On Friday, September 02, 2016, I published an article on the subject – “10 Foundations of Business Success” (if you missed the article, I have provided the link to the article, click the link to the article) an excellent very practical book by my friend and colleague Guy Hamilton. Guy spent 35 years with global banking giant HSBC Group.
We discussed the 10 foundations of business success, today (and the following few weeks), we will focus on each foundation and discuss in detail each principle and pointers we need to consider.
Chapter 1, Market Segmentation – Part 1: It’s all about understanding the field you want to play on. No one field is the same as another.
Typically when a business owner is asked what business segment they operate you’ll receive generic replies that have limited insight. It’s surprising and you would think being focused on your core markets and their dynamics would be fundamental to success.
Successful businesses are very focused on delivering a consistently good product or service to a defined group of customers. Delivery is supported by relevant and engaging messages, and tailored sales and service experiences and processes.
There are many aspects to market segmentation, so let’s explore a number of these to stimulate some ideas relevant to your business.
Two common start points are:
- Business-led segmentation, based on what the business owner would like their business to look like; i.e., they define the business model first and then use limited level of segmentation to justify what they want to see.
- Market-based segmentation, which starts with a working hypothesis business model first and then refines it based on identified dynamics at play in the market and target customer preferences.
When defining your market segment it is important to have the right balance being too general in definition and too tightly focused. The “keep it simple” principle, provides a few basic steps that will provide an adequate level of segmentation thinking for smaller businesses.
It goes like this…
Rule 1: Define the boundaries of your geographic market.
Geographic segmentation is about understanding where you want to compete and what is the likely catchment area, or the “hinterland”, for the business.
Example: *How far will customers be prepared to travel to visit your business?
*Where are they coming from today, and why? e.g., would a Western Australian buyer naturally consider a Queensland supplier? Will they e prepared to “travel” cross-border via the internet?
*Where do your target customers live, and in what numbers?
*What area can your logistics and distribution model sensibly cover? This clarifies the area you can compete in.
*Where are your competitors based, and to what extent does their hinterland overlap yours?
*What other equivalent brands (by product or service value) are in your market? Are they attracting required customer volumes?
Be very clear on the geographic footprint of your intended business. With convenience, a growing expectation of all customers, understanding how far they are willing to reach out for your product or service is at the heart of understanding the potential size of your market.
Rule 2: Clarify the industry segment you want to operate in.
Example: If you want to set up a swimming pool service business, what actually does this include? Design? Build and Install? Renovation? Pool pumps and equipment? Servicing and cleaning? Pool supplies? Recreational products? Each of these services (and potentially many more) can widen or narrow the market segment in which you choose to compete.
Build up a clear and comprehensive statement of what your business is (or should be) and use this to define the industry segment you will compete in. Generic headings like “fashion retailer”, “airline:, “accountant”, or “ interior designer” are all too blunt to helpfully focus a business model. Within each of these, what are the specific sub-segments you will compete in, such as “regional airline” or “interior designer of contemporary office spaces”
Rule 3: Understand your distribution capabilities within your geographic market.
You retain customers and win repeat business through quality customer service. This means, delivering a product or service on time, on quote and within promised standards.
To be successful, you must consider the distribution and logistics model required to successfully support your target business model.
Understanding competing logistics and distribution models in your geographic segments is all part of being able to meet the expectations of your target customers.
Rule 4: Define your target customers by needs, preferences and price sensitivity.
In simple terms, what do they expect to receive in terms of quality and service, and how much will they be prepared to pay for it? Have a target profile in mind, but always be prepared to evolve your view of the target customer if market data and firm evidence show customers having different expectations to what you first thought.
Many businesses start their planning from broad assumptions of what they believe the market will like, biased by the product they want to offer, and their pre-conceived notions of a price point they have broadly defined or require. You’ll need to think through the socio-economic group or demographic you are targeting by age, spending power and service preference where a key part of your model is supplying services to other businesses it is important to understand your customer’s customer. Who are their target customers and how are they trying to engage with them?
Rule 5: Establish whether there are sufficient target customers within your market to make your business viable.
It sounds simple but the key question has often not been considered. Let’s be realistic, validate data and any conclusions reached. Some assumptions may be required to refine, but it’s the headline number that matters – are there 5000 people in the target market of 50,000?
Rule 6: Ensure that segmentation drives both your marketing and your service models
Sales win customers, but it’s the quality of service that retains their business. Good segmentation should drive more effective sales and marketing activities, that being said good servicing segmentation will help drive customer retention and repeat revenue streams.
The Pareto principle applies to many businesses: 20% of customers typically provide 80% of revenues. Business relationships are based on frequency of contact and how friendly and relevant that contact is. Good segmentation helps a business ensure the right time and service is made available to the right customer by the value they can bring to the business.
Rule 7: Make your segmentation clear and compelling to third parties.
The value of your business to potential investors, buyers or lenders will be directly liked to their ability too understand and assess the segment(s) you compete in, their view of prospects and the probability of success with the segment.
Segmentation from many angles is the simple fact that it is no more and no less than a disciplined thought process that distils down broad market and customer definitions into something that is more tightly defined around a business’ “right to win”.