Segmentation, Differentiation and Positioning (Part I of a Series)

Today I am beginning a new series of articles on segmentation, differentiation and positioning (SD&P). SD&P form the foundations of any successful marketing campaign, program, strategy and/or plan - and therefore a basic understanding of these concepts is essential. The first of this multi-part series is on the topic of segmentation.

Segmentation and the Selection of Target Markets

Few are the products that are relevant to the entire world. Familiar examples include products such as Coca Cola, McDonalds' hamburgers, and Tylenol. Most marketers, therefore, have to think through the process of market segmentation - in reality, even marketers at a company such as Coca Cola need to segment their market in order to optimize the effectiveness of their efforts; marketing Coca Cola to teenagers is very different from marketing the soft drink to a mature audience.

I like to differentiate between two different types of segmentation. One is the top-down method - in technology, this is also known as the "Ivory Tower" method. When practicing top-down segmentation, a marketer generally has a product in mind - it may be an existing product, or just a concept for a product - and his task is to fit the product to a segment of the market. It is exemplified by companies such as SAP (the giant German software company) - they gather a bunch of very smart people, develop a software product that they believe will allow certain segments of the market to manage their businesses better, and then try to sell the product into those segments. While this is the classical marketing approach, it is reminiscent of the egotistical approach to marketing - it is driven by a sales person's methodology - "Who can I sell this to?". Such a segmentation analysis always begins with the mass market and proceeds in a top-down fashion. The marketer, who is familiar with the product or service's attributes, tries to find the best mapping between these attributes and the requirements or desires of a specific segment of the market. This segment is most likely to purchase your product, and you should maximize the effectiveness of your marketing program by directing most (or all) of your resources towards this segment.

The second type of segmentation is the bottom-up method. This method is the way many entrepreneurs go about their business. Typically, the entrepreneur becomes familiar with the needs of a specific market segment - for example, small and medium medical industry distributors. He then applies his expertise (which is, hopefully, somewhat relevant!! :-) to creating a solution for that market segment based on the real needs of his potential customers. Among small and medium medical supply distributors, for example, the management of the supply chain is a complicated and inefficient process - it could be significantly improved by facilitating supply chain processes through the use of automated software systems. The entrepreneur would then develop a solution while working closely with his potential future customers to ensure a good fit between the attributes and benefits of his product - and his segment's needs. This is how we went about developing our private business network systems at Veranto, for example.

Often, an entrepreneur is not familiar with a specific segment, but will search for a segment that has a set of unmet needs to which he believes he can apply his expertise.

Top-down segmentation, then, typically begins with a product or service and seeks to find the best set of potential customers to which that product or service may be sold. Bottom-up segmentation begins with the selection of a segment that has some unmet need, then proceeds through the product development process in an empathetic fashion.

The segmentation process itself is typically either purely quantitative, or it can be a combination of quantitative and qualitative processes. As a reminder, quantitative data is of a numerical character - e.g. a person's level of income, the number of times a month he does something, etc. Qualitative data is typically more descriptive - a person's favorite color, what he likes about a product, or how he cooks his eggs. Note that almost any qualitative data can be transformed into a quantitative form for the purpose of analysis. You are surely familiar with questions that ask you how much you like a product on a scale of X to Y (called a Likert scale, btw - more on that in a future note on market research). But more complex attributes can be converted to numbers by various systems of mapping and indexing.

A quantitative process can vary from simple data collection techniques in tandem with descriptive characteristic analysis (min/max, average, standard deviation etc.) and bar graphs, to complex statistical methods such as factor and cluster analysis, which are outside the scope of this course and are examined in more advanced graduate marketing classes (if you are interested in exploring further I can point you to some good resources). More typically, however, one will find that the segmentation process in most organizations is based on a methodological research process that combines both quantitative and qualitative elements. A marketer may begin with the collection of data along some dimension (for example, demographic or geographic) and apply simple statistical techniques to divide the sample into segments (e.g. by age group or by region). The marketer will then proceed to map various quantitative and qualitative characteristics to the various segments. Next, he or she will attempt to find the best fit between the characteristics of the various segments and the attributes of the target product or service. The segment - or segments - that provide the best fit are those selected as targets. From here, the marketer will proceed with more in-depth primary research, target markets, etc.

In my next note I will tackle the challenge of differentiation.

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