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Getting Started: Segmentation and Targeting

In reality, the segmentation and differentiation decisions are typically developed together. However, for ease of communication, we will take them one at a time and consider the interrelationships as we go. Conceptually, segmentation is a process in which a firm’s market is partitioned into submarkets with the objective of having the response to the firm’s marketing activities and product/service offerings vary a lot across segments, but have little variability within each segment. For the entrepreneur, the segments may, in many cases, only amount to two: the group being targeted with the offering and marketing activity and “everyone else.” The targeted segment(s) will obviously be related to the product/service offering and the competitive strategy of the entrepreneur.

There are some important questions that need answers as part of the selection of target market segment(s):

  1. The most important question is: Does the target segment want the perceived value that my differentiation is trying to deliver more than other segments? Sometimes targeting may involve segments that differ on response to other elements of the marketing mix. However, many successful ventures differentiate target segments on the value they place on the differential benefits they perceive the firm to deliver. If a firm can target those people who value their offering the highest compared with competition, it has many benefits, including better pricing and higher margins, more satisfied customers, and usually a better barrier to potential and actual competition.
  2. Almost as important to profitable segmentation is: How can the segment be reached? And how quickly? Are there available distribution or media options, or can a self-selection strategy be used? Are the options for reaching the segment cost effective? Can enough of the segment be reached quickly enough so that you can be a leader before competitors can target the same segment?
  3. How big is the segment? If the segment is not big enough in terms of potential revenue and gross margin to justify the cost of setting up a program to satisfy it, it will not be profitable.
  4. Other questions to also keep in mind include: What are likely impacts of changes in relevant environmental conditions (for example, economic conditions, lifestyle, legal regulations) on the potential response of the target segment? What are current and likely competitive activities directed at the target segment?3

Virtual Communities: The Ultimate Segment?

The Internet has fostered thousands of virtual communities. These are made up of groups of people who are drawn together online by common interests. Just as enthusiasts for certain activities such as hobbies, sports, recreation, and so on have gotten together in metropolitan areas for years, the Internet lets enthusiasts from all over the world “get together” virtually. The same phenomenon holds for business users of certain software or specialized equipment. Users or potential users like to get together to help each other with mutual solutions to common problems, helpful hints, new ideas, or evaluations of new products, which might help the community members. It is much easier to post notices on a blog or a forum than to physically go to an enthusiast’s meeting. A virtual community member can interact with his counterparts any time of the day or night and reach people with very similar needs and experiences.

These virtual communities can be an entrepreneur’s penultimate segment. In terms of the preceding segmentation selection questions, the answers to the first two questions are almost part of the definition of an online virtual community. If your product or service offering is tailored (or as importantly, is perceived to be tailored) to the members of a virtual community, then it will be positioned as very valuable to that segment compared with any other group. The size of the segment is easily determined as the size of the virtual community.

The incentives for entrepreneurial companies to get involved with virtual communities are great, but it is not a one-way street. All elements of the marketing program need to be cleverly adapted to the new segmentation environment. The challenges of marketing in virtual communities are summarized nicely by McKinsey consultants John Hagel III and Arthur G. Armstrong:

  • Virtual communities are likely to look very threatening to your average company. How many firms want to make it easier for their customers to talk to one another about their products and services? But vendors will soon have little choice but to participate. As more and more of their customers join virtual communities, they will find themselves in “reverse markets”—markets in which customers seek out vendors and play them off against one another, rather than the other way around. Far-sighted companies will recognize that virtual communities actually represent a tremendous opportunity to expand their geographical reach at minimal cost.4

An Entrepreneurial Segmentation Example—Tandem’s East

A clever entrepreneur can use target segmentation as a prime reason for beginning a venture. An example is Mel Kornbluh, who began a company called Tandem’s East in his garage in the late 1980s. Mel is a specialist in selling and servicing tandem bicycles—bicycles built for two (or three or four). Mel realized there was a segment of bicycling couples that would appreciate the unique benefits of tandeming. It is the only exercise two people can do together, communicate while they exercise, appreciate nature together, and do all this even though they may have very different physical abilities.

When he began his venture, intuitively Mel had very good answers to the previous questions. There were actually two target segments that Mel could target. The first was existing tandem enthusiast couples—those who already had a tandem and would need an upgrade or replacement. The other target segment was relatively affluent bicycling couples who had trouble riding together because of differences in physical abilities. The couples needed to be affluent because tandems are relatively expensive when compared with two regular bicycles. They are not mass-produced and do not take advantage of mass scale economies.

At the time Mel started in 1988, there was no one on the East Coast who had staked out a position as a specialist in tandems. As tandem inventory is expensive and selection is very important to potential buyers, he could establish barriers to potential competitors by being first to accumulate a substantial inventory. He was also able to establish some exclusive arrangements with some suppliers by being first in the area and offering them a new outlet.

Mel also had invented a better tandem crank extender to make it easier for the stoker (the rear rider and typically the female of a couple) to reach the handlebar comfortably. He has patented the design and still sells over 600 pairs per year almost 25 years later.

It was relatively easy for Mel to reach both of his segments. Existing tandem enthusiasts were members of the Tandem Club of America that has a newsletter they publish bimonthly. It is relatively inexpensive to advertise in the newsletter that reaches his first segment precisely. Not only does it reach the segment, but because the readers are already enthusiasts, they pay attention to every page of the newsletter. Over time, Internet user groups dedicated to tandeming were also formed. They are also natural vehicles for effectively reaching the segment.

His second segment was also relatively easy to reach cost effectively. Affluent bicycling couples read cycling magazines—the major one being Bicycling Magazine—and specialized websites and blogs. Again, because they are enthusiasts, the target segment pays a lot of attention to even small ads. This segment also attends bicycling rallies and organized rides. Mel still attends many rallies that his target customers will attend.

Both segments were much larger than Mel needed to make the business viable. With small response rates in either segment, he could afford to pay his overhead and to begin to accumulate a suitable inventory. In fact, his advertising costs are significantly under 10% of revenue, indicating that reaching the segments is extremely cost effective.

Thus, Tandem’s East was begun and flourished by creatively seeing target segments that valued what Mel was selling. The segments were substantial and easily reached cost effectively, and competitive barriers could be erected. In 2014, Mel had more than 100 tandems displayed in stock for customers to try. Since 1988, no one has been able to effectively compete with Tandem’s East in the Mid-Atlantic area. A few other entrepreneurs have started similar ventures in other geographic areas, but no one has been able to effectively challenge Mel in his area. If the average tandem sells for about $4,000, having $400,000 of inventory is a substantial barrier to entry.

An Entrepreneurial Segmentation Audit

Figure 1-1 shows a segmentation audit that the entrepreneurial marketer can use as a checklist to make sure that he has not forgotten an element of segmentation to consider. It may not be cost effective to address many of the audit issues with robust quantitative analysis. However, the issues could be addressed qualitatively—not addressing these issues at all can cause big problems.

Figure 1-1

Figure 1-1 A segmentation audit

Adapted from correspondence of Yoram J. Wind, 1997.

The goal of the rest of this book is, in fact, to flush out the seventh group of issues in the segmentation audit. How does segmentation relate to all the other elements of the marketing mix for an entrepreneurial venture? Just as fundamental as the targeting decisions, however, are the interrelated decisions about differentiation, to which we turn next.

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