Imagine your partner came down for breakfast one day and told you they’d booked the two of you a camping trip next month in a national park.
When you ask how you’re getting there, they point out the window and say, “Not sure, I don’t have a map but I think it’s that way! Let’s just figure it out as we go...”
You’d probably be a little worried...
No sane person starts a journey without a clear idea of where they're going or how they're getting there, but that’s exactly how many marketers approach strategy. We kinda know where we want to go, but we’re not sure how to get there.
A successful trip and a successful marketing strategy share one thing in common - you need a map to figure out the best way to get to your destination.
Market segmentation allows you to create this map, to see and understand the territory you're in and plan the best route for achieving your goals.
I’m going to show you how to start building a marketing strategy for any market, in any category, using market segmentation.
What is market segmentation?
Market segmentation is research that determines how your company divides its customers into smaller groups based on shared characteristics.
The goal of segmentation is to create a map of your market that kills the average customer in order to look at actual ones.
You are breaking the mass market into submarkets of people with common behaviours or needs. Segmentation then becomes a map of your market as a whole.
Why is segmentation important?
Segmentation is often misunderstood or misused, which is a shame because it’s a vital ingredient in any good marketing strategy.
The benefit of segmenting a market is that it helps you understand what different groups of people actually want from your products or services - how they like to shop, what they look for when deciding what to buy, and how you can best reach them through advertising.
You can also identify and target groups that are profitable customers for your company, and avoid groups that aren’t.
It’s important to understand that segmentation is all about understanding the customers’ needs, not your own. In theory, all brands in the same category should have the same market segmentation map, because you’re all sharing the same potential customers!
The best type of segmentation
The best type of segmentation is one that is customized exactly to your company's needs.
What we're not going to do is segment by generic demographic variables like gender, income, age, Boomers/Millennials/Gen X etc.
Demographic segmentation is a poor method because it rarely highlights actual differences in shopping behaviour. If someone shops online for luxury handbags or only buys mint-flavoured organic toothpaste, is it really important how old they are?
It's lazy (and silly) to assume that everyone in a certain age, gender or income group shares the same interests and behaviours. They don't. We're going to use a Meaningful-Actionable grid to identify the variables that are most important to your business, and then segment your market on those variables.
Let’s see how it’s done.
How to segment any market
For this example I'm going to use a fake company, but real research - as much as I can find for free on Google...
This framework applies to ALL market categories. The steps will be the same, but the results will always be unique to your category.
DoggoTreats is a new Canadian D2C startup making high quality dry dog food. They plan to sell their products exclusively online across Canada to reduce distribution and wholesale costs, and pass on the savings to their customers.
Their first product is SuperPooper, a large bag of dried dog food made from organic ingredients for healthy bowel movements. Each bag provides three weeks of dog meals, and sells for $45.99 with free shipping anywhere in Canada.
Most organic dog food costs $54.99, so they have a good price advantage over the competition.
There are 12.4 million households in Canada. 41.5% of those households have at least one dog, therefore there are 5.1 million Canadian households with dogs.
92% of Canadians purchase dog food in brick and mortar stores, while only 8% shop for dog food online.
42.5% of Canadians say they would pay more for healthier pet food.
Average cost of healthy dog food per year = $1,000 CAD
Average cost of regular dog food per year = $800 CAD
Total market value of dog food in Canada = ~$5 billion CAD per year
To segment our market, make a list of all the relevant variables in your category.
Proximity to pet store
·Pet store owners
People with more than one dog
Write everything you can think of. Leave nothing out.
Give each variable a score from 1-10 based on how meaningful it is to your company, and how actionable it is.
A Meaningful variable to a dog food brand would be identifying if someone owns a dog (10 - very meaningful). A less meaningful variable for a dog food brand is how many cars dog owners typically have (1 - not meaningful at all)
Actionable refers to how able you are to reach consumers of a particular variable - easy (10) or difficult (1). You might find out that 78% of dog owners are introverts, but how exactly are you going to target introverts with advertising? If you have an advanced CRM database with in-depth digital targeting capabilities this might be easy, but if you don't it's near impossible.
Multiply the two numbers together to get your final score.
The 4-5 variables with the highest score are what you segment your market on.
Arrange them on a 2 x 2 axis, and draw a map.
I decided to drop urban/rural households because they were too difficult to target, and online vs. in-store seemed the most important factor for a D2C brand.
Name each segment based on their purchasing behaviour, and use your research data to fill in the total number of people in each segment, and their total value in buying power per year.
You have just segmented your market using actual consumer data that is relevant to your category and company.
You now have a foundation to build a marketing strategy on.
The start of strategy
You can now ask smart strategic questions:
Is a Canadian D2C-only organic dog food brand a profitable idea?
What market segments should DoggoTreats consider targeting?
What position should DoggoTreats take if targeting Digital Dog Lovers?
Should that positioning be different for other segments?
These questions are the beginning of building your marketing strategy. You can now make smart choices about what (and what not) to do, based on real data that's tailored to your business.
You have a map of the territory, and can now start planning your trip!
Do you have segmentation questions? Just reply to the Twitter thread below, I'm happy to answer any questions you have.