Wholesome Marketing Ideas, Bite Size

Wholesome marketing ideas, bite size

Sunday, April 10, 2011

Why we segment

At the heart of everything that marketers do resides a notion so fundamental, so basic, it is the engine that makes the free market tick.

This notion is, of course, that every customer is different.
Few have said it better than Monty Python in Life of Brian


Segmentation is the idea that if every customer is different, then business should address them differently, with different products, through different distribution channels, at different prices, and with different messages.

When I was a child (in the same decade that Life of Brian was made), I lived in a land without marketing, without brands, and where segmentation was a foreign notion. I lived on the grey side of the wall for almost four years. In Poland.

The implicit assumption made by the apparatchiks who ran Poland's communist economy was that all customers are the same. Product differences, brand differentiation, and variety were unnecessary -- they merely added to costs and detracted from efficiency.

So everyone wore the same limited range of clothes available at the government-owned store, ate the same limited variety of foods (sometimes) available at the grocery, and drank the same plentiful brand of vodka.

It was not that the factory managers and bureaucrats making production decisions under communism were evil. But they simply had very little incentive to seek out consumer needs and respond to them. There was no reason for them to ask what consumers wanted, why they might want to buy, and at what price, and where. There was no competition, no measure of profitability, and no reason to bother asking customers, no market research. As a result, customer needs went unfulfilled and markets performed far below their potential

In 1967, a few years before I got to Poland, the state-owned auto maker FSO introduced a re-badged Italian car – the snazzy Fiat 125 (posing at right). It immediately sparked a ten year waiting list which scarcely diminished until production ended in 1991 after the 1,444,791th one had left the factory. But even the waiting list did not clue the producers in to the latent demand for cars, or differentiated cars – in fact, quite the opposite.

Offering a segmented range might have spurred demand and triggered production, revving the economy, and raising living standards. But if you’d suggested segmentation, you’d have been deemed certifiable: why would you want to spur demand when you had a 10-year waiting list?!?

To the aparatchiks the ten year waiting list was proof, if proof was ever needed, that they were making a product that customers really, really wanted.

The igniting spark of segmentation was missing, and they never had a clue it was missing.

In a competitive market every producer and every seller has an incentive to find out what makes each of their customers different – to find out what they want to buy, why the want to buy it, when, where, and at what price.

Today, market segmentation is a pervasive exercise in most businesses. Still, we could do a lot better on both the 'why' and the 'how' of segmentation. This is the first of many posts on segmentation. We'll come back at regular intervals of a few weeks to take deeper dives into segmentation from a variety of angles.

In the meantime, don't forget to ask why customers buy, and remember that they are all different. The free market is counting on you.

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Next week: Guest post by Jeff Swystun, Chief Communications Officer, DDB Worldwide


Sagar Premkumar said...

That was some very intriguing reading, even more so for me personally, being a huge monty python fan.
I suppose more extreme examples of market segmentation would be the breakfast cereal market, for example?
Also, in the field of automobiles, Tata has truly taken the lead in the Indian Market with the introduction of the Tata Nano, which figured frequently in our studies and has actually become a huge success, despite initial hiccups. The fact that it has become a favorite amongst the faculty in my campus, indeed, in a city like goa, where it seems almost tailormade for thhe market, really emphasized it's popularity amongst the indian middle class.

Anonymous said...

On the subject of segmentation... this is a great TED talk by Malcolm Gladwell regarding the shift in the food industry in the early 90s from trying to find the "perfect spaghetti sauce" to finding the "perfect spaghetti sauces".


Anonymous said...

With the rising of Web 2.0 and social media, many people now seem to think that segmentation is going to become a thing of the past. Usually, segmentation and placement of promotions is very heavily based on gender, geographical location, social standing, etc... With Web 2.0 breaking down many of these barriers, segmentation is going to be harder and harder for companies to accomplish when your product is being advertised within a world-wide network. Some are saying that "product endorsing" people will now be the way to leverage brands and that is the new channel to push brands out through those who endorse the product.

S. Chiu said...

"With Web 2.0 breaking down many of these barriers, segmentation is going to be harder and harder for companies to accomplish". Although this may have been true 10 years ago, I would argue that today's technology actually facilitates segmentation a lot better than it used to. When the internet was first introduced, then sure - many of the criteria that companies used to segment their market became useless. But as demonstrated by web-based applications and businesses, the ability of current technologies to collect, store, and process data has probably, if anything, further enhanced a company's ability to segment.

Facebook Ads are a perfect example of how the internet and social media has actually made it easier for companies to segment. Companies are able to select target age demographics, genders, individuals with certain 'Likes' and interests, etc. With more and more people adopting social media sites and giving up at least a little bit of personal information, I believe that the internet will make segmentation, in general, more efficient.

Alex Binette said...

