the MARKET SEGMENTATION · PDF fileSegmentation, one of the most fundamental concepts in marketing. Let us start by looking at how new products and services are diffused across

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Chandos House, 26 North StreetBrighton, BN1 1EB, UK

Tel. #44 (0)1444 441110Fax.#44 (0)1444 441011

e-mail: [email protected]

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SEGMENTATIONCOMPANY

the MARKET

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Professor ofMarketing Strategy

An introduction toAn introduction toMarket SegmentationMarket Segmentationby Malcolm McDonald

SEGMENTATIONCOMPANY

the MARKET

Chairman

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Welcome to my Introduction to Market Segmentation, one of the most fundamental concepts in marketing.

Let us start by looking at how new products and services are diffused across markets over time as this will explain the factors that cause markets to break into smaller groups . . .

When something new is invented not everyone adopts one at the same time but clearly someone has to be first . . .

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innov

ator

s

innov

ator

s

2.5%2.5%

time

Diffusion of Innovation curveDiffusion of Innovation curveNormally, about 2.5% of any population will be thefirst to adopt new products or services. Thesepeople are known as Innovators . . . they are very

unusual people who enjoy being different.

* E.M. Rogers, ‘New product conceptions and diffusion’, Journal of Consumer Research (2), March 1976, pp 220-230

**

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innov

ator

s

innov

ator

s

2.5%2.5%

time

opinion leaders

opinion leaders

13.5%13.5%

Diffusion of Innovation curveDiffusion of Innovation curveInnovators are followed by Opinion Leaders, oftenthe more affluent and privileged in a market. Theyare independent thinkers caring little about what

others think of them. They are, however, crucial ingetting any new productor service adopted and

account foraround

13.5%.

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innov

ator

s

innov

ator

s

2.5%2.5%

time

opinion leaders

opinion leaders

13.5%13.5% 34.0%34.0%

early majority

early majority

Diffusion of Innovation curveDiffusion of Innovation curveNow that the new offer has been endorsed, a muchlarger group, the Early Majority (34.0%), enter themarket. When these people start to enter a market

there is a rapid growthin sales. By now, around 50% of all

those who could adopt the new offer

have doneso.

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innov

ator

s

innov

ator

s

2.5%2.5%

time

opinion leaders

opinion leaders

13.5%13.5% 34.0%34.0% 34.0%34.0%

early majority

early majority

late majoritylate majority

Diffusion of Innovation curveDiffusion of Innovation curveAt this point the Late Majority begin to enter themarket. Generally, these people are less affluentand less privileged than those already in the

market and priceoften becomes important at this

stage.

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innov

ator

s

innov

ator

s

2.5%2.5%

time

opinion leaders

opinion leaders

13.5%13.5%

early majority

early majority

34.0%34.0%

late majoritylate majority

34.0%34.0%

laggardslaggards16.0%16.0%

Diffusion of Innovation curveDiffusion of Innovation curveFinally, the remaining 16.0% of the populationadopt the new offer. Rogers referred to these asLaggards. By now, everyone who could have one

has got one - the markethas become a

replacementmarket.

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sale

s

time

PLC

Although this is not the purpose of this presentation,it is useful to note that the diffusion of innovationcurve explains the phenomenon known as theProduct Life Cycle (PLC), and why after the 50%

point markets continue to grow but therate of growth declinesuntil maturity isreached.

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We can now see why, over time, variations on the basic offer will be required - the needs of this broadening base of customers will differ . . . they will divide into segments.

The picture we have developed also sees mature markets consisting of customers at one extreme largely insensitive to price and customers at the other extreme very sensitive to price. In the middle there will be a large number of customers, let us call them Mr and Mrs Average, for whom competitors will all too readily assume that price is their main requirement . . .

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pric

e

price low

price high

Distribution of customers in a Distribution of customers in a mature marketmature market

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Price is rarely the main requirement of customers. Only a lack of understanding by suppliers of the real needs of customers forces them to trade on price . . . avoiding this commodity trap is the whole point of Market Segmentation.

But astute marketers don’t wait for a market to mature before adopting a segmented approach to their marketing mix, they avoid the commodity trap by understanding the real needs of customers at an earlier stage and by developing their offers accordingly.

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The following is an example of how one company, ICI Fertilisers (ICIF), after falling into a commodity trap where all suppliers talked only about ‘price’, discovered through Market Segmentation that the market divided into 7 very distinct types of customers, each with different needs.

