In my search for articles by guest bloggers to help small businesses to make more money, I found this excellent piece on Market Segments by John McMillan who specialises in bringing high tech new products to market.
Successful companies almost all have a significant market share; it is rare for more than three or four companies to be truly successful in any segment of the market.
It is not unusual for one company to dominate with every other company trying to catch up. Consider some examples.
- There are around three really successful supermarkets in the UK, with Tesco dominating.
- Software is dominated by Microsoft and Google
- BMW, Mercedes and Audi dominate the market for executive cars
- For many years. the US car market was dominated by just Ford and General Motors with American Motors trailing
There are a number of reasons for this:
- A dominant supplier controls the market and sets expectations of price and quality
- He develops a reputation and brand, he is highly visible
- There is a "comfort factor" in buying from a market leader
- Customers come to him first
Marketing becomes very much easier if you are a big player in your market place. If you are not, you will always struggle to be seen.
This is all very well for very large companies. But unless you are a Microsoft or Ford, you won't be able to dominate sales to the whole world, you can only ever end up with an insignificant market share.
It is often said that it is better to be a relatively big fish in a small pond than a small fish in a big pond and the way to achieve this is to shrink your target market. You should specialise on a particular sort of customer. This is called segmenting the market.
When you do this, it is much easier to become known and develop a reputation. You can concentrate your marketing activities. Referrals are both easier and more effective. You learn the special needs or desires of your customers.
So, how do you select your segment?
To be useful, a segment must be:
- Suitable size
Difference is what really defines the segment.
There are any number of ways to define a segment. Some of the commonest ways are:
- Geographic (e.g. a town, county or region)
- Industry or profession
- Consumer interest (e.g. discotheques, koi carp, classic cars)
The most suitable segment will depend on the type of business of the supplier.
Businesses like shops or restaurants mostly sell to customers within a certain area and geographical segments work well for them. Other businesses like manufacturing or design are often more successful when they sell to a specific industry.
The terms vertical and horizontal markets are often used - a horizontal market refers to a geographical segment and a vertical market to an industry one.
It may help to combine both geographic and industry, for example supplying builders in Hertfordshire, or garages in the Midlands. The important thing is to define a segment of the right size.
There are other ways of defining segments.
Size of company is one. Few small companies supply companies of all sizes. Some specialise in selling to very large companies, some to small, some to SMEs, some to the public sector.
Price brackets are another. Supermarkets aim at customers in different spending brackets. Waitrose aim at the high end of the market, Tesco for the middle, Aldi and Somerfield for the low end. Supermarkets take the trouble to attract their target customers and make them feel comfortable in the stores.
Garages sell cars within price ranges, some sell new cars and second hand ones less than three years old, others sell cars from two to five years old, others sell cars costing less than £3000.
The clothing industry tends to segment customers by age.
It is possible to break an industry or product type into further segments. The car market is a good example of this, there are several segments in the motor industry, for example:
- Small cars - targeted at young adults and pensioners
- Family cars
- Fleet cars (once dominated by Ford and Vauxhall)
- Executives (BMW, Mercedes)
- Low price sports cars
- Expensive sports cars (Porsche, Ferrari)
- Luxury cars (Jaguar, Rolls Royce)
- Off road and SUVs
There are even very specialist niches occupied by companies like Morgan.
Relevance and Significance
There must be something special about the needs or desires of the segment.
An entire industry will clearly have special requirements, but even then they can be broken down smaller.
Almost all farms need tractors. However dairy farms, pig farms, orchards, and grain farms all have very different specialist equipment. Chinese restaurants need equipment that is not used by Italian restaurants.
Let us look at the case of a supplier of locks.
- The hotel sector needs pass keys that will open any of a group of rooms
- The domestic sector needs easily fitted locks - DIY
- Corrosion is a problem for the marine sector
- The business sector needs locks that conform to insurance industry demands
Each sector has its own special need that is not shared with the others.
It must be possible to identify the members of a community. A good segment will have some sort of "community".
Perhaps a list of members of the community exists.
This could take the form of a trade directory. If that is the case, you can buy the directory or a mailing list and use direct mail or cold calling. If there are journals or magazines, these will be suitable for press releases or advertisements. You could even write articles for the magazines.
If events and exhibitions are organised for that segment, these provide marketing opportunities, as do clubs and on line forums.
Local papers can be used for geographical segments, both for advertisements and press releases. For small geographic segments, leaflet drops can be used.
Members of the best segments will talk to each other, allowing the best form of marketing: word of mouth. Geographical segments are good for this. Industries tend to be less good because your customers can be competitors of each other. Customers like local councils, schools and colleges can be excellent because they do not cooperate with each other rather than compete and it is easy to get referrals.
