Marketing plays a fundamental role in business, it's the channel that we use to attract and retain customers. But a critical question that needs to be answered before we engage in any marketing efforts is, which customers? Who should we be targeting in order to maximize profits and long-term success?
THREE STEPS TO DETERMINE WHICH CUSTOMER GROUP TO TARGET:
Segment The Market
Evaluate Each Segment: Market Targeting
Select A Target Segment And Position Your Product
SEGMENT THE MARKET
So what exactly is market segmentation? Segmentation is the process of dividing your target market into sub-groups based on common demographics and product value drivers so you can focus your marketing and sales efforts on the group that is most likely to purchase your product. Customer needs and wants differ across segments, and there are existing competitors trying to cater to those needs. Coming up with a single product or service that satisfies the needs and wants across multiple segments better than the existing competition in each segment is extremely expensive, difficult, and time consuming. You will generate a higher return on your marketing investment by focusing on the group who's needs you can best satisfy.
Step 1) Group customers in your target market into segments based on demographic, geographic, and psychographic variables
Demographic variables: age, occupation, income level, education
Psychographic variables: motives for product purchase, lifestyle, personality characteristics
Geographic variables: location, population, density, urban/rural
Example: Say I started a male t-shirt line with the following product features: high quality, simple design, locally sourced fabric, slim fit. In an ideal world I would be providing these t-shirts to every male who valued those attributes. But in reality there is a variation in people’s assignment of value to each of these attributes, and competitors supply products that attempt to satisfy these targeted needs. So let’s break down this target market more deeply.
Segment 1: Males 25-35, young professionals, above average income, price insensitive, career focused, simple style, city-based, single or married, no children, working in “new-age” professions like tech, thus dressing simple yet clean to work, would wear t-shirt for work
Segment 2: Males 35-45, professionals, price sensitive, simple style, city-based, married, children, working in fields like law, thus wearing clean crisp t-shirts under dress shirt
Segment 3: Males 30-45, stable 9-5 career, slightly price sensitive, simple style, suburban- based, married, children, would wear t-shirts more leisurely (weekends and after work)
Step 2) Assign Value Drivers
Once you have grouped your target market into segments based on the sub-sets of variables, assign value drivers to each segment- the key product features and qualities that are fundamental to that segments purchasing decision.
Examples of value drivers: price, quality, reliability, life-span, uniqueness, crowd appeal, aesthetic, elegance, snob-value, experience…
Using our example..
Segment 1: Clean/sharp look, simplicity, high quality, local sourcing
Segment 2: Slim fit, high quality, simplicity
Segment 3: Clean look, simplicity, low/medium price
Step 3) Determine Market Variables
List the competitors for each segment and what they are offering
Determine the size and growth rates of each segment
These steps involve market research, and sometimes some estimating, but are important variables to collect.
At this point you have all of the information you need and can construct an analysis table like the one seen below.
Time to move on to the next step, market targeting.
EVALUATE EACH SEGMENT: MARKET TARGETING
Market targeting involves evaluating and selecting the market segment to enter by analyzing your customer, company, and competitor data.
Step 1) Based on your company’s competencies, as well as cost or technological constraints, determine if your company has the ability to deliver on the customer value drivers for each segment. Eliminate segments where the match is not good.
For example, locally sourced material means higher costs, which translates into a higher price. Segment 3 doesn’t value sourcing location, and is price sensitive, eliminate this segment.
Step 2) Analyze the strength and intensity of competition in the remaining segments.
Number of competitors in each segment
Customer loyalty to competitor products
Your company’s ability to deliver on the value drivers better than the competition (ability to differentiate)
Eliminate segments where you are unable to differentiate from the competition, especially if the competition is fierce (slow growth and would be fighting for market share).
Step 3) For remaining segments, compare the market size and growth rates. If resources are constrained (capital, technology), choose the more favorable segment.
SELECT A TARGET SEGMENT AND POSITION YOUR PRODUCT
You should now have a clear picture of the market segment(s) you should focus on. Position your product to align with this segment by emphasizing the value drivers important to these customers in your branding and marketing. In order to differentiate your product from competitors in this lane, place extreme emphasis on the value drivers competitors are currently not providing or successfully delivering on.