By adopting a segmented approach to its marketing activity, this company became the most profitable in its sector.

Segmentation case historySegmentation case history

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-100

-50

0

50

100

150

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994(est)

GB£m profit/loss

Segmentation case historySegmentation case historyTo accompany a decline in market share,caused by competitors being attracted into themarket by previous high growth and profits, themost telling picture of ICIF’s predicament was its decline in profitability - partially recovered by

huge cut backs but not enough to achieveprofitability.

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Segmentation case historySegmentation case historyThe company’s segmentation project, basedaround understanding the real needs of thecustomers in their market, found that only 1 of the7 segments focussed on price (10% of the total).

Each of the other 6segments, 3 of whichappear to the left,offered much more profitable opportunities,if only a supplier would sit up and take notice!

So ICIF did just that and began to match offersto segments. New products, new promotionalapproaches, new prices, and PROFIT.

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The ‘gurus’ of marketingsay that the ingredients ofWorld Class Marketing are:

Key elements of World Class Key elements of World Class MarketingMarketing

1. A deep understanding of your market2. Creative segmentation and selection3. Powerful differentiation, positioning

and branding. . . and in that order.

This gives us a clue as to how we arrive at meaningful market segments . . .

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Stage 2: Customers and TransactionsStep 3 - What is Bought

Purchase options

Step 4 - Who Buys WhatCustomers and their purchases

Step 2 - Who BuysCustomer profiling

Stage 3: Segmenting the MarketStep 5 - Why it is Bought

Customer needs

Step 6 - Forming SegmentsCombining like-minded customers

Step 7 - Segment ChecklistReality check

Stage 1: Your Market and How It OperatesStep 1 - Market Mapping

Structure and decision makers

The Segmentation ProcessThe Segmentation Process

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The process starts with Market Mapping which corresponds to a deep understanding of the market. Essentially this entails drawing a map of the flows of goods and services from producers through to use and noting where decision makers are found - as it is the needs of decision makers we must understand.

In a sense the Market Map is somewhat like a balance sheet, in that 100% of what is supplied has to balance with the number of goods and services bought at the end of the chain . . .

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Here is an example of a completed Market Map showing volumes and/or values as well as share.

UK Manufactur’s

Independent Distrib’s (245)

Overseas Manufactur’s

Importers

Co-Ops & Clubs (30)

National Distrib’s (5)

Distrib’s Consultants

Manuf’s Consultants

Independent Consultants (150) Specialist

Publications

1,970ktns 35%

2,500ktns 45%

1,250ktns

850ktns 27%

525ktns 25%

405ktns 6%

215ktns 49%

370ktns 21%

300ktns 30%

1,935ktns 33% 400ktns 38%

65ktns 8%

75ktns 22%

50ktns 49%

355ktns 15% 200ktns 40%

2,385ktns 34%

3,750ktns 30%

Total UK Market - 3,750ktns Agrofertiliser’s share - 30%

Farmers (180,000)

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It will be obvious that very few of the tools and techniques of marketing, including segmentation, have any meaning unless there is a correct definition of ‘market’.This is essential for:• measuring ‘market’ share and growth• the specification of target customers• recognition of relevant competitors• the formulation of marketing strategyAnd a ‘market’ is best defined in terms of a And a ‘market’ is best defined in terms of a customer need that can be met by the customer need that can be met by the products or services seen as alternatives.products or services seen as alternatives.

See Project parameters on the website for more details.

An important definitionAn important definition

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Purchase options






Turning to the process again . . . Steps 2, 3 and 4 will lead you to a list of different customers found in your market. They will differ by the combination of Key Discriminating Features (KDFs) they include in their buying decision. We refer to this list of customers as ‘micro-segments’ and remember, they are actual purchase combinations.

*

Includes Where, Whenand How

*Describing who behaves ineach way is crucial

†

†

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Purchase options




Customer needs




In Step 5 we aim to explain for each micro-segment the reasons for their particular buying behaviour, in other words the benefits sought -we may need to refer to market research.

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To summarise so far . . .To summarise so far . . .

3. And by understanding thebenefits being sought wecan explain differentcustomer behaviour

1. No market is totallyhomogeneous

2. The reality is, markets consist of a number of purchase combinations

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Customer needs

Step 6 - Forming SegmentsCombining like-minded customers


Computer programs can assist you hereSee Software & books on the website for more details.

All we need to do now is bringlike-mindedcustomers . . .

