How to: Segment a Market

How do you segment a market to ensure efficient delivery of the correct messages to responsive audiences? This how-to will take you through the basics.

You've been placed in charge of the marketing campaign for a product or service in a high-tech market. The (small) company that you work for developed the product on a hunch, there was little or no formal marketing involvement in the product definition phase of the project as there was no marketing department at the time.

The product has been selling well in the segment we've come to know as 'early-adopters' and, based on the sales in the early adopter market, the business has forecast extremely impressive continuing sales growth in the future.

Sound Familiar?

To many working in a high tech market, segmentation seems to be something that happens naturally and is a linear process. We start off with early adopters, then move onto those who allow themselves to be easily influenced by the opinion of those early adopters, then to those who are naturally inclined to follow a trend, etc, etc, etc. This process seems to happen almost without us thinking about it, a company stumbles from one segment to another, filling the high-profile demand in each before becoming bogged down chasing the few high-profile purchasers left and moving on to the next segment.

The marketing message evolves from one segment to another by a process of trial and error (mostly error) which is later dressed up as 'market testing'.

In the meantime your competitors, who entered the market late, seem to be selling to people you haven't heard of, using messages radically different from yours and snaring large numbers of customers in segments that you'll only stumble upon at a later stage, after your competitors have grabbed a lead.

In high tech markets its easy to be drawn into this 'stumbling' approach as there's usually no shortage of eager early adopters, providing that your product/service is really innovative. To make things worse we often sugar the pill with introductory offers exacerbating the unrealistic sales forecasts.

Stop and rewind. How much better would it be if you were able to define specific market characteristics of those likely to buy your product? Find out who it would be most profitable to sell to and what messages are likely to appeal to them? Ad-hoc segmentation can lead to you getting bogged down in a area of the market that's a dead end whilst ignoring profitable (but not always larger) areas that can be easily reached.

Whilst I can't do the segmentation for you (unless you pay me!), as it overwhelmingly depends on the characteristics of your market and the creativity you can bring to it, there are a few principles of segmentation that I can introduce you to and some pitfalls you need to be made aware of.

What is segmentation?

Segmentation is simply the process by which we subdivide a large potential market into smaller groups that have different opinions and needs, thereby enabling us to construct marketing strategies which will appeal to the needs of those particular segments.

Segmentation is one of those areas in which there are no 'right' answers, there's no set formula for segmentation, no master list of criteria that you should use in order to segment successfully, segmentation is a combination of hard-nosed business analysis (i.e. is this segment wealthy enough to make it worth our while?) and creativity (What common thread can we find that might bind this segment together?).

There is however a simple three step outline to segmentation:

1. Identify your market

What are the overall boundaries of the market that you intend to segment? In many traditional marketing operations this is done at the product development stage, in newer business (e.g. the software market) this is often not done at all with many software products developed on a hunch or as a result of the drive of one leading personality.

2. Establish a Segmentation Matrix

Establish the key market segmentation drivers for your product, this could be based on age of consumer, spending power, usage of other products, demographics, preferred payment method, the list is endless. Use those which you consider to be most important to to define a few 'master' segments.

3. Evaluate and Prioritise

Establish criteria for evaluating your segments' attractiveness for your product and or service and prioritise in line with the resources that you are able to devote to your marketing effort and the likely impact of addressing each segment on any support/spare parts services.

Applied Segmentation

Although I'm using the word 'market' generically to cover all possible customers of a product you can in fact apply segmentation to markets, end-users or distribution channels. Each application should help you to define approaches to each segment or to decide if that segment is worth marketing to. As an example lets look at some of the ways computer manufacturers have segmented market, distribution and customers for personal computers...

Individual component segment (i.e. monitors, CPUs, etc. as separates)

  1. Complete system segment
  2. Desktop PC segment
  3. Portable PC segment (further subdivided into laptops, handhelds, etc.)
  4. Business user segment
  5. Home user segment (further subdivided into educational home use and home use for gaming)
  6. Style segments (do you want your PC to look like a traditional PC or like it's been designed by Terrance Conran)
  7. Finance (are you buying outright, paying cash, or do you require an easy loan payment option)
  8. Nervousness (do you want to buy direct from a 'box-shifter' with no onsite service, from the manufacturer with a limited warranty or from a store with a complete home-based PC maintenance and software assistance service).

The first 6 items in the list above are examples of market segmentation, the next two examples of customer segmentation and the last an example of distribution channel segmentation.

The ways in which you choose to segment are endless and limited only by your imagination however there are some rules that you need to bear in mind when segmenting:

The segment must be practical: There's no point in defining a segment whose existence can make no difference to your marketing strategy. Any segmentation strategy you use must be geared towards measurable results.

The segment must posses distinctive characteristics: Whilst the 'borders' of a market segment will be naturally porous and fuzzy, each segment you define should have distinctive characteristics, wants and needs off of which you can hang a distinct marketing message.

The segment must be manageable: There's little point in constructing a segmentation matrix that subdivides your market into an excessively large number of precise but small segments. Look at identifying no more than half a dozen segments which you can then further segment into areas that are all capable of responding positively to the broad marketing message you apply to its parent. Don't get too enthusiastic too soon or you'll end up with a fragmented, unmanageable market.

The segment must be measurable: Above all you need to be able to measure your segment (its size, potential for growth or decline and spending power) in order to be able to prioritise. Don't assume that the largest segment you identify is going to be the most profitable for you. Large, easily identifiable segments attract fierce competition.

Practical Applications

The aim of your segmentation is to find an angle on segmenting that your competitors have missed. Success in identifying new segments can lead to innovative approaches to customers that will appeal to them in ways, or using means, that your competitors have not considered.

Segmentation is also a great way of prioritising marketing spend, allowing you to concentrate limited resources on the one or more segments upon which you can have a real impact. If you do not carefully segment your market, and tailor your marketing propositions for each segment you choose to compete in, you'll likely end up marketing your product or service in a generalised way that misses opportunities with the result that you'll end up falling back onto price competition in order to make headway.