Thursday, April 19, 2012

Small Business and Entrepreneurship - To Startup or Not to Startup Part X - Market Segmentation

"The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself" -- Peter Drucker

"A market is never saturated with a good product, but it is very quickly saturated with a bad one" -- Henry Ford

The last article in this series focused on the difference between industries and markets, and the benefits of focusing on market segments.  For this post we will look at how to segment markets, what bases we should use for our comparisons, and how to select attractive markets.

As we stated in the previous post, studying market segmentation is an important practice for all companies but is especially so for a start-up. With limited resources market segmentation can focus a potential start-up on its most likely avenue of success, and least likely avenue of wasting those limited resources. What we want to do is identify different customer groupings in our market, explore what it is that drives each segment,  pick the most attractive segment and begin testing our product/idea on that group.

Let's begin with how to segment our market. In their book Consumer Behavior, Leon Shiffman and Leslie Kanuk identify four major categories of bases for segmentation[i]. These are Empirical Personal Features, Usage and Purchase Behaviors, Personality Lifestyles and Sociocultural Values, and Attitudes and Preferences Regarding the Product. When trying to decide how to best segment your market try looking at your market from these angles and see if one of them lends itself to your customer groupings:

Empirical Personal Features -- Demographics, age, location, gender, marital status, etc.

Usage and Purchase Behavior -- How and how often the product is used, purchased, etc.

Personality, Lifestyles and Sociocultural Values -- General attitudes and beliefs not related to the product for example, early vs late technology adapters, vegetarians, outdoor enthusiasts, i.e., this can be nearly anything.

Attitudes and Preferences Regarding the Product -- This is attitudes and beliefs specific to the product like benefits desired, attentiveness to and involvement with the product, etc.

Hopefully these give ideas for possible segments for your market. Perhaps you can use a strictly regional mark up of North America, Europe, Asia, etc, maybe it's how the product is used such as for commercial, residential or industrial applications, or maybe you can segment based on benefits desired such as functionality, size, or low cost. 

Once we have our bases for segmentation we need to define each segment. The important things we want to know are:

  • Identity - How do you define this segment, what is your separating characteristic?
  • Size - How large is this segment?
  • Growth - Is the segment growing, shrinking or stable?
  • Benefits - What are the key benefits that customers in this segment seek?
  • Competition - What is the nature of competing offerings in this segment and what are the competing products strengths or weaknesses?
  • Examples - Can we identify specific examples of potential customers in this segment?

After compiling all this information it may be helpful to organize it into a chart for easy comparison. If no segment appears to be clearly more attractive, perhaps the market can be segmented in another way in which will better describe the market from the perspective of our product.

Once we have completed our segmentation we can identify which segment appears to be the strongest or best fit for our product based on our preliminary research. We should understand that all this information is likely to change as we learn more about our customers, and that we may even shift our  focus a few times before deciding to launch our product. 

What this exercise does is give us a direction towards which we can begin testing potential customers. The next article in this series will deal with how to test target customers.

[i] Shiffman, Leon G., Kanuk, Leslie Lazar Consumer Behavior, 10th edition Prentice Hall Publishing, 2010, pg 58

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