With the realization that every customer is different, and therefore businesses should target them differently, the question becomes: what degree of segmentation is most effective from the company’s standpoint? One could argue that our ability to understand consumer behaviour is improving, with the likes of web-based applications as previously mentioned. So, when it comes to segmentation, companies must carefully contemplate the balance of the benefits garnered from more specific segmentation, against the costs associated with tailoring the product and its value proposition to those segments.

The increase in specialty retailers suggests that either customers increasingly value specialized stores/products, or that the market is moving towards capitalizing on this need which has existed all along. This trend lends to great potential benefits yielded from segmentation; however, one must ask, how specific can one afford to be? By targeting a very specific segment of the market, and tailoring the product offering accordingly, a company may limit itself to a small corner of the market--one that cannot sustain the additional costs of altering products, or yield large enough revenues to be worthwhile. In these cases, the costs of this degree of segmentation
is likely not worth it. An even greater risk is that initial market research did not accurately predict the demand/ consumer behaviour patterns of the specific segment. Therefore, while there is almost always an incentive for a producer to examine what makes each customer different, there is not necessarily an incentive to act on all of these findings. The ‘why’ and ‘how’ questions raised in this article are going to play a large role in the competitive marketplace. It is one in which the Canadian company, Tim Hortons, will need to address in order to gain a strong position in the US market—particularly when faced with strong competition from Dunkin Donuts (lower quality) and Starbucks (higher quality).

Nick Kuchtaruk said...

I would have to agree with S. Chiu's stance that with online ad segmentation tools firms can now more than ever successfully segment consumers. Many feel that Facebook's recent extraordinary valuation by Goldman Sachs is partly due to the enormous value of Facebook's user data to potential corporate clients. Yet the problems associated with acquiring accurate consumer information in the past are still evident online. Traditional demographic information is often widely available. However, the "juicier" consumer insights that firms seek are not necessarily a part of everyones profile. It is therefore no surprise, that Facebook and other social media sites are working diligently to establish trust with their users, promoting sharing personal information beyond age, sex, race, etc. Sites that can elicit the most personal/relevant details from its users will surely attract companies looking to use technology to better understand the differences between consumers. It would appear that social media/the web will support segmentation rather than diminish its usefulness.

Eric Cordon said...

With web 2.0’s emergence, the increasing availability of consumer information may mark a change in how the businesses of tomorrow will operate. Consumer information may now be more accessible thanks to social networking sites and increasingly sophisticated customer management software, however, with so much data to look at, using this information to positively impact your business has become increasingly complex. The ability to see through this clutter can be extremely valuable. With so much potential hidden in the data, I think new growth opportunities for businesses will lie in their ability to develop ways of seeing through the complexity and understanding how to manage this surge of information. This leads me to believe that IT capabilities will be of ever-more importance in tomorrow’s businesses.

Christine Nicholson said...

While learning about the power of brand image, adapting to customer wants, and differentiating oneself from a competitor, I can’t help but draw a parallel to the current political election in Canada. The many tactics used by marketers in top corporations are the same as those enacted by leaders of the five political parties. Each leader is challenged every day to convey the right message to the right people, in a better way than their competitors. Their reputation and jobs are on the line in this high-risk battle, where one mistake can have fatal consequences. They are in a race where success is measured by gains in market share, specifically, seats in the House of Commons.
While on the election tour, extensive market research is conducted based on demography and history to properly segment the “target markets”. For example, when the leaders visit university towns like London, a big focus of their speech is on the platform initiatives dealing with education, grants and job creation. The speeches often take place in a social setting, advertised widely through social media outlets, and are in the form of a rally to entice students to get informed. Similarly, while visiting an area with a large population of seniors, leaders tend to focus on pensions, guaranteed income supplements and old age security and choose smaller, quieter venues.
It is evident that marketing and segmentation plays a huge role in election campaigns. Although the political parties, much like consumer brands, continuously try to outrun the rest, we are again daunted with the questions “Aren’t they all the same? Is it just marketing?”

Selena Ng said...

My Previous Comment - "With the rising of Web 2.0 and social media, many people now seem to think that segmentation is going to become a thing of the past. Usually, segmentation and placement of promotions is very heavily based on gender, geographical location, social standing, etc... With Web 2.0 breaking down many of these barriers, segmentation is going to be harder and harder for companies to accomplish when your product is being advertised within a world-wide network. Some are saying that "product endorsing" people will now be the way to leverage brands and that is the new channel to push brands out through those who endorse the product."

To add on...

In class the other day we learned the importance of segmentation, and how it should be the priority of businesses to constantly innovate new products, and especially new segments. With disaggregate forms of communication becoming more and more popular, and it becoming harder for businesses to control their brands' reputation, segment creation by competitors will become increasingly more difficult to monitor. As a result, businesses will need to constantly monitor their competitors more than ever before, as faster means of communications become widely used among consumers. In response to S.Chiu's comment, segmentation will become more efficient, yes, but harder to keep track of and analyze.