. . . togetherto form our

segments

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Step 7 - Segment ChecklistReality check

The Segmentation ProcessThe Segmentation ProcessFinally, the last step consists of checking:1. Whether the resulting segments are big enough

to justify separate treatment.2. They are sufficiently different from each other.3. Whether the customers in them are described

sufficiently well so that they can be reached bythe organisation’s communications methods.

4. And the company is prepared to make thenecessary changes to meet the needs of theidentified segments.

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• Fundamental to Corporate Strategy

. . . it’s important and must be. . . it’s important and must becarried out thoroughly!carried out thoroughly!

• Senior Management must focus on market segmentation

Market Segmentation and Market Segmentation and Corporate ResponsibilityCorporate Responsibility

• Too important to be left to the marketing department - it affects the whole company

It will now be clear that Market Segmentation is:

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Presentation ReviewPresentation Review

1. Understand how your market works 2. Identify and list the key features (KDFs)3. Capture details about decision makers4. Identify and list their real needs5. Search for groups with similar needs

• Not all customers have the same needs.• Successful market segmentation focuses

on customer needs . . . but this isn’t easy.

• Once a market is segmented, select a segment and serve it. Do not straddle segments and sit between them.

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Process steps in more detailProcess steps in more detail

See Market Segmentation McDonald and Dunbar, ISBN 0-333-73369-X

Market Mapping

Why

Who Buys

What* is Bought

Who Buys What*

SegmentChecklist

1. Market definition - 'A customer need thatcan be satisfied by the products orservices seen as alternatives'. It is based around what the customers perceive asdistinct activities or needs they have which

using alternative products or services.

2. The distribution and value added chainthat exists for the defined market.

3. The decision makers in that market and the amount of product or service they areresponsible for in their decision making.

1. Recording information about thedecision makers in terms of whothey are - customer profiling.Demographics, geographics etc.

2. Testing a current segmentationhypothesis to see if it stacks up - Preliminary Segments.

different customers could be satisfying by

1. Listing the features customerslook for in their purchase - what,where, when and how.

2. Focusing onto those featurescustomers use to select betweenthe alternative offers available - Key Discriminating Features KDFs

1. Building a customer 'model' ofthe market - based on either thedifferent combinations of KDFscustomers are known to puttogether, or derived from the random sample in a research project. Can be constructed by Preliminary Segment. Eachcustomer in the model (sample)is called a micro-segment.

2. Each micro-segment is profiledusing information from the data listed in 'Who Buys',

3. Each micro-segment is sized toreflect the value or volume they represent in the market.

1. As customers only seek out features regarded as keybecause of the benefit(s) these features are seen tooffer them, the benefits delivered by each KDF should be listed. For some customers it is only by combiningcertain KDFs that they attain the benefit(s) they seek - benefits should also be looked at from this perspective.

2. For thoroughness, benefits can be looked at from the

3. Once the CPIs for the market have been developed

These benefits are Critical Purchase Influences CPIs.

perspective of each Preliminary Segment.

their relative importance to each micro-segment isassessed (by distributing 100 points between the CPIs).

FormingSegments

1. By attributing a 'score' to all theCPIs for each micro-segment,the similarity between micro-segments can be determined.

2. Micro-segments with similarrequirements are brought together to form clusters.

3. Clusters are sized by adding thevolumes or values representedby each micro-segment.

1. Is each cluster big enough to justify a distinct marketingstrategy?

2. Is the offer required by eachcluster sufficiently different?

3. Is it clear which customers appear in each cluster?

4. Will the company change and adopt a segment focus?

If all 'yes', clusters = segments.

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Segmentation is the heart and soul of marketing and unless a company spends time on it, driven from the board downwards, it is virtually impossible for the company to be market driven. I therefore hope that you have found my brief Introduction to Market Segmentation both interesting and encouraging. It has outlined an approach that produces spectacular results.If you would like to discuss your own project with us we would be very pleased to hear from you. A final comment for those of you who are in companies already performing well; remember, you do not have to be sick to get better!Best of luck. Malcolm McDonald

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© tMSC2001

Chandos House, 26 North StreetBrighton, BN1 1EB, UK

Tel. #44 (0)1444 441110Fax.#44 (0)1444 441011

e-mail: [email protected]

SEGMENTATIONCOMPANY

the MARKET

the MARKET SEGMENTATION · PDF fileSegmentation, one of the most fundamental concepts in marketing. Let us start by looking at how new products and services are diffused across

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