INSIGHT on INSIGHT: The Value of Segmentation

Most categories are mature enough that new products won’t find success by attempting to appeal to all category shoppers (i.e the “average” category buyer).

Launching another smartphone or car or watch isn’t going to attract much attention or interest.

But launching an iPhone or Tesla or Apple Watch will get noticed.  But it isn’t because everyone will be a buyer of these products.  Its because these branded products are recognized for seeking out a clear niche in the market and addressing it better than anyone else.

These products know who the buyer is.  And those buyers recognize how these products uniquely address their desires and needs better than any other options.

For most categories, the greatest sales potential exists for new products that have a clear focus.  They focus on meeting the needs of a particular group of shoppers.  Or they focus on offering a particular combination or assortment of features or benefits better than others. 

This is segmentation.

And if you don’t really understand how your category and its shoppers are segmented, you’re at a huge competitive disadvantage.  If you are using an inferior segmentation model or you’re making it up as you go, you might be at even more of a disadvantage.

 

AN EXAMPLE TO DRIVE THE POINT HOME

Think about how the automotive market is segmented.

Back in Henry Ford’s early years, there were plenty of automobile manufacturers, but they produced cars of inconsistent quality and sold them at high prices.

Ford recognized that improving the quality and lowering the price could attract a certain segment of potential buyers.  He took a fragmented market and found a niche that happened to be very large (people unwilling or unable to buy most vehicles of the day).  He addressed it by offering one product:  The Model A.

Higher market share and higher production volumes allowed him to further reduce the cost of his product, further improve consistent production standards, and still maintain healthy profit. 

Over time, competitors that had lost market share to the Model A began to identify and pursue other underserved segments, such as those that wanted a vehicle in a color other than black, those that wanted a larger vehicle, those that needed a more durable vehicle and those that desired more luxury.

Henry Ford helped explode vehicle ownership, maturing a market and eventually creating new and large enough segments for other companies to build their unique product offering around.

 

FAST FORWARD

Today, there still are some vehicles targeting the market segment that made Ford rich:  Toyota Corolla, Honda Civic or Ford Focus.

These models rely on heavy advertising, aggressive pricing and a collection of one-size-fits-most features to satisfy a variety of tastes (subdued design, mid-size, good MPG, etc.).

It would be really difficult to launch a new model to compete with these.

Other models are able to command higher prices by appealing to the specific needs (read:  desires) of sub-segments.

Need a practical people- or grocery-hauler?  Get a mini-van.

Need a more stylish and comfortable people- and grocery-hauler?  Get an SUV.

Want to tell others you’re the adventurous outdoors type?  Get a Jeep or Subaru.

Have a self-esteem issue?  Get a flashy two-door sports car.

 

Understanding how to accurately and meaningfully segment your category and your shopper will be the foundation of building a successful business.

While there are almost an unlimited number of ways to approach segmentation, almost all of them are wrong.  That is, they will not provide the right insight to build a profitable strategy around.

Due to the unique dynamics of every category, broad lessons on segmentation have limited value.  Proper models can only be built with data in-hand to develop, test, modify, and retest the model until useful results are produced. 

Segmentation is iterative, requiring time to find the best fit.

But it is priceless once you have it.

Follow this link to learn a little more about how to best utilize segmentation.