1.1.19. Defining the Focal Market: Market Segmentation

Welcome to our discussion on market segmentation and defining the focal market. Today we are going to be talking about market segmentation. We’ll be looking at how to answer three questions. Why segment? How to segment? And, how to prioritize? Let’s start with why you want to segment the market. There are two key reasons. The first is that segmenting helps because you need to make clear, prioritization decisions. The second is because segmenting helps you manage your limited resources.
Your ultimate goal in segmenting is to identify your focal market. That group of customers to whom you want to sell your product. Your product can entail anything that is a product, service, or solution.
The second goal is to understand and to serve your target market’s needs and behaviors better than your competitors. Before you start segmenting, it’s helpful to know where you’re coming from. Do you have a product already and you’re in search of an appropriate market? Or have you identified an underserved market for which you are trying to identify an offering that brings value? For each situation, there are some things that you know and some things that you do not know.
For the first, you may know what the feature set of your product is. You may also have some information about the cost structure. However, it’s unclear whether or not the market will actually pay for this product.
On the other hand, if you start with the market, it may be clear who your customer is. And it may be clear what the customer’s pain points are. However, you need to define value propositions that meet this customer’s needs. Ultimately, your goal is to be able to articulate a few things about this segment that you decide upon. You need to be able to articulate things like, your segment, in terms of who the typical customer or buyer is. You must also have a perspective on the size, value, and growth. For example, how big is this segment? How quickly is this segment changing and how profitable is this segment? You’ll also need to be able to articulate how to activate your focal segment. Ultimately you’ll have to be able to deliver, and what this means, is you need to think about how you’ll provide products or services to your segment. Knowing your customer is tricky, but it’s absolutely critical. One way to think about this is to think about it in terms of the 3 W’s. The first, who buys. What is this customer look like, what are their behaviors, what are their needs and pain points? The second, what products do they buy today? What is it that they actually purchase today and why are they purchasing in that manner? And third, why do you think they will buy your product tomorrow and in the future? Why would they switch from the types of products that they are currently purchasing? As you start a segment, you need to have a way to narrow down the entire population into who will actually buy. Some things to look at include demographics, behaviors, and needs. You can use one or a combination of any of these. For demographics, you want to think about the demographic profiles of these customers. What genders are they? What ages are they going to be, and so on. Behaviors, you want to think about how these customers act. What are their routines? What are their usage patters, and so on? In terms of needs, you want to think about, what are their pain points? What are the things that they currently need but that are unfulfilled? Once you segmented, you want to prioritize among these segments. How do you actually compare segments? The traditional way is to look at size, growth, and profitability. As you see here, on the two axes we have profitability and growth. The ideal spot is the spot where there’s high growth and high profit. Low value areas are those that have low growth and low profit. Let’s take an example. Here let’s look at an innovation on men’s beard care. The questions you might be thinking about are, how do you define profitability, how do you define growth, and what might you find? You might start with thinking about profitability based on median income.
From there, you map out your demographic and their median income. Growth is based on perceived adoption rates of facial hair, which you’ll probably need to estimate to some degree.
What you might find in this upper right box is that segments look similar in terms of population. Income levels are mostly in the top half, and growth rates vary. From here your possible next steps might be to zoom into the top two segments and further subsegment based on, for example, urban verses rural, or purchasing behaviors and so on. Lastly, you need to figure out how actionable your segment is. What I mean by actionable, is that you can actually serve them. You know how to make and get them something that they want. As we’ve seen, market segmentation enables you to prioritize. It also allows you to make use of your resources in a more cost-effective and actionable manner. Thanks for joining this session.

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