Remember that the purpose of a segment is so you can be one of the major players there.
You should aim for a segment where you will be one of the top three suppliers. This means you need to supply at least a quarter of the market. The ideal size of the segment should be from around three to ten times your target turnover. Smaller than that, you won't have room to grow, larger, you will be one of the bit players.
Choosing a Segment
Start by looking at your present customers. What can you say about them? Who are the customers? What do they have in common? Are they in the same industry for example.
When you have asked these questions, you should be able to create a list of candidate segments. Next, ask how relevant they are and how easy it is to reach them. Use the sections above for this.
Finally, consider the size of the segments. If it is too small, then ask how you could make it more general. If it is too big, repeat the first step to break the candidate segment down into smaller chunks.
Bringing high tech products to market
Market segments and the process of market segmentation are key issues in any marketing strategy and it brings together a lot of different issues.
Why You Need To Consider Market Segments?
The main reason is that customers are different. They want different things, they have different problems and they will have different buying criteria.
So if you are going to compete effectively and make more money, you need to be tailoring your product offerings to meet the particular needs of a particular market segment.
Once you have designed your offer you then need to make sure that customers in the market segment a) know about you and b) recognise that you are the obvious first choice to meet their requirements.
Market Segments v Market Niche v Market Positioning v Target Market
There are various terms in marketing that can mean similar things depending on just how narrowly you are looking at the market and which marketing guru you are listening to.
John defines market segments widely based on geography, industry (which for consumer products you may think of as demographics) or consumer preference (which is psychographics).
As a certified Guerrilla Marketing Coach, I split the issue into two with a) your target market or audience determined by the demographics of the consumers or businesses and b) your unique positioning which is designed to appeal to certain elements of the target market.
This is because demographics can be determined based on statistical research and you can market directly to all accountants outside of the Top 20 within the West Midlands. What is less clear is the way particular accountants think and make buying decisions.
Will Market Segments Cause Me To Lose Business Opportunities?
The purpose of market segments is to help you design your offers to be compelling and give great value to your customers.
John used lots of examples so let us look at fast food takeaways and see how the market segmentation process works.
Anyone wanting to buy a takeaway meal has the choice between:
- Fish and chips
- Fried chicken
In the market segmentation process, you would look at each of these in turn and decide what matters to the customer who is thinking about buying a pizza, fish and chips etc.
You would then decide if you could provide a good product at a fair price and whether you wanted to compete - i.e. is this a market segment that you can win and is it large enough to produce the profit levels you want?
Looking at market segments doesn't have to restrict you. For example my local fish and chip shop provides burgers, fried chicken and kebabs as well as fish and chips.
But sometimes competing in one market segment forces compromises in service, quality or image in another market segment. A specialist fish and chip shop like Harry Ramsdens is likely to have a better reputation for its main product.
Other times, customers see an advantage in being able to "one shop stop" so the large family where Mum and Dad want fish and chips, their son wants a kebab and their daughter chicken pieces is drawn to the general fast food supplier.
I wrote about this issue in Choosing Your Generalist or Specialist Niche and it is a fascinating subject which has a profound effect on the way you look at your business. I also looked at the issue in terms of how it affects the size of your market and your conversion rates in Sales & Marketing Funnel
How Do I Design Products For My Market Segment?
I am an advocate of the perceived customer value school of thinking which says that buying decisions can be broken down into a small number of criteria that are qualifiers (if the product doesn't meet this requirement then it is rejected) and order winners (which determine preference for those products above the qualifying threshold).
If we go back to think about buying a car because it is such an easy example to understand.
First I have a qualifier because I am 6 foot 4 tall so I must be able to fit into the car comfortably which rules many cars out.
Then I have to like the looks which is a qualifier in that there are some cars I will just reject on looks but it is also an order winner since I usually have a preference which can be a very strong factor.
Reliability must be average or better so it is a qualifier as I will reject cars that do badly in customer surveys as just too much trouble potentially.
Price is an order winner. I don't go out with a fixed budget which can confuse car salespeople trying to sell to me but I do have a clear idea of value and what I will pay for it.
Performance including economy is a qualifier - a sign I'm getting old - I have minimum standards that will rule a car out but i have no desire for the souped up version with the turbo charger and go fast stripes.
And that's about it for how I would chose to buy a car.
Can you see how understanding how a customer in a market segment thinks about making a buying decision means that you can design a product that matches their value criteria and then you can communicate that value in your marketing?
I could write much more about this fascinating subject and I will comes back to address more of the customer value topics but I wanted to give you an understanding of how to use your market segments after you have identified them.
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