What’s the Right Number of Market Segments?
by Robert W. Bradford, President/CEO
For years, we’ve told people that too many market segments leads to bloated and ineffective planning. This is true – at some point, you simply end up with more details than your team can wrestle with in your strategic planning.
It is, however, also possible to have too few market segments. Certainly, the ridiculous “one page” strategic planning fad has given us examples of companies that have failed to reach their potential because they are taking a “one size fits all” approach to market segments.
Treating every customer the same is certainly convenient if you want to get your strategic planning done quickly, but it robs you of the ability to cater to the specific needs and preferences of distinct customer groups. One of the critical changes we are seeing in every industry is a trend towards greater segmentation. As an example, consider the market for hot sauce.
A few years ago, you would find Tabasco sauce and not much else in many grocery stores and restaurants. Today, you can find entire stores that sell nothing but hot sauce (and hot sauce related items), and they may carry hundreds of different brands, including several segmented flavorings of the original Tabasco brand.
This kind of segmentation is the result of customers seeking products and services that meet their exact needs, which are not necessarily your needs. The reason we are seeing more segmentation today is that improved information technology, distribution systems, and the ability of the internet to deliver highly focused marketing enable producers to target and sell to narrower segments much more efficiently than in the past.
So…how many segments should you have? As a rule of thumb, you will find that you can manage about 6-8 segments with most strategic planning teams. Fewer segments may be acceptable if you cannot identify enough targetable behavior groupings in your markets – but beware, if you fail to identify a viable sub-segment, your competitors may, leaving you with a poor image with that group of customers.
This economic recovery is a good time to reassess your market segments: have your strategic planning team develop a number of different segmentation schemes – more than the usual product/service vs. market matrix. You may look at slicing your markets by use or application, by channel and/or by geography. Use this time to re-engage your team to think creatively about where the true differences are among your customer groups. You may uncover a clearly differentiated segment that has emerged during the recession – this segment may be fundamental to enhancing your company’s growth and profitability. While you may not significantly change your segmentation, this work will allow your team to think about your customers and renew the commitment to your strategic planning process as you plan for growth in the years to come.
For additional thoughts on how to position your company for success please read: Three Keys to Recovery Success: Re-focus Your Efforts to Outperform Your Competition