There are a number of ways marketers segment the market. Before that, why segment and what is segmentation?
Segmentation, very broadly put, is a way to divide up the Total Available/Addressable Market (TAM) by well-defined attributes that allow a firm to market products to these segments. A simple way to put this would be – “There is no size that fits ALL”. For example, a company (P&G owns the Pampers brand, Huggies brand is owned by Kimberly-Clark) that manufactures diapers cannot create a single diaper that will fit all babies. The market here is “segmented” based on a range of baby weights (for example, Size 3 diapers for babies in the 16 – 28lbs weight range).
Segmentation also takes into account various attributes of each segment. For example,
- Infants go through more diapers than toddlers in a day.
- Pull ups are needed only after Size-5.
- Baby-wipes are an important accessory to the diaper. Hence, they need to be merchandised close to the diapers.
- Packaging –
- Need to-go diaper packs for parents on the go.
- Diapers must be easily accessible in these packages.
So on an so forth. You get the idea – right? I know that this is a very simplistic example. Depending on the product and the market, market segmentation can be a complex subject.
The other important benefit of segmentation is price-discrimination across segments. Different segments in the same market are willing to pay more or less for products that bring a certain perceived value to them. As a consequence, marketers often position products in a manner that speak to the needs of these segments. Broadly speaking, for any given market, the VVP (Value, Volume, Premium) methodology can be applied to divvy up the TAM.
- For a manufacturer the Value offering represents their offering to their price-conscious customers.
- The Volume offering targets the broad market and products in this segment are adequately featured and priced to help move large quantities.
- Products targeting the Premium segment are priced high and typically offer high end features. Demand is not very high.
In each segment, marketers use GBB (Good, Better, Best) positioning to further divide up the market. Just in this simple example, the manufacturer will need to manage 9 SKU’s (illustration below). In reality, SKU and feature proliferation can be come a huge issue as the market gets more finely diced up. Competitive pressures and demands made by large accounts typically cause SKU and feature creep respectively.
Just to illustrate, here are a few scenarios.
Furthermore, segmentation is also influenced, quite heavily in some cases, by competition. Who plays in what segments with what products and at what price? Do we have a product road-map that cuts through competition? Can we ignore a few segments? Why is “Player X” not in this segment, but in other segments? Can we deduce their strategy? What channels are they selling in? What are the channel dynamics? etc etc. Get it! This is complex stuff.
And when we tie this up with market research, things start to muddy up really quick.
Marketers often get wrapped in MR numbers and the various attributes of the segments. Attributes like age, income levels, geo-locations, company size, demographic data, psychographic info, product features needed/preferred, decision maker profiles, end-user profiles etc. The end goal of MR is to tease out customer preferences either within a segment or across segments. And pretty soon, one can easily get mired in tons of data that essentially give job security to a few and confuse the heck out of others.
All of these are good if done right, but we have to remember one critical thing. Products are purchased to fulfill a need or a want. Or put in another way, products are being ‘hired’ to perform a function or a set of functions. What are those functions? Are these functions different across segments? Why does the end-user want to buy this product? Marketers tend to gloss over this aspect.
The reason this is very important at least in the tech world is because these functions can change due to innovations in other related areas. Meaning, disruptive innovations. And these innovations can render many of these functions useless and pose an imminent risk to your product. Segmentation cannot save you then.
The point I am trying to drive home is that product managers and marketers should keep a keen eye on these underlying trends that dictate the usage of their products in a segment and across segments. A robust understanding of why the product is hired is as important as understanding the attributes of the various segments as well.
I recognize that I may have oversimplified many things in this post. Apologies in advance. Feel free to respond and initiate a conversation based on what you think one should address from a market segmentation POV.