation (at least as starting points). Finding valuable segments to your firm requires that you understand what your customer values first, and then find the characteristics that make certain customers in that segment more valuable than others. But, we’re getting ahead of ourselves here. A customer-focused business will always start with the customer and what they value. Then they will determine who they need to be as a value-promoting company.
A somewhat freestyle method of finding customer segments is to understand their situation. This can help you to uncover the why’s and when’s of interest in your product. It can also uncover channels of approach that yield a significantly higher return on your marketing dollar. You can also turn mature product segments into higher margin opportunities. As Bertell and Nitterhouse argue in Target Situations, Not Demographics this approach to segmentation can help to:
- De-commoditize mature products
- Rescue lackluster new product launches
- Generate new product and business ideas
The best way to understand their concept is to share one of the stories they tell. This one is about a chain of dive shops that was trying to generate more interest in scuba diving; especially during the off season. The dive shops marketed in the same manner all of its competitors did, they marketed classes and products to people with a demonstrated interest based on scuba magazine subscriptions (product) and lived in a zip code near one of their stores (location). Since the business wasn’t growing, they decided to find out what situations had led their previous customers to their dive shops.
One of the standout situations were customer stories that began with “We’re engaged and planning our wedding trip to the Caribbean. We wanted to share a new activity there – something neither of us had ever done before.” Once they had identified this as a valuable group, they took steps to target them through existing channels that targeted engaged couples. They created a gift registry and purchased local mailing lists from bridal magazines, instead of dive-related magazines. They had tapped a short-term situation that was not included in long-term demographic data. With a few experience changes to accommodate the hectic schedules of engaged couples, they began messaging through existing media that already sold into the engaged couple segment.
Clearly, if they had continued to focus on their product category, they would have missed the opportunity to deliver value to a highly profitable customer segment; through the proper channel. Here are the seven key questions to ask per Nitterhouse (in Customer Case Toolkit):
- What started you on the road to making this purchase?
- Why did you make this purchase at this particular time – and not before?
- What was the hardest part of this process? Was there any point where you got stuck?
- When and how did you decide the price for the product was acceptable?
- Is there someone else with whom I should talk to get more of the story behind this purchase?
- If you’ve purchased this product before, how does the story from your last purchase differ from this one?
- At what point in the process did you decide you trusted this organization and this person to work in your best interests?
Systematically Uncovering Themes based on Desired Outcome Metrics
A more systematic approach is one that I prefer (until something better comes along) because it provides a dynamic canvas to track value as it changes over time. Once the initial foundation is laid, keeping metrics up to date can be done through a simple survey instrument. Motorola’s Radio Products Group utilized the Outcome-Driven Innovation® (ODI) methodology from Stategyn; a functional derivative of jobs-to-be-done theory. The group manufactures vehicle installed radios for 2-way communication with a dispatcher or central location. When market growth stalled, they looked for a new way to achieve growth.
Motorola was a classic example of a company that identified segments using a vertical classification. They knew there had to be another way to classify their market but they didn’t know how to identify it. The methodology itself has been described in detail in two very good books, What Customers Want (Ulwick) and Service Innovation (Bettencourt) so I won’t go into it again here. But I will go into what Motorola learned.
After collecting and analyzing all of the data using ODI they were able to determine that there were actually three unique segments that each had different needs. While each group needed to communicate, they each valued a different theme of desired outcomes. At this point, it begins to make sense to profile them further with demographic and psychographic data, which they had also captured through ODI. Here’s what the three segments looked like (Segmenting for Innovation – Ulwick):
- Segment 1 – This segment hired mobile radio products to communicate privately, discretely or covertly, without being noticed by others and without being overheard. They valued privacy and security-related outcomes and included federal and state police, security. They were younger users and found in urban areas more often than not.
- Segment 2 – This segment hired mobile radio products to provide clear, unambiguous and uninterrupted communications when faced with dangerous and life-threatening situations. This segment consisted of firefighters, police and security personnel that left their vehicles but needed to stay in contact with it at all times.
- Segment 3 – This segment hired mobile radio products to communicate with teams and groups, to coordinate activities and to perform administrative tasks. Members of this group included coast guard personnel, locomotive engineers and others who make constant use of the radio throughout the day. They required neither privacy not emergency-situation capabilities.
Until this time, Motorola had designed and marketed products using a one-size-fits-all mentality. Now they were able to design products for each segment that focused on their unmet needs, and eliminate features they deemed unimportant. The result was better products, reduced price for each segment and increased satisfaction. Messaging was also much clearer and personalized for each segment which helped them realize 18% growth in a stagnant market.
This is the End….
Not really. Everyone knows that once you’ve gained a better understanding of your customer, designed a better product or service, and targeted a specific segment with your message, you need to make sure you do it profitably. The execution side of your marketing is going require additional efforts to understand the value of each customer within these segments (micro-segments), who influences them and the channels through which you can reach each of these parties. Yes, the fun is just beginning because then you must continuously improve, and that’s yet another thing to fear in the top-down and inside-out cultures that dominate the business landscape today.