How Can I Identify a Useful Market Segmentation?

Q. I’ve been trying to develop a useful market segmentation for my small business. Do you have any tips for how to do this most effectively?

A. Identifying a segment of the market that is willing to pay a premium for the things that differentiate your product or service from your competitor’s products or services can be extremely valuable. We worked with a company that did this and saw its sales increase by 50 percent over two years. Profits also soared as they focused on a segment that was less price sensitive.

However, not every market segmentation will produce this kind of results. For effective market segmentation, there are two rules that you must follow:

1. Members of each market segment must make the buying decision like those in the segment and differently from those not in the segment.

2. Members of the segment must be externally identifiable or be willing to self-identify.

Good market segmentation begins by gaining an understanding of how prospective customers make the buying decision. For example, in the automobile market, customers consider many factors when making the buying decision. We’ll simplify things a bit to make our point. Consider only three segments of the market: (1) price sensitive – those looking for basic transportation at a modest cost, (2) performance – those who primarily want a car with power that handles well, and (3) transport – those needing to transport children, their friends, and related paraphernalia to various activities.

While admittedly oversimplified, this meets the first criteria for a good segmentation. People in each segment make the buying decision like each other and differently from those not in the segment. Manufacturers who understand this can tailor products for each segment. For example, the price sensitive segment might be interested in a no frills Chevrolet. The performance segment would likely be more attracted to a BMW, while the transport segment might prefer a minivan.

The second criteria is that the members of the segment must be externally identifiable. That is, you must know how to deliver your marketing message to them. For example, manufacturers targeting the performance segment described above might advertise in Car & Driver, while those targeting the transport segment might advertise in Family Circle. The point is that if the segment is externally identifiable, you can reach them with your marketing message.

Alternatively, the segment might self-identify by looking for your product. In these cases, you will need to make yourself easy to find. Historically, that might have led you to advertise in the Yellow Pages. Today, you may be better off spending your advertising dollars on Search Engine Optimization (SEO). This way when prospective customers identify themselves by searching for your product, they will find your company.

Identifying a market segment where your product/service offering is uniquely well positioned can net huge profits. To succeed, make sure that you follow the criterion above. Be brutally honest with yourself regarding how the members of each market will view your offering vis-à-vis your competitors’ offerings. In this case, self-deception has a very high cost. When you do identify a segment where your offering either is better positioned than your competitors, or where it can be altered so that it is better positioned, exploit it to the fullest.